What is petty cash?
Petty cash is a small reserve of physical money kept by a business to cover minor day-to-day expenses that are too small to justify the use of a cheque, electronic transfer, or corporate card. Common examples include buying office supplies, paying for staff refreshments, covering small postage costs, or reimbursing employees for minor out-of-pocket expenses.
Despite its informal reputation, petty cash is an asset on the balance sheet — not an expense — and must be properly managed and recorded in accordance with ATO guidelines.
How does a petty cash fund work?
A petty cash fund begins with a fixed amount of cash withdrawn from the business bank account, often between $200 and $500. This is known as the petty cash float. As money is spent, receipts are collected to account for each transaction. The total of receipts plus remaining cash should always equal the original float amount.
When the balance runs low, the fund is replenished by withdrawing additional cash from the business account. At this point, the individual expenses are recorded in the appropriate expense accounts in the general ledger.
Recording petty cash transactions
All petty cash transactions must be supported by a receipt or petty cash voucher and recorded in a petty cash register. These records are then entered into your accounting system. The ATO requires businesses to keep accurate records of all petty cash spending, as these may be reviewed during an audit to verify the legitimacy of claimed tax deductions.
It’s a common misconception among Australian small business owners to treat random cash withdrawals from a business account as “petty cash.” Without proper receipts and reconciliation, such withdrawals should instead be coded as drawings.