What is Petty Cash?

Petty cash is a specific amount of cash allocated to a particular employee or department in the company, intended to cover small and urgent expenses that are difficult to pay through official channels such as bank transfers or checks.

It is also known as "incidental expenses" and is used to facilitate daily operations without needing to refer to the finance department every time. The person responsible for this fund is called the "custodian" and is personally responsible for safeguarding the money and documenting every disbursement.

Characteristics of Petty Cash:

• Fixed and specific amount: The petty cash value is usually small and predetermined (for example, 5,000 or 10,000 riyals).
• For small expenses only: Not used for large or long-term payments.
• Imprest system: When the amount nears depletion, what was spent is replenished to return the fund to its original value.
• Mandatory documentation: Every riyal spent from petty cash must be supported by a receipt or invoice.

Types of Petty Cash

Types of petty cash differ according to the nature of use and purpose. Here are the two main types:

1. Permanent Petty Cash

This is the most common type. A fixed amount is set for the petty cash (for example, 5,000 riyals), and when the balance decreases due to spending, the exact amount spent is replenished to return the fund to its original value.

Example: If the petty cash is 5,000 riyals and 2,000 riyals were spent, exactly 2,000 riyals are replenished to return the balance to 5,000 riyals.

2. Temporary Petty Cash

Granted to a specific employee or department for a specific period or project, and after the purpose is fulfilled, it must be returned in full with supporting documents. It is often used for travel, conferences, or special projects.

Example: Giving an employee 3,000 riyals to attend a trade exhibition, and upon return, they submit receipts and return the remainder.

When is Petty Cash Used?

Despite the advancement in electronic payment methods, there remain many cases where a company needs immediate cash. Here are the main uses of petty cash:

• Emergency purchases: When the company needs to purchase materials or services urgently that cannot wait for regular purchasing procedures or bank transfers.
• Mandatory cash transactions: With suppliers or service providers who only accept immediate cash payment, especially in traditional sectors or remote areas.
• Daily operational expenses: Covering small and recurring daily work needs that are difficult to anticipate or schedule in advance.
• Employee advances for field tasks: Providing employees with cash to cover their expenses during field visits, external meetings, or tasks requiring mobility.
• Administrative and government expenses: Paying official fees, certifications, or government services that require immediate cash payment.

Important reminder: Petty cash is not for large or planned expenses such as salaries, purchasing fixed assets, or long-term contracts. These expenses should go through official channels.

Steps for Managing Petty Cash in Accounting

To ensure efficient and transparent fund management, clear and organized accounting steps must be followed:

1. Creating the Fund and Determining the Amount

The system begins by determining the appropriate petty cash value for the activity size (for example, 5,000 riyals). This amount is withdrawn from the bank and delivered to the custodian with a signed official receipt. The accounting entry is:

Dr. Petty Cash
Cr. Bank

2. Disbursement from Petty Cash with Documentation

With each disbursement, the custodian must obtain an official receipt or invoice clarifying the nature and value of the expense. These documents are kept in a special petty cash file with each transaction recorded in a dedicated register.

3. Periodic Review of Petty Cash

The financial officer must review the petty cash periodically (weekly or monthly) to ensure that: Cash on hand + Receipt values = Original petty cash value. This equation must always balance.

4. Replenishing the Fund and Returning it to Original Balance

When the cash balance in the fund decreases, the custodian submits all receipts to the finance department for review. After audit and approval, an amount equal to the receipt values is disbursed to replenish what was spent. The accounting entry:

Dr. Expenses (by classification)
Cr. Bank

In this way, the petty cash balance returns to its original value, and expenses are recorded in their correct accounts.

5. Final Settlement at End of Financial Period

At the end of the fiscal year, the petty cash must be fully settled. All remaining receipts are disbursed and recorded accounting-wise, so that only cash at its original value remains in the fund, ready to start fresh in the coming year.

Frequently Asked Questions

1. What is the appropriate limit for petty cash value?

There is no fixed number, but it is preferable for the value to be sufficient to cover one to two weeks of expected small expenses. Small companies may suffice with 3,000-5,000 riyals, while larger companies may need 10,000-20,000 riyals.

2. Who should be the petty cash custodian?

A trustworthy, organized person with the ability to document accurately. Usually an administrative or financial employee who is easily accessible, not necessarily from the finance department. The important thing is that they are responsible and accountable.

3. What if receipts from petty cash are lost?

In case of lost receipt, the custodian must write an explanatory memo clarifying the reason for disbursement, amount, date, and beneficiary. However, this should be a rare exception, and excessive use raises suspicions and requires strict review.

4. Can the custodian disburse to themselves?

Yes, but under strict conditions: the disbursement must be approved by their direct supervisor, supported by official receipts, and clearly recorded. Complete transparency is necessary to avoid suspicions.

5. How often should the fund be replenished?

Depends on the disbursement rate. Some companies replenish weekly, others monthly. The important thing is not to let the fund reach zero and halt operations, nor to leave receipts accumulated for long periods without accounting recording.

6. What is the difference between petty cash and imprest fund?

The two terms are sometimes used interchangeably, but imprest fund usually refers to a specific system where the spent amount is regularly replenished, while petty cash is a broader term covering any cash delivered to an employee for specific purposes.

Conclusion

Petty cash is an indispensable tool for facilitating daily operations in companies, but it requires disciplined and transparent management to avoid manipulation and waste. By determining an appropriate value, choosing a trustworthy custodian, accurately documenting every disbursement, and continuous periodic review, you can transform petty cash from a potential weak point into an effective system that supports workflow.

Remember that success in managing petty cash depends on balancing operational flexibility with strict financial control. Don't make procedures so complex that they halt work, nor so flexible that they open the door to chaos.

Track Your Petty Cash Easily with Mezan

Managing petty cash manually can be exhausting and prone to errors. With Mezan, you can accurately track all your petty cash, document every disbursement, and review balances instantly. Mezan helps you ensure complete transparency and reduce risks of manipulation or financial waste. Start with Mezan now