Petty cash is a small amount of physical money kept on business premises to pay for minor, everyday expenses where using a bank transfer or company card would be impractical. Think stamps, milk for the office, parking meters and small stationery purchases.
Despite its name, petty cash is real money and must be accounted for just as rigorously as any other business expenditure. HMRC expects the same level of record-keeping for a £3.50 roll of tape as for a £3,500 software licence.
How petty cash works
The typical petty cash system follows the imprest method:
- A fixed amount (the float) is withdrawn from the business bank account and placed in a secure cash box
- When someone needs to make a small purchase, they take cash from the box
- They return with the receipt and a completed petty cash voucher
- The receipt is attached to the voucher and filed
- When the float runs low, it is topped up back to the original amount
The key principle is that at any point, the cash in the box plus the total value of receipts and vouchers should equal the original float amount. If it does not, there is a discrepancy that needs investigating.
Setting the float amount
There is no fixed rule for how much your float should be. Consider:
| Factor | Guidance |
|---|---|
| Frequency of small purchases | More frequent purchases need a larger float |
| Maximum single transaction | Set this at £25-£50 typically |
| Top-up frequency | Weekly or monthly is common |
| Security | Larger floats carry more risk if lost or stolen |
Most small businesses start with a float of £50 to £200. You can adjust this once you see how quickly it depletes.
The petty cash voucher
Every withdrawal from the petty cash box must be supported by a petty cash voucher. This is a simple form recording:
- Date of the expense
- Description of what was purchased
- Amount spent
- VAT paid (if applicable)
- Category or account code
- Name of the person making the claim
- Signature of the claimant
- Authorising signature (if required by your policy)
The original receipt from the supplier is stapled to the voucher. If there is no receipt (for example, a parking meter), a note explaining the expense is written on the voucher instead.
Recording petty cash in your accounts
Petty cash transactions must be recorded in your bookkeeping system just like any other expense. The typical process is:
Setting up the float
When you first withdraw cash for the float:
| Account | Debit | Credit |
|---|---|---|
| Petty cash (asset) | £100 | |
| Bank (asset) | £100 |
Recording an expense
When someone spends £8.40 on stationery (£7.00 + £1.40 VAT):
| Account | Debit | Credit |
|---|---|---|
| Stationery (expense) | £7.00 | |
| Input VAT (asset) | £1.40 | |
| Petty cash (asset) | £8.40 |
Topping up the float
When the float runs low, you top it up by the total amount spent since the last top-up. If £67.80 has been spent:
| Account | Debit | Credit |
|---|---|---|
| Petty cash (asset) | £67.80 | |
| Bank (asset) | £67.80 |
After the top-up, the petty cash balance returns to the original float amount.
VAT and petty cash
If your business is VAT-registered, you can reclaim input VAT on petty cash purchases, provided you have a valid VAT receipt. For purchases under £250 (including VAT), a simplified VAT invoice is acceptable – it must show the supplier’s VAT registration number, the date, a description and the total including VAT.
Without a valid VAT receipt, you can still record the expense but you cannot reclaim the VAT element. This is a common area where businesses lose out – make sure everyone who uses petty cash understands the importance of getting a proper VAT receipt.
Internal controls
Petty cash is inherently more vulnerable to misuse than electronic payments because it involves physical money with limited audit trail. Good controls include:
- Limit the float to the minimum practical amount
- Lock the cash box and restrict access to named individuals
- Set a maximum per-transaction limit (typically £25-£50)
- Require receipts for every transaction without exception
- Require authorisation for transactions above a certain amount
- Reconcile regularly – weekly for busy offices, monthly at minimum
- Separate duties – the person authorising payments should not be the person handling the cash
- Document discrepancies – investigate and record any shortfalls or overages
Reconciliation process
To reconcile petty cash:
- Count the physical cash in the box
- Add up the total of all vouchers since the last top-up
- Check that cash plus vouchers equals the float amount
- Investigate any discrepancy
- Record the reconciliation with the date and the person who performed it
| Item | Amount |
|---|---|
| Original float | £100.00 |
| Voucher total | £63.20 |
| Cash remaining | £36.80 |
| Expected cash (float minus vouchers) | £36.80 |
| Discrepancy | £0.00 |
When to stop using petty cash
Petty cash is becoming less necessary as electronic payments become more common. Consider whether you still need a petty cash float if:
- Your staff have company debit cards for small purchases
- You use a prepaid expense card system
- Most suppliers accept contactless payments
- Your transaction volume is very low
Even if you eliminate petty cash, you still need proper receipt management and expense tracking for card-based purchases. The recording requirements are the same regardless of the payment method.
Common petty cash mistakes
- No receipts – the most common problem; every transaction needs documentation
- No reconciliation – money goes missing unnoticed over time
- Float too large – creates unnecessary risk
- Using petty cash for personal expenses – even temporarily borrowing from the box creates problems
- Not recording in the accounts – petty cash expenses are legitimate deductions and should appear in your bookkeeping records
- Ignoring VAT – failing to identify and reclaim VAT on eligible petty cash purchases