Petty cash: Key info for business owners

No matter what size your business is, sometimes you just need a tenner for some last-minute office snacks, or a few pens on the way to a meeting. These expenses might seem too small to run through your formal payment processes, but still need to be accounted for properly. That’s where petty cash comes in. 

While petty cash is relatively easy to manage, it can cause unnecessary headaches if you get lax with your record-keeping. Let’s explore how petty cash works and what you can do to keep your books accurate and HMRC happy.

Petty cash (meaning)

So, what is petty cash?

Petty cash is a small amount of physical money that businesses keep on hand to cover minor, day-to-day expenses that are too small or urgent to warrant processing through your usual payment systems. Typically ranging from £50 to £500, depending on your business’s size and needs, petty cash might be used for:

• Buying milk for the office kitchen
• Paying for a taxi fare when the card machine is down
• Purchasing emergency stationery supplies
• Reimbursing an employee for a small work-related expense

Petty cash offers a simple and convenient solution to small, inevitable expenses. It means that employees don’t have to pay for something out of pocket and claim it back later, and that you don’t need to process cumbersome purchase orders for a £3 packet of biscuits. Instead, you can authorise these little transactions on the spot.

However, don’t let the word “petty” fool you into thinking this money doesn’t matter when it comes to your accounts. Under UK accounting standards, every penny of petty cash must be properly recorded and reconciled, just like any other business asset. HMRC expects to see clear records of how this money is spent, and it all needs to tie back to your business’s financial statements.

Is petty cash always physical cash?

While petty cash has historically referred to physical notes and coins, many businesses are increasingly moving away from handling actual cash for practical and security reasons. Instead, some are opting for what’s often referred to as “digital petty cash” or prepaid expense cards.

Prepaid business cards work like debit cards but are loaded with a set amount. The advantages are obvious: no one needs to handle physical cash, there’s an automatic digital record of every transaction, and you can set spending limits per card or per transaction. Many of these cards also integrate with accounting software, making the bookkeeping process much easier than manually logging cash transactions. Some companies still prefer physical cash, however, while others use a hybrid cash and prepaid card solution. 

Regardless of the option you choose, remember that your petty cash is still a business asset, and your expenses still need to be properly documented and categorised.

Speaking of which, is petty cash an asset or expense?

This is an important point to clarify: petty cash is an asset, not an expense.

The physical cash itself sits on your balance sheet as a current asset — it’s money your business owns, just like the funds in your bank account. When you initially set up your petty cash fund by transferring £200 from your business bank account, for example, you’re simply moving money from one asset (bank) to another asset (petty cash).

The expenses only appear when you actually spend the petty cash. When someone uses £15 to buy office supplies, that’s when you record a £15 stationery expense. The petty cash asset decreases by £15, and you’ve got a legitimate business expense for your profit and loss account.

This distinction matters for your bookkeeping. You’ll need to track both the petty cash balance as an asset and categorise each individual purchase as the appropriate type of business expense when preparing your accounts.

What are the rules for petty cash?

There are several important processes to follow when it comes to handling petty cash. These steps will help you stay compliant with HMRC’s requirements and maintain proper financial controls.

• HMRC and tax requirements: Every petty cash transaction must be properly documented with receipts or vouchers, as HMRC treats these expenses the same as any other business expenditure. You’ll need to retain all supporting documentation for at least six years, and ensure that only legitimate business expenses are paid from petty cash. Personal purchases are strictly off-limits and could land you in hot water during a tax inspection.
• VAT considerations: If your business is VAT registered, you can reclaim VAT on petty cash purchases, but only if you have proper VAT receipts. Hastily scribbled till receipts from the corner shop won’t cut it. You need receipts showing the supplier’s VAT number, a clear breakdown of VAT, and your business details.

• Internal controls and limits: Most businesses set spending limits for individual petty cash transactions, typically between £10 and £50. Anything above this threshold should go through your normal purchase approval process. It’s also wise to limit who has access to the petty cash tin (or card). Designating one or two responsible custodians helps prevent unauthorised spending and makes reconciliation that much easier.

• Record-keeping essentials: You must maintain a petty cash book or log that records every transaction, including the date, amount, purpose, and who made the purchase. Each entry should be supported by a receipt or petty cash voucher. Regular reconciliation, ideally weekly or monthly, ensures your records match the actual cash left in the literal or virtual tin.

