What is Petty Cash? Why Do Businesses Use Petty Cash Funds, and Why Does It Matter?

“When day-to-day business expenses knock on the door, petty cash answers instantly.”

Petty cash may sound small, but it plays a vital role in managing business expenses and operations smoothly. From buying office supplies to spending money on coffee, this small fund helps a lot to meet instant expenditures. Therefore, as a business owner, you should be aware of:

• What is petty cash?
• Why does it matter in small expenses?
• How to manage it?

So, stay tuned till the end to explore the petty cash definition and a detailed example with journal entries. 

What is Petty Cash?

Petty cash is a small amount of cash reserved in a business for minor expenses, such as office supplies, employee lunches, and miscellaneous expenses. You can think of petty cash meaning as a business’s piggy bank.

Moreover, it is not meant for major expenses, but pettycash plays a crucial role in managing business operations smoothly. It can also handle incidental expenses, like postage, parking, and transportation, quickly without disrupting the accounting equation.

Periodically, businesses manage and reconcile petty cash transactions to ensure accuracy, transparency, and accountability. Therefore, businesses must pay equal attention to a small cash reserve for maintaining financial stability.

Examples of petty cash usage:

• Random purchases like birthday cards for employees.
• Buying postage stamps for mailing out documents and files.
• Sanitary products
• Stocking office supplies, like pens, notepads, and folders.
• Office tea or coffee expenses

Why Do Businesses Use Petty Cash Funds?

Businesses leverage petty cash funds for fast transactions, manage small expenses, ensure financial liquidity, and empower employees.

Here are the following points on why businesses rely on petty cash funds.

1. Fast Transactions
   It provides immediate cash for unexpected expenses without needing the approval of a long authorization process.  

2. Manage Small Expenses
   Petty cash handles small expenditures effortlessly, which doesn’t fit in with other expenses, such as coffee, sanitary items, or minor repairs. 

3. Ensure Financial Liquidity
   Having a small cash flow helps to maintain overall financial liquidity, ensuring that urgent expenses are incurred within a short time. 

4. Employee Empowerment
   It empowers employees and managers to handle minor operations on their own without going through hoops and administrative delays.

Types of Petty Cash: Explained

There are typically four types of petty cash: general, imprest, emergency, and discretionary. These categories are distinguished by their purpose or management.

That’s why I’ve jotted down the primary types in great detail for your guidance in the following section. 

1. General Petty Cash

Used to cover day-to-day small expenses like stationery items, coffee, etc. It is generally managed by a petty cashier, and funds are replenished as needed. 

2. Imprest Petty Cash

The fund starts with a specific amount and is periodically replenished to maintain the original balance. For example, reimbursement for business travel expenses.   

3. Emergency Petty Cash

As the name suggests, this fixed amount is set aside for urgent or unexpected expenses. Hence, access to this money is restricted and requires documentation. For example, dealing with unforeseen repairs. 

4. Discretionary Petty Cash

It allows managers and department heads to make small purchases immediately, which don’t fit into other categories. For example, purchasing small gifts to celebrate achievements.

How to Manage Petty Cash? Rules and Regulations

The procedure of petty cash management involves steps, such as appointing a custodian, setting an initial amount, establishing a policy, tracking every transaction, collecting receipts, and replenishing the fund.

Let’s look at the following step-by-step guidance to learn how to manage petty cash.

1. Appoint a Custodian

“A custodian is a petty cashier who has the responsibility to manage, store, and replenish funds.”

Firstly, you have to assign a dedicated employee to manage petty cash accountability. The petty cashier maintains accurate financial records in bookkeeping, reduces the risks of misuse, and ensures oversight.

2. Set an Initial Amount

Now, decide the amount of money you want to reserve for petty cash accounts. In order to calculate this fund, you have to evaluate your business’s average requirements.

Generally, many companies hold a reserve of around $50 – $500, depending on the volume of minor expenses.

3. Establish a Pretty Cash Policy

Furthermore, you must establish guidelines on how petty cash is used for expenses. It ensures transparency in requesting or spending cash in front of employees.

The policy should include:

• Which type of expenditures are allowed?
• Who is eligible to request money?
• Spending limits per transaction
• Document (receipts or purpose) required
• Reconciliation and reimbursement process 

4. Track Every Transaction

Significantly, you must record every transaction in a spreadsheet, petty cash book, or suitable accounting software according to your convenience. For example, the name of the person who received cash, the date, the amount, and the reason for the expense. 

