“Petty cash” is the term used to refer to the money a business keeps handy for unexpected expenses that occur.
If you’re a small business owner, it’s important to understand how petty cash can be used so you can account for it correctly in your books.
Definition and Example of Petty Cash
The petty cash account covers business-related expenses generally categorized as miscellaneous expenses. Business owners usually keep a small amount of cash in a safe or lockbox that they use to pay for unexpected items.
- Alternate names: Petty cash fund, Imprest fund, Pocket money
A petty cash account provides an easy way for employees to pay for postage, extra supplies an employee might need, or snacks you might buy for a meeting with a client. There are various scenarios where it makes more sense to use petty cash rather than reimbursing an employee through their paycheck.
For example, say your small business provides specific services for local business owners. Another business owner walks into your office at 10 a.m., and you decide you need some refreshments for the meeting. However, you don’t do this regularly. So you ask an employee who doesn’t normally make business purchases to pick up the refreshments. That employee could be reimbursed later using petty cash, or you could give them money from petty cash and have them bring you the change and receipt.
Petty cash shouldn’t be used to help cover operating costs such as bulk office supplies, office-equipment maintenance, or any larger purchases where using a credit card, line of credit, or check is more practical.
How Petty Cash Works
The petty cash fund is generally accounted for using the imprest system—an accounting system where a specific amount of cash is established to be used for incidental and small expenses. When you set up an imprest fund, follow these steps to ensure the fund and its uses are accounted for and that it's replenished:
- Create the petty cash fund with a set amount.
- Record the amount in your ledger and create an account for it. You could use “Imprest Account” or “Petty Cash” for the account name.
- Require that receipts and exact change are stored with the funds after purchases have been made.
- Create a journal for the account and require that exact amounts used are entered.
- Reconcile the journal entries, funds, and receipts at intervals that help you stay on top of the account, such as once a week.
- Enter transaction amounts in your ledger in the intervals you choose.
- Set a point at which you’d like to replenish the fund.
- Replenish the fund when necessary and account for the fund transfer in your general ledger.
It’s important to account for petty cash uses in your general ledger because it is an expense recorded in your financial records, like the balance sheet. Depending on the types of expenses and your industry, you may also be able to claim itemized deductions for these expenses.
If you have more than one employee, you could delegate managing the account. If you do, that employee is called the fund or account custodian. The custodian is tasked to overlook and safeguard the account by issuing cash, approving reimbursements, and recording the debits and credits to the account.
For additional security, you can require the custodian to keep a log of who refunds are given to. You might even enter the names of employees who request funds and why they may need them—it might indicate an expense you weren’t aware of.
Petty cash can have a variety of uses depending on your industry. You set your own rules about which expenses can be reimbursed and how much the petty cash account can cover. Initially, you may need to adjust the petty cash fund amount you’ve selected as a cap; over time, you’ll figure out the best level to set it at.
Since purchases using the petty cash fund are small, it’s typical to see purchase limits of $50 or less with a total account balance of a few hundred dollars.
Types of Petty Cash Uses
Every industry will have different uses for and definitions of petty cash. However, there are several common uses across the board for petty cash:
- Office supplies: Paper, pens, staples, printer ink, etc.
- Postage: Stamps, packaging, and envelopes
- Business meals: Refreshments and snacks for meetings, meals provided for clients
- Transportation expenses: Taxi fare or gas
- Petty cash is used by businesses to simplify the reimbursement process for employees who have made minor business purchases.
- Examples of common incidental expenses the petty cash fund can be used for are small amounts of office supplies, business meals, and gas.
- Petty cash uses and balances should be recorded, and receipts should be reconciled so you can balance your ledger and replenish the fund for other expenses.