• Security and storage: Keep petty cash in a locked box or drawer, with keys held by authorised personnel only. If you’re using a petty cash card, restrict who has access. It’s also important to consider your business insurance policy — some insurers have specific limits on cash kept on premises.

The golden rule: treat petty cash with the same respect and rigour as your other business finances. Good habits from the start will save you problems later and will ensure you keep HMRC happy.

What is a petty cash example?

Let’s walk through a typical week in the life of a small marketing agency’s petty cash system to see how it works in practice.

Imagine Creative Spark Ltd decides to establish a £200 petty cash fund. The office manager, Sarah, withdraws £200 from the business bank account and places it in a locked cash box. In the accounting records, this appears as a transfer from the bank account (reducing that asset by £200) to petty cash (creating a new £200 asset).

The office runs out of milk on Monday morning, so Sarah spends £3.50 on a couple of pints. She keeps the receipt and records this in the petty cash log: 

Date: 03/06/2025

Description: Office milk, purchased by Sarah Miller

Receipt #: 034

Amount: £3.50

Category: Office refreshments

The running balance now shows £196.50 remaining.

On Wednesday, a client meeting runs late and the team needs to order sandwiches for lunch, totalling £24.80 from the local café. Tom handles this purchase and provides the receipt. Friday brings an urgent need for printer paper when the regular supplier can’t deliver until next week – £12.99 from the high street stationer, complete with a proper VAT receipt since the business is VAT registered.

By Friday afternoon, the total amount of petty cash spent comes to £41.29. The physical count shows £158.71 in the tin, which matches the calculated balance.

When preparing monthly accounts, these petty cash expenses are allocated to their proper categories: office refreshments and client hospitality go to different expense accounts, and stationery becomes an office supplies expense. The VAT on the stationery purchase can be reclaimed since there’s a proper VAT receipt.

What does a petty cash template look like?

A good petty cash template is your financial lifeline for tracking every penny that goes in and out of your petty cash tin. Here’s what an effective template should include and how to structure it:

• Essential columns for your petty cash log: Your template needs to capture the key details that HMRC expects to see. Start with the date of each transaction, followed by a brief but clear description of what was purchased. “Office milk” is fine, but “miscellaneous supplies” won't cut it during an audit. Include who made the purchase (this can be handy for queries later), and the receipt number or voucher reference so you can easily match entries to your supporting documents. Enter the amount spent.

It’s also a good idea to include separate columns for different expense categories like office supplies, travel, refreshments, or postage. This makes it much easier when you’re preparing your accounts and need to allocate expenses to the right categories. 

• The reconciliation section: Your template should include a reconciliation area where you can regularly check that your records match reality. This typically shows your opening balance, total receipts added during the period, total payments made, and the closing balance that should match the physical cash in your tin. Make sure you investigate any discrepancies straight away.
• Supporting voucher system: Many businesses use numbered petty cash vouchers alongside their log. These small forms capture the same information as your main record but provide a paper trail for approval. The person requesting money fills out the voucher, gets approval from an authorised signatory, and attaches the receipt when they return. The voucher numbers then reference back to your main log.

• Digital vs. paper options: While a simple Excel spreadsheet works perfectly well, some businesses prefer cloud-based templates that multiple people can access (with proper permissions, of course). Whatever format you choose, make sure it’s backed up regularly. Losing your petty cash records is a nightmare you want to avoid.

The key is to keep your petty cash process simple but comprehensive. Your template should be straightforward enough for anyone to fill in correctly, but detailed enough to satisfy HMRC’s requirements and your own need for financial control.

Quickfire summary

Petty cash might seem like a minor detail in your business finances, but getting it right from the start will save you considerable hassle down the line. Remember that every pound in your petty cash tin is a business asset that needs tracking, every expense requires proper documentation, and regular reconciliation is essential for maintaining accurate records.

The key is finding a system that works for your business — whether that’s physical cash, prepaid cards, or a combination of both. Set clear limits, designate responsible custodians, and maintain meticulous records. With proper controls in place, petty cash becomes a valuable tool for handling those inevitable small expenses that keep your business running smoothly.

Also read:

• How to claim VAT back: Step-by-step guide
• What's the Best App for Invoicing? Top 7 Picks
• What expenses can I claim as self-employed in the UK?