# Understanding Petty Cash: Usage, Accounting, and Best Practices

![Petty Cash](https://www.investopedia.com/thmb/9IyEl1_bJRmjYuhr27peg53TTvQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/petty-cash-4191334-Final-2f5b5c6464e14d2d8a135dc21a096d73.jpg)

*— Investopedia / Madelyn Goodnight*

## What Is Petty Cash?

Petty cash refers to a small amount of cash that businesses keep on hand for convenient payments of minor expenses, like office supplies or small reimbursements, for which issuing a check or corporate credit card is impractical. Typically maintained in a secure location such as a locked box, petty cash ensures smooth and quick handling of [incidental expenses](https://www.investopedia.com/terms/i/incidentalexpenses.asp) without disrupting accounting processes. Periodically, businesses reconcile petty cash funds to align transactions with financial statements, maintaining transparency and accountability. Understanding this process allows businesses to efficiently manage micro-expenses without compromising on internal controls.

### Key Takeaways

*   Petty cash is a small reserve of cash kept on hand by a business to pay for minor expenses, offering convenience for quick and small-scale transactions.
*   The petty cash fund is managed by a custodian, who is responsible for disbursing funds and maintaining accurate records through receipts and periodic reconciliations.
*   While petty cash is useful for incidental transactions, it introduces security risks due to the ease of misuse, theft, and difficulties in tracking physical money compared to digital payments.
*   Reconciling petty cash involves accounting for expenses with receipts and ensuring the cash-in-hand equals the expected balance, adjusting for any overages or shortages in records.
*   Though seen as outdated by some due to modern electronic payment options, petty cash remains an effective solution for immediate and unplanned small business needs.

## How Petty Cash Simplifies Everyday Transactions

Petty cash provides convenience for small transactions for which issuing a check or a corporate credit card is unreasonable or unacceptable. The small amount of cash that a company considers petty will vary, with many companies keeping between $100 and $500 as a petty cash fund. Examples of transactions that a petty cash fund is used for include:

*   Office supplies
*   Cards for customers
*   Flowers
*   Paying for a catered lunch for a small group of employees
*   Reimbursing an employee for small work-related expenses

Petty cash fund [custodians](https://www.investopedia.com/terms/c/custodian.asp) are appointed to oversee the fund. The custodial duties generally include enforcing petty cash rules and regulations, requesting replenishments, and dispensing funds.

## Essential Rules and Controls for Managing Petty Cash 

Petty cash funds might bypass some [internal controls](https://www.investopedia.com/terms/i/internalcontrols.asp). However, the availability of petty cash doesn't mean that it can be accessed for any purpose by any person. Many companies employ strict internal controls to manage the fund. Usually, only a few people are allowed to approve disbursements for legitimate company activities.

A petty cashier might be assigned to issue the check to fund the petty cash drawer and make the appropriate accounting entries. The petty cash custodian is charged with distributing the cash and collecting receipts for all purchases or any uses of the funds. Receipts should increase to match the declining petty cash total.

By having a petty cash cashier and a petty cash custodian, the dual-process helps to keep the funds secure and ensure that only those authorized have access to it.

## How to Record Petty Cash Transactions Accurately

When a petty cash fund is in use, petty cash transactions are still recorded on [financial statements](https://www.investopedia.com/terms/f/financial-statements.asp). Journal entries are only recorded when the custodian requests more cash, not when purchases are made with petty cash. The [journal](https://www.investopedia.com/terms/j/journal.asp) entry for giving the custodian more cash is a debit to the petty cash fund and a credit to cash.

If there's a shortage or overage, a journal line entry is recorded to an over/short account. If the fund is over, record a credit to show a gain. If the petty cash fund is short, a debit is entered to represent a loss. The over or short account is used to force-balance the fund upon reconciliation.

> **Important**
>
> The Internal Revenue Service (IRS) recommends filing out petty cash slips and attaching them to receipts to record and document petty cash expenses.

## Step-by-Step Guide to Reconciling Petty Cash Balances

1\. Determine the current balance of the petty cash fund.

2\. Subtract the current balance from the original balance to calculate the total amount withdrawn.

3\. Sum the amounts on all petty cash slips and receipts.

4\. Compare this total to the calculated withdrawn amount.

5\. Investigate any discrepancies and correct errors.

6\. Apply for cash replenishment if needed.

7\. Record replenishment transactions appropriately in the ledger.

## More About Balancing Petty Cash in Accounting

Each time you tap into a petty cash fund—that is, take money out—a slip or voucher should be filled out. This acts as a receipt, logging the amount of the withdrawal, the date, the purpose, and other details. Increasingly, these slips are electronic ones, entered in a digital spreadsheet or ledger. But it can be helpful to keep paper slips too, along with receipts from the purchases or payments (if possible).

After a designated interval—usually, the same time each month or week—it's time to reconcile or balance the petty fund account. First, note the current amount in the fund. Then, subtract this amount from the starting balance. This sum is the total withdrawn from the account during that time period.

Next, total the amount of all the outstanding slips (plus attached receipts). This figure should be the same as the withdrawn sum you calculated from the account starting and ending balances. And the amount of cash you have in your storage box or drawer should be the same as the current balance of the account.

[If they don’t match](https://www.investopedia.com/terms/o/over-and-short.asp), you’ll have to investigate why: Was there a mathematical error? Is a receipt missing or incorrect?  

Balancing the petty cash account usually occurs when the fund needs to be replenished. The petty cash custodian brings all the slips or vouchers to the business' bookkeeper, cashier, or accountant. The petty cash receipts are logged into the company's General Ledger as credits to the petty cash account, and probably debits to several different expense accounts. When the petty cash fund is replenished, usually by drawing on a company-issued check, it's recorded as a debit to the petty cash account and a credit to the cash account.

