Petty cash

Definition

Petty cash is a small sum of physical cash a business keeps to pay for minor, incidental expenses — postage, small supplies, refreshments — that are impractical to settle by bank transfer or card. It is topped up periodically and recorded against receipts.

In plain terms

Typically managed on an imprest system: a fixed float is held, spending is recorded with receipts, and the fund is topped back up to the float by the amount spent, so the total is always accounted for.

Why it matters

Petty cash is small in the scheme of cash flow but needs proper records for accounting and control. See float and cashbook.

In practice

For a small UK limited company, petty cash usually starts as a simple decision by a director or office manager: a modest float is drawn from the business bank account and kept somewhere secure on-site, such as a lockable tin or drawer. Whoever needs cash for a minor purchase — a book of stamps, milk for the office, a parking fee — takes what they need and leaves a receipt in its place.

At the end of a set period, someone reconciles the tin: receipts are added up, matched against what has been spent, and a top-up is drawn from the bank to bring the float back to its original level. The receipts themselves get logged in the company's bookkeeping so the expenditure is captured in the accounts, not left as an unexplained gap between what was in the tin and what should have been there.

Common pitfalls

The most frequent problem is simply losing the receipts, or letting spending happen without any paper trail at all, which makes the float impossible to reconcile and can leave a director unable to explain a discrepancy to their accountant or auditor. A related pitfall is treating petty cash as a personal top-up rather than a strictly business fund — blurring that line creates exactly the kind of informal, undocumented cash movement that a company's bookkeeping and, ultimately, its bank reconciliation should never contain.

Because petty cash sits outside the normal flow of invoices and bank payments, it can also be overlooked when a business is assessing its own working capital position — it is worth remembering that however small the float, it should still appear consistently in the cashbook alongside the rest of the business's cash movements.