It is beneficial for a business to have a detailed overview of expenses and money, which is essential for making informed decisions.    

5. Collect Receipts

You should collect receipts for every purchase you make from the petty cash fund. Afterward, attach the receipt, petty log, or voucher with the corresponding entry to the cash flow statement.

This way, you can easily analyze and compute all transactions at the end of the accounting period with registered proofs.

6. Replenish the Fund As Needed

When the fund is depleted, you can submit the collected receipts and recorded expenses to your accounts payable department. Subsequently, the team issues a check or transfers the amount to restore the fund to its original amount. 

Overall, a petty cashier or custodian should conduct audits of the fund regularly to ensure accuracy and detect discrepancies. 

A Detailed Example of Petty Cash Usage

“Every cash transaction, whether small or major, should be recorded clearly and accurately.”

But you might be wondering how to record petty cash transactions in recordkeeping books. Don’t fret about it — I’ve mentioned a case study here for in-depth guidance.

Let’s understand with a detailed example of petty cash usage.

Example:

Company Name — Innovation Marketing Pvt. Ltd.

Petty Cash Fund — $500 (initial amount)

Custodian — Daniel (person who handles petty cash account)

Policy overview:

• The fund is used for small expenses, like postage, supplies, and reimbursement.
• It is replenished when it is low.

Step 1: Journal entry for setting initial amount

Date	Account	Debit	Credit
September 1, 2025	Petty Cash	$500
	To Cash a/c		$500

Step 2: Using the amount for office supplies

Date	Amount	Debit	Credit
September 3, 2025	Office Supplies Expense	$23.50
	To Petty Cash		$23.50

Step 3: Using petty cash for postage

Date	Amount	Debit	Credit
September 5, 2025	Postage Expense	$12.75
	To Petty Cash		$12.75

Step 4: Using the fund for employee reimbursement (taxi ride)

Date	Account	Debit	Credit
September 9, 2025	Travel Expense (Reimbursement)	$18.50
	To Petty Cash		$18.50

Step 5: Replenish the petty cash amount

At the end of the month (September 30), Daniel should sum up all the expenses recorded in the journal entry to know the current status of the replenishment.

Total small expenses = Office supplies + postage + employee reimbursement

                                         $23.50 + $12.75 + $18.50

                                         $54.75

So, the spending amount $54.75 needs to be replenished to bring the petty cash balance back to $500.

Date	Account	Debit	Credit
September 30, 2025	Petty Cash	$54.75
	To Cash		$54.75

On the whole, by recording transactions with journal entries accurately, Daniel submits transparent and well-documented details to Innovation Marketing Pvt. Ltd.  

Petty Cash Vs. Cash on Hand: What’s the Difference?

Petty cash and cash on hand are used to cover unexpected expenses. However, cash on hand is a broader and more generic term than petty cash. The purpose, usage, and scope distinguish them.

To mitigate your confusion, I have provided a breakdown table of the difference between petty cash and cash on hand.

Feature	Petty Cash	Cash on Hand
Definition	Petty cash is used to cover small expenses, like coffee and supplies.	Cash on hand is a broad term used to cover operating expenses immediately.
Purpose	To make small in-office purchases where credit cards are unreasonable.	To cover small and long-term expenses, including strategic investments.
Form	Physical cash or coins are stored in a locker within an office.	Physical cash, cash equivalents, and funds held in bank accounts.
Management	Usually managed by a designated custodian who handles all transactions and money.	Management is done through bank accounts and financial software to provide financial liquidity.
Scope	Minor: Only covers small expenses.	Major: Include all forms of cash or cash equivalents.
Examples	Office supplies, travel expenses, coffee, birthday cards, etc.	Rent, utilities, payroll, and large capital expenditures.

Pros and Cons of Using Petty Cash

Evidently, petty cash has a wide range of advantages related to convenience and smooth business operations. However, the comfort also poses risks in securing and tracking cash amounts.

Here are the following benefits and drawbacks of petty cash usage.

The Bottom Line

By analyzing the aforementioned information, you get a detailed insight into “what is petty cash?”

Pettycash is a small amount used to be stored in offices to meet daily expenses. These minor expenditures include office supplies, postage, taxi rides related to office work, and coffee.

Interestingly, it doesn’t require advanced software to record or manage petty cash, so you can simply hire a custodian or petty cashier to keep track of all transactions.