Understanding petty cash

Definition

Petty cash is a small amount of bills and coins kept on site for minor purchases. On the books, this is an account in current assets, and it stays an asset until someone spends from the fund.

It sits in the cash area of the Balance Sheet. It is still cash, just not in the bank.

The fund is usually kept at a fixed amount and brought back to that amount on a schedule. A $200 box that is always restored to $200 is easier to watch than a drawer that drifts.

This is not the owner's wallet, and it is not a free-for-all till. Receipts and a replenishment routine are what keep the assets from walking away.

Where it shows up

Balance Sheet: Located in the current assets section.

P&L: Related to small expenses paid from the fund.

Cash flow: Decreases in this account, reported cash from operating activities decreases.

See also: Cash And Cash Equivalents · Account Reconciliation · Expense Reimbursement

When you look at your Balance Sheet, petty cash is a small line in the current assets section, often rolled into the cash total. The $100 or $300 in the box rarely gets its own printed subtotal, but the ledger still tracks it.

A high balance usually just means you set the fund higher than you spend. A zero balance with no receipts means the money left without a record.

The profit and loss statement does not list the box. The small expenses paid from it — tea, stamps, a replacement cable — hit the P&L when you record the spend.

On the Statement of Cash Flows, spending from the fund is an operating outflow. Restoring the box from checking is a move between cash accounts, not a second expense.

How it works

You start the fund by moving cash from the bank into the box. That entry does not create expense; it only changes which cash account holds the money.

A custodian holds the box and collects a receipt for every spend. Those receipts are the source documents that support the next entry.

When someone buys a small item, the box goes down and an expense or a supply asset goes up. Count the remaining cash plus the receipts; they should still equal the original fund.

On a set day, you replenish. You write a check or pull cash from the operating account for the receipts, put that cash in the box, and file the receipts.

If the count is short, record the difference as an expense so the fund returns to its set amount. Repeated shortages are a missing-receipt problem, not a rounding error.

Do not pay rent, payroll, or a supplier bill from petty cash. Those payments belong in the operating bank account, where they leave a bank trail.

Employee out-of-pocket spending that never went through the box is an expense reimbursement, not petty cash. Reimburse that from checking against an expense report.

One person should not both hold the box and approve the replenishment. A second person counting the box from time to time is how you catch a quiet leak.

IOUs and personal borrowing from the box do not belong there. If an employee takes $20 and leaves a note, you no longer have a $200 fund; you have a receivable you did not approve.

Date the expense in the period of the purchase, not the period of the replenishment. A December receipt replenished in January is still a December cost.

Example

A yoga studio keeps a $200 box at the front desk for tea, candles, and last-minute supplies. The ledger shows $200 of petty cash inside current assets.

The desk manager buys $40 of tea and files the store receipt in the box. The studio records:

Debit: Supplies expense $40

Credit: Petty cash $40

The asset falls by $40, and the profit and loss statement shows $40 of expense. Cash from operating activities on the Statement of Cash Flows falls by $40.

The box now holds $160 plus a $40 receipt. Later the owner restores $40 from checking so the box is $200 again.

Common mix-ups

Petty cash is not an expense sitting in a drawer. The box is an asset until a purchase is recorded.

Spending from the box is not the same as reimbursing an employee who used a personal card. That reimbursement never passed through this fund.

The box is not the operating bank account. Large bills, payroll, and rent should not be paid in cash from the desk.

Related terms

• Cash And Cash Equivalents: Bank balances and near-cash holdings that can be spent immediately.
• Expense Reimbursement: Paying an employee back for out-of-pocket business spending.
• Source Document: The original receipt, bill, or statement that supports an entry.
• Journal Entry: A dated record of debits and credits posted to the ledger.
• Internal Controls: The procedures that keep the books accurate and assets protected.
• Account Reconciliation: Proving that a ledger balance agrees to independent support.
• Segregation Of Duties: Splitting recording, approving, and payment tasks so no one person controls a transaction end to end.
• Bank Reconciliation: Matching the book cash balance to the bank statement and explaining every difference.