Accounting and bookkeeping
Petty cash
Petty cash is a small amount of physical currency kept on hand by a business to pay for minor, everyday expenses where using a bank transfer or cheque is impractical.
What is Petty cash?
When you run a business, you often face minor expenses like buying milk for the office, paying for a taxi, or purchasing emergency stationery. Writing a cheque or processing a bank transfer for these tiny amounts is inefficient. Instead, you keep a small fund of physical currency known as petty cash. To maintain control over this money, businesses typically use the imprest system. Under this method, you establish a fixed balance for the fund. When an employee needs cash, they provide a receipt for their purchase. The total of the remaining cash and the collected receipts must always equal the fixed imprest balance. Once the cash runs low, you withdraw money from the main bank account to restore the fund to its original amount, recording the accumulated expenses in your general ledger at that time.
Replenishment Amount = Fixed Imprest Balance - Cash on Hand
This calculation determines exactly how much money you must withdraw from the bank to restore the fund. The replenishment amount should perfectly match the total of your collected receipts.
How Petty cash works
The lifecycle of a petty cash fund begins when you withdraw a set amount from your business bank account and place it in a secure cash box. You assign a specific employee, known as the petty cash custodian, to manage this box. Whenever someone needs to make a minor purchase, the custodian hands over the cash and collects a physical receipt in return. Alternatively, the employee buys the item with their own money and submits the receipt to the custodian for reimbursement. The custodian logs every transaction in a petty cash book. At the end of the period, or when the cash is nearly depleted, the custodian totals the receipts. You then issue a cheque to replenish the exact amount spent, bringing the physical cash back to the starting balance.
- Withdraw a fixed amount from the bank to establish the initial imprest balance.
- Assign a single custodian to secure the cash box and approve disbursements.
- Collect a valid receipt or voucher for every single purchase made.
- Record each expense in a dedicated petty cash logbook or spreadsheet.
- Replenish the fund by transferring the exact total of the spent cash.
Worked example
Gulf Trading LLC sets up a petty cash fund with a fixed imprest balance of 500. During the month, the custodian pays 40 for office tea, 60 for a courier service, and 150 for emergency printer ink. The custodian collects receipts for all three purchases, which total 250. To check the fund, the custodian counts the remaining physical cash, which equals 250. The total of the cash on hand (250) and the receipts (250) matches the original 500 imprest balance. To replenish the fund for the next month, the business transfers exactly 250 from its main bank account into the cash box.
Why it matters for your business
Managing petty cash properly is vital to prevent theft and keep your financial records accurate. Without a strict imprest system, small cash withdrawals can quickly add up to significant unrecorded losses. This distorts your profit margins and complicates your tax reporting, as you lose the ability to claim deductions for undocumented business expenses. Assigning a single custodian creates clear accountability and ensures every coin is tracked. To make this process easier, Paper & Pen posts journal entries directly to your general ledger, helping you record your replenished petty cash expenses accurately. Regular reconciliations protect your working capital and maintain financial discipline.
Questions
Common questions
What is the difference between petty cash and cash on hand?
How often should a petty cash fund be replenished?
What happens if the petty cash does not balance?
Related terms
- General ledger A general ledger is the master accounting record of a business, containing all financial transactions categorised by account to track assets, liabilities, equity, revenue and expenses.
- Journal entry A journal entry is a formal accounting record that logs a business transaction by showing the date, the accounts affected, and equal debit and credit amounts.
- Bank reconciliation Bank reconciliation is the process of matching the cash balances in your business accounting records to the corresponding information on your official bank statement to identify and correct any discrepancies.
- Working capital Working capital is the financial metric representing the difference between a business's current assets and its current liabilities, indicating its short-term liquidity and operational efficiency.
- Accounts payable Accounts payable is the total amount of short-term debt your business owes to suppliers and vendors for goods or services that you have received but have not yet paid for.
- Accounts receivable Accounts receivable represents the total amount of money owed to a business by its customers for goods or services that have been delivered but not yet paid for.