What is Petty Cash?
Petty cash is a small amount of cash a business keeps on hand to pay for minor, everyday expenses like postage, office supplies, or coffee for a meeting. It avoids the hassle of writing checks or using cards for tiny purchases.
Petty cash is a small, fixed cash fund kept on-site for minor expenses. It is managed under the imprest system: the fund is replenished periodically to bring it back to its fixed balance, using receipts as proof of spending.
- 1↓Establish the fundWrite a check for a fixed amount (e.g. $200) and cash it to fill the petty cash box.
- 2↓Disburse cashCustodian pays small expenses and collects a signed receipt for each payout.
- 3↓Total the receiptsSum of receipts plus remaining cash should equal the fixed fund amount.
- 4↓Replenish the fundWrite a new check for the amount spent to bring cash back to the fixed balance.
- 5Record the entriesDebit the expense accounts shown on receipts, credit Cash, at replenishment time.
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Step-by-step worked examples
A company sets up a petty cash fund of $200. At month-end, $46 in cash remains along with receipts for supplies ($90) and postage ($64). How much is needed to replenish the fund?
Total receipts = 90 + 64 = $154 Check: Cash on hand + receipts = 46 + 154 = 200 ✓ Replenishment = Fund − Cash on hand = 200 − 46 = $154
A $150 fund has $22 cash left and receipts totaling $126. Is the fund short, and by how much?
Expected cash on hand = Fund − Receipts = 150 − 126 = $24 Actual cash on hand = $22 Shortage = 24 − 22 = $2 (recorded as Cash Short and Over)
Management decides to increase the petty cash fund from $200 to $300. What journal entry is needed?
Increase needed = 300 − 200 = $100 Entry: Debit Petty Cash $100, Credit Cash $100 (no expense involved — just a fund size change)
Flashcards
Quick quiz
Q1.Under the imprest system, the petty cash fund is always replenished to:
Q2.A $250 fund has $60 cash and receipts of $185. What is the shortage or overage?
Q3.When is the expense recorded for a petty cash disbursement?
Q4.Increasing the size of the petty cash fund requires:
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Common mistakes
Recording an expense every time cash is paid out of the box. — Correct: Expenses are only journalized when the fund is replenished, based on receipts.
Assuming petty cash and cash on hand are the same account forever. — Correct: Petty Cash is a separate ledger account that stays at a fixed balance under the imprest system.
Ignoring small shortages or overages. — Correct: Differences are tracked in a Cash Short and Over account so the books always balance.
Treating a fund increase as an expense. — Correct: Increasing the fund size is just moving money from Cash into Petty Cash — no expense involved.
FAQ
What is petty cash?
Petty cash is a small fixed cash fund a business keeps on hand for minor, incidental expenses like postage or supplies.
What is the petty cash formula?
Replenishment = Fund Amount − Cash on Hand. The receipts collected should exactly equal that replenishment amount.
What are examples of petty cash uses?
Office supplies, postage stamps, delivery fees, small client refreshments, and emergency parking or taxi fares.
How do you calculate petty cash replenishment?
Subtract the cash remaining on hand from the fund's fixed amount; that difference should match the total of the receipts collected.