What it means
The purpose is convenience rather than economics. Raising a purchase order and a bank payment for a $12 taxi fare or a box of teabags costs more in administration time than the item itself, so a small cash float handles those items with a receipt and a signature.
An imprest float is the standard arrangement. The fund is set at a fixed amount, say $500, and at any moment the cash in the tin plus the value of the receipts held should equal that $500, which makes checking the fund a matter of simple addition.
Reimbursement happens when the cash runs low or at a set point in the month. The receipts are totalled, coded to the right expense accounts, and a single payment restores the float to its original level, so one bank transaction covers dozens of small purchases.
Controls matter more than the amounts involved, because cash is the easiest asset to misappropriate. Good practice is one named custodian, a second person who approves the reimbursement, a written limit on any single payment and a receipt for every disbursement without exception.
Accounting treatment is straightforward: the fund itself sits within cash on the balance sheet, and no expense is recorded until the reimbursement is processed with the receipts attached. That is why an unreimbursed pile of receipts at year end has to be accrued to land the cost in the right period.
Many businesses have now abolished petty cash entirely in favour of prepaid company cards with per-transaction limits. The control logic is identical, but the digital record removes the counting, the tin and the awkward conversations about missing receipts.
In practice
Real-world examples.
Example
A veterinary practice keeps a $300 float for parking, postage and emergency supplies. The practice manager reimburses it every fortnight and codes the receipts to four expense accounts, replacing what would otherwise be around thirty separate bank payments a month.
Example
A film production company runs a $2,000 float on location because many local suppliers will not take cards. Each day's spending is reconciled against receipts that evening, since a shortfall discovered a week later would be impossible to trace.
Example
A charity finds its $400 tin is short by $70 with no supporting receipts. The trustees replace the fund with a prepaid card carrying a $50 single transaction limit, on the basis that the control problem was the format rather than the people.
Think of it
“A petty cash fund is the small cash box for minor everyday purchases-your business's pocket money.
Formula
Calculation
Cash in tin + receipts held should equal the imprest float
Reimbursement required = imprest float - cash counted
Cash shortage or overage = float - (cash counted + receipts held)
A design studio operates a $500 imprest float. At the end of the month the custodian counts $135.10 in cash and holds receipts totalling $362.40 for postage, taxis, stationery and refreshments.
Cash plus receipts comes to $135.10 + $362.40 = $497.50 against a float of $500, so there is a cash shortage of $500 - $497.50 = $2.50. The reimbursement needed to restore the float is $500 - $135.10 = $364.90.
The bookkeeping entry charges $362.40 across the relevant expense accounts and $2.50 to a cash shortage account, which together equal the $364.90 reimbursement. Recording the shortage separately rather than burying it in expenses means a pattern of small unexplained differences becomes visible over time.Case study
Seen in the real world.
The following is an illustrative and clearly fictional story. Ashcombe Veterinary Group, an invented three site practice, ran a $500 petty cash float at each location with no written rules about who could take money out. Reimbursement happened whenever a tin looked empty, and receipts were often replaced with a handwritten note.
At the fictional year end the auditors found that across the three sites $1,900 had been paid out during the year against receipts totalling $1,240. The difference was not evidence of theft, but nobody could demonstrate what the remaining $660 had been spent on, and the amount had to be treated as an unsupported expense.
Ashcombe moved to a single custodian per site, a $40 limit on any one payment and a rule that no cash left the tin without a receipt or a signed voucher going in first. The illustrative point is that petty cash rarely fails because of large sums, but because small amounts attract small amounts of attention.
Watch out
Common mistakes.
- Recording an expense when cash leaves the tin rather than when the fund is reimbursed, which double counts the cost once the reimbursement is also posted.
- Letting the float creep upwards each time it runs out, so the imprest discipline disappears and nobody can say what the fund should hold.
- Allowing IOU notes or staff loans from the fund, which turns a controlled expense float into an untracked lending arrangement.
Questions
People also ask.
How large should a petty cash float be?
Enough to cover roughly two to four weeks of genuinely small purchases, which for most offices means somewhere between $200 and $500.
What happens if the cash never quite balances?
Small differences are posted to a cash shortage or overage account, but a repeating pattern needs investigating rather than writing off month after month.
Is petty cash still worth having?
For many businesses a prepaid card with spending limits does the job better, though cash still earns its place where suppliers, markets or remote locations do not accept cards.
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