What is Petty Cash and How Does it Work?

Petty cash is the term used to describe the cash that a business keeps on hand for unexpected expenses. It is essential for small business owners to understand how petty cash works to properly account for it in their financial records.

The petty cash account is used for miscellaneous business expenses that arise unexpectedly. Business owners typically keep a small amount of cash in a safe or lockbox for these purposes.

Alternative names for petty cash include petty cash fund, imprest fund, and pocket money. This fund provides an easy way for employees to pay for small items such as postage, extra supplies, or snacks for meetings.

There are situations where it is more practical to use petty cash instead of reimbursing employees through their paycheck. For example, if you need refreshments for a meeting with a client, you can use petty cash to cover the cost.

How to Manage Petty Cash

The petty cash fund is typically managed using the imprest system, where a specific amount of cash is designated for small expenses. When setting up a petty cash fund, follow these steps:

Create the petty cash fund with a set amount and record it in your ledger.

Require receipts and exact change to be stored with the funds after purchases.

Create a journal for the account and require exact amounts to be entered.

Reconcile the journal entries, funds, and receipts at regular intervals.

Set a point for replenishing the fund when necessary.

It is important to account for petty cash uses in your general ledger as an expense recorded in your financial records. Depending on your industry, you may be able to claim itemized deductions for these expenses.

If you have multiple employees, you can delegate the management of the petty cash account to a custodian. This employee oversees the account by issuing cash, approving reimbursements, and recording transactions.

For added security, require the custodian to keep a log of reimbursements and the names of employees requesting funds. Petty cash can be used for various expenses in different industries, and you can set your own rules for how it is used.

Common Uses for Petty Cash

Every industry has different uses for petty cash, but some common expenses include:

Office supplies

Postage

Business meals

Transportation expenses

Petty cash helps simplify the reimbursement process for minor business purchases and should be recorded and reconciled for proper accounting. Purchase limits are typically set at $50 or less, with a total account balance of a few hundred dollars.