What is a petty cash fund? Purpose, uses, and accounting

Petty cash is a convenient way to cover small, everyday business expenses like grabbing office supplies or paying for a quick delivery. But before you set up a petty cash fund for your business, you should understand how to keep it organized, the pros and cons, and consider some modern alternatives.

Get Ramp's free petty cash log template in our Accounting Documents Library.

What is a petty cash fund?

A petty cash fund is a nominal amount of money a business keeps on hand for small expenses. It's usually held in cash in amounts up to $500. Larger corporations often make petty cash disbursements by department, putting each team in charge of its own funds. You’d list petty cash as an asset on your balance sheet.

You typically wouldn’t use petty cash to cover recurring expenses like bill payments. Instead, petty cash is meant to cover infrequent expenses like taxi rides, coffee, office supplies, client gifts, or employee lunches.

Note that having a petty cash fund isn’t the same as having a cash register or other cash system where large volumes of money are transacted. In theory, petty cash funds shouldn’t amount to significant company spend.

Examples of petty cash expenses

Petty cash is useful for purchases that don’t warrant a check or credit card payment. Some common examples of petty cash expenses include:

• Office supplies: Buying pens, paper, staples, or other small office supplies
• Postage: Paying for stamps or mailing small packages
• Refreshments: Purchasing coffee, tea, snacks, or drinks for the office
• Transportation: Reimbursing employees for short taxi rides, parking fees, or public transit fares
• Tips: Giving tips to delivery personnel, waitstaff, or other service providers
• Emergency purchases: Buying items that are urgently necessary for an event or meeting, such as batteries or extension cords
• Small repairs: Paying for minor repairs or maintenance services, such as fixing a leaky faucet or replacing a light bulb
• Miscellaneous expenses: Covering any other minor, unexpected expenditure that arises from conducting business

Why should businesses have a petty cash fund?

Petty cash funds are a holdover from a time when credit cards weren’t common for small purchases. Having cash on hand was convenient for situations where merchants either didn’t accept credit cards or had a minimum purchase limit to use one.

Imagine a scenario where you’re going to visit a client, and you find out it’s their birthday. If your business has a petty cash fund, you can grab a $10 bill from the cash drawer, stop at a convenience store, and purchase a birthday card.

When you return to the office, you put the change from the purchase back in the cash drawer and register the amount spent in a cash log, whether digital or paper. If all goes according to plan, accounting includes this cash log when they close the books. Overall, the process is more convenient than paying out of pocket and submitting a reimbursement request.

This used to be a frequent occurrence in many offices. Nowadays, petty cash is most common for brick-and-mortar businesses or businesses that often transact in cash. For other companies, it’s usually simpler to automate accounting and bookkeeping without a petty cash fund.

Petty cash accounting

Recording petty cash requires a few steps to ensure you’re tracking and managing expenses accurately. Here’s how you’d typically handle petty cash in accounting:

1. Appoint a petty cash custodian

Before you fund a petty cash account, you need to appoint a petty cash custodian. The petty cash custodian is in charge of cashing the check you use to fund the account and maintaining the ​​amount of cash in the cash box. This person is also responsible for determining your petty cash policy, and they’re in charge of collecting receipts and verifying the cash log is up to date as well.

2. Fund the petty cash account

Once you’ve tapped your petty cash custodian, determine the total amount of money you want to keep in the petty cash fund. For example, you might keep just enough cash on hand to cover small expenses for one month at a time—say $100.

Then, create a petty cash account in your accounting system under current assets. Withdraw the amount you need from the bank, then make a journal entry to transfer cash to the petty cash fund:

3. Record your petty cash expenses

Each time you pay an expense out of petty cash, you fill out a petty cash voucher. This voucher records the transaction details, including the date, dollar amount, purpose, and the person receiving the cash. You then use these vouchers to update the accounting records.

4. Record petty cash transactions in your ledger

After you collect and organize the expense receipts from your employees, you’d update your books to show how you used your petty cash for the period. Record all your petty cash transactions in your general ledger, detailing each expense and the corresponding voucher. This helps to reconcile the petty cash account and ensure you accurately account for all transactions:

5. Reconcile the petty cash fund

Regular reconciliation of your petty cash fund ensures that your physical cash on hand plus the total of receipts and vouchers equals the established petty cash fund amount. Investigate and resolve any discrepancies when they arise.

Proper documentation and regular reconciliation are crucial to managing petty cash effectively and ensuring accurate financial records. It’s especially important to make sure your financial statements are accurate in the event of an audit.

6. Replenish the petty cash fund

When the petty cash fund needs replenishing, you’ll calculate the total amount spent using the petty cash vouchers, then write a check from your bank account to bring the petty cash fund back to its initial amount.

5 reasons to avoid petty cash funds

Since credit cards and e-payments are more common nowadays, petty cash funds are no longer necessary for a healthy business spending culture. Today, it’s mostly considered an outdated practice that often brings more risks than benefits.

Here are five reasons you might not want a petty cash fund:

1. They make it hard to keep records

Unlike other payment methods, cash is virtually untraceable. Keeping track of a petty cash fund requires time and attention; for this reason, it’s subject to human error.

To properly maintain the total amount of cash in a cash box, team members must receive training on appropriate uses for the petty cash fund, cash management, and how to register transactions in a cash log.

2. Small transactions add up

In theory, petty cash shouldn’t make up a significant amount of business spend. But spending a few dollars here and there quickly adds up, particularly on a growing team.

Let’s say you have a team of five people in an office. Each person drinks an average of two cups of coffee a day, for a total of 10 cups of coffee per person per week. If the office is open 50 weeks of the year, this amounts to 500 cups of coffee per person per year.

That’s 2,500 cups of coffee. Even if you’re purchasing coffee in bulk, this will still amount to hundreds of dollars. If your office opts for single-serve coffee pods, you’re likely spending thousands of dollars—just on coffee.

Petty cash transactions make it difficult to see where your business is spending money, which makes it hard to create expense policies that align with business goals.

3. They're subject to theft and oversights

Because cash is hard to track, petty cash funds are liable to disappear. This can often be unintentional, like if a team member forgets to register a purchase on the cash log or doesn’t return change to the cash drawer.

4. Cards are commonly accepted

Petty cash funds are a holdover from a time when cash was preferable to card transactions. Today, most major retailers accept—and even prefer—cards. And with the advent of online shopping, buying items like office supplies, birthday cards, and coffee from online retailers is often more cost-efficient, making petty cash funds obsolete.

5. There are better alternatives

Corporate credit cards, debit cards, virtual cards, and other electronic payment options all automatically register in a neat summary. This avoids the major pitfalls of petty cash funds and gives you more visibility into company spend.

Replace your petty cash fund with Ramp

Instead of having petty cash on hand, your team can use Ramp’s corporate cards to cover everything from recurring bills to the smallest business expenses.

With real-time expense reporting and built-in spending limits by category, you can access all the benefits of a petty cash fund without the risk of human error, fraud, or theft. Best of all, you won’t need a fund custodian to review every little transaction.

Try an interactive demo to learn more about how Ramp saves customers an average of 5% annually across all spending.