DEFINITION
Petty Cash Fund
A petty cash fund is a small amount of money that a business keeps on hand to cover minor everyday expenses such as office supplies, postage, or cab fare. Petty cash is useful for quickly covering incidental or small-scale expenses that would be impractical to pay by check or credit card.
In this article, we'll explain the purpose of having a petty cash fund and what it’s used for. We’ll also share some potential alternatives, equipping you with all the information you need to decide whether to start or continue with this business practice.
Get Ramp's free petty cash log template in our Accounting Documents Library.
What is a petty cash fund?
Petty cash 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 separate petty cash by department, putting each team in charge of its own funds. You’d list petty cash as an asset on your balance sheet.
Unlike recurring bill payments, petty cash usually covers infrequent business 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 don’t amount to significant company spend.
Examples of petty cash
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 or 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 expense that arises from conducting business
How to record petty cash
Recording petty cash in accounting involves several steps to ensure you’re accurately tracking and managing your expenses. Here’s how petty cash is typically handled in accounting:
1. Establish and fund the petty cash account
First, 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.
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 from your main bank account to the petty cash fund.
2. 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, amount of petty cash, purpose, and the person receiving the cash. You then use these vouchers to update the accounting records.
3. 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 to bring the petty cash fund back to its initial amount. Use the vouchers and receipts to create a journal entry to record the expenses and replenish the petty cash.
4. Record petty cash transactions in your ledger
Record all your petty cash transactions in a petty cash ledger, detailing each expense and the corresponding voucher. This ledger 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 case of audits.
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 transactions. Having cash on hand was convenient for situations where merchants didn’t have card readers or had a minimum purchase limit to use a credit card.
Imagine a scenario where you find out it’s a client’s birthday. If your business has a petty cash fund, you can grab a $10 bill from the cash drawer, run to the convenience store, and purchase a birthday card. This is a more common and convenient practice than paying out of pocket and submitting a reimbursem*nt request.
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.
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. This is especially true for teams with remote employees.
To establish a petty cash account, your business writes a check to a petty cash custodian. The petty cash custodian is in charge of cashing the check and maintaining the amount of cash in the cash box. This person is responsible for determining when it’s appropriate to use the petty cash fund, and they’re also in charge of collecting receipts and ensuring the cash log is up to date.
5 reasons to avoid petty cash funds
Because credit cards and online transactions are common nowadays, petty cash funds are no longer necessary for a healthy business spending culture. It’s mostly considered an antiquated practice and often brings more risks than benefits, especially for businesses that mostly operate online.
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, it’s often more cost-efficient to buy items like office supplies, birthday cards, and coffee from online retailers. You can only make these small purchases with cards, making petty cash funds obsolete.
5. There are better alternatives
Credit cards, debit cards, and online transactions all automatically register in a neat summary. This avoids the major pitfalls of petty cash funds and gives you more visibility into company spend.
Alternatives to a petty cash fund
As discussed above, dealing with petty cash is an antiquated practice, and most businesses benefit from using other methods. Consider the following alternatives to petty cash funds:
Debit cards or gift cards
One alternative to petty cash funds is a debit card or Visa gift card. Like a cash fund, this requires putting a small amount of money onto the card and then appointing a custodian to oversee the use of the card.
The benefits of this method include an automatic log of transactions, which better safeguards your cash by reducing human error and the risk of theft. On the other hand, debit and gift cards don’t accrue points or other perks like modern business credit cards, and they typically don’t come with anti-fraud measures.
Gift cards also have to be registered in an expense management software. With Ramp, this is as easy as uploading a receipt and letting the automation take care of registering the spending and reimbursing employees as needed.
Physical credit cards
One of the best cash alternatives is business cards. These are physical cards you can issue to employees, which they can then use for business-related expenses.
The biggest perk to using a business card is that it automatically syncs with expense management software—no uploading receipts or assigning cash custodians to update the spreadsheet. Every transaction is neatly accounted for. With a Ramp card, you can also set limits on spending categories. This reduces the need for employee training or constant reminders about expense policies.
This also gives you more granular control over how money is spent. Instead of having a general fund for small expenses, you can set limits for specific purchases. For example, you can create a category for client gifts and set the limit at $50 per month. This ensures that spending aligns with business objectives and prevents small expenses from adding up over time.
Virtual cards
The main drawback to physical cards is that your employees could potentially lose or damage them. Virtual cards not only eliminate this risk, they also add another layer of anti-fraud protection to your company spending.
While physical cards are convenient for purchases made at brick-and-mortar locations, virtual cards protect your business and allow employees to make online purchases and tap-to-pay transactions confidently.
With Ramp, you can issue unlimited virtual cards your employees can easily use online and add to their Apple Wallet or Google Pay. By issuing virtual cards, you gain more precise control over how much your team spends on specific categories and vendors.
Simplify spend management 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 spend updates 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 cash custodian to review every little transaction.
Our AI will alert you of spending that falls outside of company policy, and your dashboard will give you insight into how you can curb unnecessary expenses.
See a demo to learn more about how Ramp can help improve your business’s expense management practices.
