Petty cash is a small, accessible reserve of physical currency kept on hand by a business to cover incidental, low-value operating expenses where electronic payments or purchase orders are impractical. While modern finance teams rely heavily on corporate cards and digital transfers, physical cash remains a necessary fallback for ad-hoc workplace needs.
In standard small business bookkeeping, a petty cash fund is classified as a current asset on the balance sheet rather than an immediate expense. In petty cash accounting, expenses are formally recognised across relevant cost accounts when the fund is replenished or at the end of an accounting period via adjusting entries. Managing this cash on hand effectively ensures small expenses do not slip through the cracks of your accounting controls.
What is petty cash?
To understand what petty cash means in practice, consider the day-to-day realities of running a physical office, retail unit, or workshop. Teams frequently face immediate, low-value costs such as buying milk for the staff kitchen, paying for urgent postage, or feeding a parking meter during an offsite meeting. Requisitioning a formal purchase order or issuing an electronic bank transfer for a £3 purchase creates unnecessary administrative friction.
The physical money is typically held in a secure lockbox, safe, or designated petty cash till under the care of an appointed staff member responsible for day-to-day disbursements.
Although digital payment methods dominate modern commerce, cash has not disappeared entirely. In 2024, cash accounted for 9% of all UK payments, totaling 4.4 billion transactions (UK Finance). Even as UK Finance projects cash transactions to decline to approximately 4% of total payments by 2034, many small businesses still maintain a modest physical cash float to handle unexpected incidental needs.
Common uses of petty cash
Setting clear boundaries around what can and cannot be purchased from a petty cash float protects your business against leakage and non-compliance.
Typical qualifying uses include:
- Office consumables: Emergency stationery, postage stamps, courier fees, and cleaning supplies.
- Staff amenities: Tea, coffee, milk, or basic refreshments for visitors.
- Local travel and parking: Metered parking fees, emergency taxi fares, or toll charges.
- Minor maintenance: Small hardware items, lightbulbs, or key cutting services.
Equally important is establishing what petty cash must never be used for. A petty cash tin should never serve as an informal lending facility for employee advances or director IOUs. External cash receipts from customer sales must never be placed into the fund, as mixing cash takings with float money obscures revenue auditing. In addition, employers running payroll must report employee remuneration and deductions to HMRC on or before payday via Real Time Information (RTI) reporting rather than disbursing unrecorded cash wages.
How to manage a petty cash fund
The most reliable method for controlling petty cash is the imprest system. Under this framework, management establishes a fixed petty cash balance, known as the float. At any given moment, the physical currency remaining in the box plus the total value of all authorised expense receipts must equal this fixed float.
Establishing a petty cash voucher system
Discipline in cash handling starts with documentation. Petty cash disbursements or reimbursements typically require an authorised petty cash voucher accompanied by a receipt or invoice where available, though advance withdrawals are issued before a receipt exists and certain minor expenses lack itemised receipts.
A petty cash voucher acts as an internal receipt that captures:
- The date of the transaction
- The exact amount disbursed
- The business justification and expense category
- The signature of the claimant and the custodian
- The attached proof of purchase
For UK businesses registered for value added tax, verifying receipts is vital. When reclaiming input tax, businesses must ensure that retail receipts and invoices comply with official HMRC rules and display required supplier and tax details. Without valid documentation, the business cannot reclaim input tax, and the purchase may be disallowed as an allowable expense.
Maintaining a petty cash book and recording transactions
The custodian records each disbursement chronologically in a petty cash book, either in a physical ledger or an electronic spreadsheet. This log typically uses an analytical layout with debit columns for incoming float funds and credit columns for disbursements, analysed across expense categories such as office supplies, postage, travel, and sundries.
Businesses should consult official HMRC guidance on digital record-keeping rules to ensure their petty cash recording methods satisfy statutory reporting criteria.
Reconciling and topping up the fund
When the physical cash balance runs low, or at the end of each accounting period, the custodian reconciles the fund. The custodian totals the vouchers, counts the remaining currency, and verifies that both sum to the agreed float.
Once approved, the finance team issues a replenishment from the main company bank account for the exact total of the vouchers. In the general ledger, the petty cash asset account remains unchanged at the original float value. Instead, the bookkeeper debits the individual expense accounts (and the VAT input account where eligible) and credits the bank account for the replenishment sum. This restores the physical cash in the box to its original float.
Petty cash security and best practices
Physical currency presents an inherent risk of theft, loss, and administrative neglect. Establishing robust internal controls protects both the funds and the staff handling them.
To safeguard your petty cash:
- Assign a single custodian: Restrict key or combination access to one designated person. If multiple individuals access the tin, accountability disappears when a discrepancy arises.
- Keep floats modest: Hold only what is necessary for two to four weeks of operations. Businesses commonly establish a petty cash float between £50 and £200 to minimise security risks.
- Enforce segregation of duties: The custodian managing the physical tin should not be the person who posts entries to the general ledger, authorises replenishment cheques, or performs bank reconciliations.
- Conduct surprise cash counts: A manager or independent internal reviewer should periodically count the tin without prior notice to verify that cash and vouchers match the float.
- Retain statutory records: Under Section 388 of the Companies Act 2006, private companies must retain accounting records, including cash books and vouchers, for a minimum of 3 years, while public companies must retain them for at least 6 years. HMRC tax rules require businesses to retain accounting records and supporting vouchers for at least six years from the end of the relevant company financial year. Non-compliance with HMRC record-keeping rules carries statutory penalties of up to £3,000 for each failure to keep or preserve adequate records (GOV.UK), whereas UK company law imposes separate criminal liabilities on company officers.