Learn what petty cash is used for and how to best manage it.

Here's what you need to know:
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Petty cash is a small amount of cash that companies keep on hand, in a locked drawer or box, to pay for minor business expenses
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Each petty cash fund is managed by a petty cash custodian
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You can track petty cash through recording and reconciliation
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Perform periodic reconciliations to catch discrepancies and ensure accurate petty cash administration
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A second person should be reviewing the custodian’s work and periodically checking the petty cash balance
As a small business owner, you might find it easier to stash a little cash away for small or incidental purchases instead of going through the trouble of issuing a check every time. This stored fund is called petty cash.
What is petty cash?
Petty cash is a small amount of cash that companies keep on hand, in a locked drawer or box, to pay for minor business expenses. In small companies, there’s usually one petty cash fund. However, in larger businesses, each department or building may have its own petty cash fund.
The petty cash fund is established as a pre-designated, fixed amount, which often ranges from $30 to $300, depending on the business. When this pre-designated amount runs low, the fund is replenished.
What do businesses use petty cash for?
Businesses use petty cash funds to cover minor business expenses that are impractical to pay for by check.
Businesses use petty cash funds to cover minor business expenses that are impractical to pay for by check.
Examples of petty cash expenditures:
- Gifts for customers, such as flowers or greeting cards
- Office supplies, such as pens or printer paper
- Postage stamps
- Reimbursing employees for small business expenses, such as snacks for a staff meeting
You should not use petty cash funds for operating expenses, such as salaries, wages, goods, or services, or to make paycheck advances.
Who controls the petty cash fund?
Each petty cash fund is managed by a petty cash custodian. In a small business, this person is often the office manager or another trusted employee.
The petty cash custodian is responsible for:
- Determining the validity of petty cash requests
- Disbursing petty cash funds
- Tracking petty cash expenses
- Enforcing the company’s petty cash policies
How do petty cash disbursements and replenishments work?
Petty cash disbursements are made through the use of petty cash receipts/vouchers, which you can buy from an office supply store. The receipt/voucher typically reflects:
- Cash disbursement date
- Disbursement amount
- Name of the person who received the payment
- Reason for the disbursement
- Name of the general ledger account the expense will be charged to
The petty cash receipts along with the remaining petty cash balance should equal the initial petty cash fund amount — meaning the original amount that was placed in the petty cash drawer or box.
When the petty cash balance reaches a certain low, you can replenish the fund by issuing a check in the amount of the receipts. This will bring the petty cash fund back up to the original level.
What to put in your petty cash policy
A well-constructed petty cash policy includes:
- A policy statement explaining the purpose of the petty cash fund and the maximum amount of funds allowed for each expenditure
- What petty can and cannot be used for
- The petty cash custodian’s responsibilities
- Other related contacts and their roles
- Procedures for disbursing, replenishing, and safeguarding petty cash funds
- The various petty cash forms and their instructions, such as petty cash receipt/voucher and replenishment form
How to track petty cash
You can track petty cash through recording and reconciliation.
Each time the petty cash custodian requests and receives new petty cash funds, in exchange for the receipts, journal entries must be made in the general ledger to record the transaction. Specifically, record the petty cash expenses — which should equal the receipts — as a debit and the replenishment amount as a credit (to your Cash account).
As stated earlier, the remaining petty cash balance should equal the difference between the starting petty cash amount and the disbursements made. If there’s an overage or shortage, try to find the source of the discrepancy — which could stem from any number or reasons, such as mathematical error or disbursing funds without a receipt.
If you’re administering petty cash appropriately, you shouldn’t have any problem balancing your transactions. But if there’s a shortage, you’ll need to account for the loss by making an additional debit in the general ledger. Conversely, if there’s an overage, record it as an additional credit to account for the gain.
Best practices to keep you safe
Always store your petty cash box in a secure area, such as a safe or a locked filing cabinet.
- Your petty cash custodian should be an honest, dependable, and ethical person who understands the importance of protecting the petty cash system
- Always store your petty cash box in a secure area, such as a safe or a locked filing cabinet. At no point in time should the box be left out in the open for customers or unauthorized employees to see
- Perform periodic reconciliations to catch discrepancies and ensure accurate petty cash administration
- Develop strict internal controls for managing petty cash funds
- Do not give one person sole authority over your petty cash. Someone else should be reviewing the custodian’s work and periodically checking the petty cash balance
- Restrict petty cash access to only a limited number of vetted personnel
Lastly, review IRS Publication 583 for petty cash rules and recommendations