## Comparing Petty Cash and Cash on Hand: What’s the Difference?

"Petty cash" and "cash on hand" sound a lot alike, and they do overlap. Of the two, "[cash on hand](https://www.investopedia.com/terms/c/cash_position.asp)" is the more generic term.

Petty cash refers specifically to money—literally, coins and bills—that a company keeps on hand for small outlays, usually because using cash is easier than using a check or credit card.

Cash on hand is _any_ accessible cash the business or liquid funds have. It can be in the form of actual money, like amounts you haven't yet deposited in the bank or smaller bills and coins that you keep in the cash register to make change for customers. In this meaning, the difference from petty cash refers to where you're keeping the money, and how you're using it—with petty cash being more for internal business needs/expenses by employees, and cash in hand referring to funds received from or being reimbursed to customers.

But cash on hand has a larger meaning, as an accounting term. In the financial world, it also refers to a company's highly liquid assets—funds in checking or other bank accounts, money market funds, short-term debt instruments, or other cash equivalents. Though not literally cash, it's money that can be easily and quickly accessed, which is why it's "on hand."

In short, all petty cash is cash on hand, but not all cash on hand is petty cash.

## Weighing the Pros and Cons of Using Petty Cash

Petty cash has its pluses. Cash, in many cases, remains the quickest, simplest, easiest way to pay for things. It works well to cover small impromptu expenses—like a tip for the kid delivering pizzas to the lunch meeting, or cab fare home for employees working late. It saves the hassle of reimbursing people or expecting them to pay out-of-pocket for work-related items.

Petty cash can also work for frequent but mundane expenses, like milk for the office fridge, stamps, or cleaning supplies.

While it shouldn't be a habitual practice, petty cash in a pinch can be used to make change for customers, if the till's running short.

However, the convenience of petty cash can pose risks. Cash is hard to secure and impossible to track; it's very easy for bills to disappear without a trace—even if you've established a careful system of receipts or vouchers.

Maintaining petty cash, including record-keeping and regular reconciliation, requires extra effort. This may be a minor nuisance in large firms with an office manager or accounting department; for small businesses, it might create a burden.

Even small shops and restaurants, where cash was common, are moving towards cashless transactions. Petty cash has become an outmoded concept, some critics say. In between credit cards, debit cards, payment services like Venmo or Paypal, electronic wallets, and other contactless ways to buy things, plenty of alternatives exist simple as cash—with the added advantages of being traceable, secure, and less subject to theft.

The security aspect is often important to small companies, who have long feared that keeping cash around is an invitation to crime.

Pros

*   Convenient, easy to understand
    
*   Immediately accessible; no advance planning/authorization required
    
*   Good for emergencies/impromptu needs
    

Cons

*   Security risk: Hard to track and subject to fraud, theft, misuse
    
*   Requires manual monitoring, record-keeping
    
*   Old-fashioned/outdated
    

## What Is Petty Cash and What Is It Used for?

Petty cash is the money that a business or company [keeps on hand to make small payments](https://www.investopedia.com/terms/i/imprest.asp), purchases, and reimbursements. Either routine or unexpected, these are transactions for which writing a check or using a credit card is impractical or inconvenient.

## Why Is It Called Petty Cash?

The English word "petty" derives from the French _petit_, which means "small" or "little." Likewise, "petty" means minor or insignificant. So petty cash refers to a small sum of money set aside for trifling or little purchases, as opposed to major expenses or bills.

One of the earliest uses of the phrase comes from an educational work on housekeeping by Benjamin Billingsley, _Advice to the women and maidens of London_, that dates to 1678.

## What Is an Example of Petty Cash?

Petty cash is usually kept in a drawer, lockbox, or large envelope. Typical petty cash purchases include:

*   Coffee, candy, or snacks
*   Flowers, birthday cards, or other small gifts
*   Cab fare or car fare
*   Small office supplies—pens, erasers, staplers, etc.
*   Catered meals

## Is Petty Cash a Cash Equivalent?

No. Petty cash is actual cash money: bills and coins. [Cash equivalents](https://www.investopedia.com/terms/c/cashandcashequivalents.asp) are highly liquid securities and other assets that can be easily converted into cash: money market funds, commercial paper, or short-term debt, like [Treasury bills](https://www.investopedia.com/terms/t/treasurybill.asp).

However, on corporate financial statements, petty cash is listed in the "Cash and cash equivalents" section of the balance sheet. So the two can be lumped together in that sense.

## The Bottom Line

Petty cash is a small amount of cash that is kept on a business or company's premises to pay for minor expenses and needs—usually, no more than a few hundred dollars. While it's easy to understand and simple to use, petty cash is subject to abuse, easy to lose track of, and vulnerable to theft. Some feel that in contemporary society, the petty cash fund is outmoded: plenty of alternatives exist for small purchases that are safer and just as convenient.

> **Article Sources**
>
> 1.  Internal Revenue Service. "[Publication 583 (01/2021), Starting a Business and Keeping Records](https://www.irs.gov/publications/p583)."
>     
> 2.  Accounting tools. "[Petty Cash Accounting](https://www.accountingtools.com/articles/petty-cash-accounting)."
>     
> 3.  The Phrase Finder. "[Petty Cash](https://www.phrases.org.uk/meanings/petty-cash.html)."
>     
> 4.  Accounting Coach. "[How is Petty Cash Reported on the Financial Statements?](https://www.accountingcoach.com/blog/petty-cash-on-financial-statements)"