Definition of Petty Cash

Petty cash is a small amount of money kept on hand by businesses for minor expenses that do not require the use of checks or electronic payments. It is typically stored in a secure location, such as a cash box or a designated petty cash fund, and is used for small, everyday purchases.

For example, an office may use petty cash to reimburse employees for supplies, postage, or travel expenses under a set spending limit.

Purpose of Petty Cash in Business Accounting

Petty cash serves multiple business functions, including:

• Covering small, day-to-day expenses without requiring bank transactions.
• Providing quick access to funds for urgent business needs.
• Reducing administrative burden by minimizing minor reimbursements.
• Improving efficiency in handling cash transactions for low-cost items.
• Ensuring employees can make minor purchases without delays.

How Petty Cash Works

Establishing a Petty Cash Fund

• Based on operational needs, businesses allocate a fixed amount of cash, typically between $50 and $500.
• A custodian is responsible for managing withdrawals and replenishing the fund.
• Example: A small business sets up a petty cash fund of $200 for office supplies and transportation costs.

Recording and Tracking Transactions

• All petty cash expenses must be logged with receipts and descriptions.
• The custodian maintains a petty cash log to track usage.
• Example: A restaurant records a $15 expense for emergency ingredient purchases.

Replenishing Petty Cash

• When the fund runs low, the custodian submits receipts for reimbursement.
• The business issues a check or cash to restore the petty cash balance.
• Example: An administrative assistant replenishes $150 in petty cash after collecting receipts for courier services and office refreshments.

Common Uses of Petty Cash

Office Supplies

• Purchasing pens, paper, and printer ink for daily business operations.
• Example: A manager buys $20 worth of notepads using petty cash.

Employee Reimbursements

• Covering small, approved expenses incurred by employees.
• Example: A staff member is reimbursed $10 for parking fees during a client visit.

Travel and Transportation

• Paying for taxis, public transit, or fuel for business errands.
• Example: A delivery driver uses petty cash to pay for a toll road.

Miscellaneous Business Expenses

• Covering minor emergency purchases.
• Example: A bakery purchases cleaning supplies with petty cash after running out unexpectedly.

Petty Cash vs. Business Expenses

Feature	Petty Cash	Business Expenses
Definition	A small fund for minor, cash-based purchases	All costs incurred by a business for operations
Payment Method	Cash only	Cash, check, or digital transactions
Example	Buying office supplies under $50	Paying rent, salaries, or large equipment costs

Example: Petty cash covers minor office expenses, while major purchases like machinery are recorded as business expenses.

Advantages and Disadvantages of Petty Cash

Advantages

• Allows quick payments for minor purchases.
• Reduces the need for frequent small reimbursements.
• Provides a simple way to handle small business expenses.

Disadvantages

• Requires diligent tracking to prevent misuse.
• Risk of theft or loss if not secured properly.
• Must be reconciled regularly to maintain accuracy.

Related Terms

• Cash Float – A reserve of cash used for small business transactions.
• Expense Reimbursement – The process of compensating employees for business-related expenses.
• Cash Flow Management – The process of tracking cash inflows and outflows to maintain liquidity.

Interesting Fact

Research shows that businesses that properly track their petty cash transactions reduce unaccounted expenses by up to twenty-five percent, improving overall financial accuracy.

Statistic

According to the Canadian Federation of Independent Business (CFIB), over sixty percent of small businesses in Canada maintain a petty cash fund to cover minor operational expenses, reducing administrative processing time.

Frequently Asked Questions (FAQ)

1. How much petty cash should a business keep?

Most businesses maintain a petty cash fund between $50 and $500, depending on their daily cash expense needs.

2. How often should petty cash be reconciled?

Petty cash should be reconciled weekly or monthly to ensure all transactions are properly recorded and accounted for.

3. Can employees take money from petty cash without approval?

No, petty cash should always require approval and a receipt to prevent misuse and ensure transparency.

4. What happens if petty cash runs out?

When petty cash is low, it is replenished by submitting receipts and obtaining additional funds from the business’s main account.

5. Is petty cash considered an asset?

Yes, petty cash is recorded as a current asset on the company’s balance sheet, representing available funds.