Petty cash seems like a minor bookkeeping concern — small amounts, infrequent transactions, low visibility. In practice, it's one of the most common sources of audit discrepancies, internal fraud, and reconciliation headaches. The problem is not the amounts; it's the informality with which cash floats are typically managed.
This guide covers how to run an imprest petty cash system correctly, what records to maintain, and how to handle the reconciliation and reimbursement process.
What Is an Imprest System?
An imprest system is the standard approach to petty cash management. The principle is simple: the float starts at a fixed amount, payments are made from the float throughout the period, and at the end of the period, the float is reimbursed back to the starting amount.
Example:
- Float: $200
- Expenditures during the month: $47 on stationery, $28 on cleaning supplies, $15 on postage = $90 total
- Cash remaining: $110
- $200 - $110 = $90 (should match the total of receipts)
- Reimbursement: $90 drawn from the bank account to restore the float to $200
At any point in the cycle, cash in the tin + receipts for expenditures should equal the float amount. If they don't, there's a reconciling difference that needs to be investigated.
Setting Up the Petty Cash System
Determine the float amount. The float should be large enough to last one month without constant replenishment, but not so large that it represents a meaningful loss if it goes missing. $100–$500 is appropriate for most small businesses.
Designate a custodian. One person should be responsible for the petty cash float at any given time. Shared custody creates diffuse accountability and makes it easier to obscure losses.
Create a petty cash box or lockbox. The float should be in a physically secure location — not in someone's drawer or bag. A lockbox kept in a secure cabinet is standard.
Establish a petty cash voucher process. For every expenditure from the float, a petty cash voucher is completed recording:
- Date
- Amount
- Purpose (description of the expense)
- Account to code it to
- Signature of the person who received the cash
The original receipt from the expenditure should be attached to the voucher.
The Accounting Entries
Initial establishment of the float:
- Debit: Petty cash (balance sheet — current asset)
- Credit: Bank
Reimbursement at end of period:
- Debit: Various expense accounts (stationery, postage, cleaning, etc.) — each category coded separately
- Credit: Bank
Note that expense entries are made at reimbursement, not when the cash is spent from the float. The float itself sits as a current asset throughout the period.
GST on petty cash expenses: Many petty cash purchases include GST. For the GST credit to be claimed, a valid tax invoice (showing the supplier's ABN and the GST amount) is required for purchases over $82.50. For purchases under $82.50, a receipt without full tax invoice details is sufficient.
Collect the receipts, review each one for GST (most small purchases from GST-registered suppliers will have GST embedded), and separate the GST from the net expense amount when coding the reimbursement.
Petty Cash Reconciliation
The reconciliation should be performed at every reimbursement — which should happen at least monthly, or whenever the float falls below 20% of its original amount.
Reconciliation steps:
- Count the cash in the float
- Total all outstanding petty cash vouchers and receipts
- Cash on hand + vouchers = should equal the original float amount
- Any shortfall (cash + vouchers < float) is a cash discrepancy that must be investigated
- Record the reimbursement entries
- Restore the float to the original amount
Cash discrepancies should not simply be written off without investigation. A pattern of small discrepancies in petty cash is a classic indicator of petty theft. Even if each individual discrepancy is small, the cumulative effect and the signal it sends about internal controls make investigation worthwhile.
What Not to Use Petty Cash For
Petty cash creates problems when it's used for expenses that should be paid through normal business channels:
Personal expenses. No personal expenditure should come from the petty cash float. This seems obvious but is one of the most common misuses — a staff member "borrows" petty cash for a personal purchase intending to replace it and doesn't.
Large purchases. Petty cash is for small, incidental expenses that can't conveniently wait for a cheque or electronic payment. Using petty cash for expenses above $50–$100 creates unnecessarily large float movements and makes the reconciliation harder.
Employee loans. The petty cash float is not a short-term lending facility. Any "loans" from petty cash that aren't promptly repaid create the same Division 7A-adjacent risk as other informal employer-employee loans.
Going Cashless: The Alternative to Petty Cash
Many businesses are eliminating petty cash entirely in favour of:
Corporate credit cards with expense management: A low-limit corporate credit card (or virtual card) assigned to a staff member, with expenses captured digitally via an expense management app and reconciled to the card statement. Receipts are photographed at the point of purchase, eliminating the paper trail issue.
Reimbursement on claim: Staff pay minor expenses from their personal funds and submit a simple expense claim (with receipts) for reimbursement via payroll or a weekly payment run.
Both approaches produce better records, better GST compliance (receipts are captured and reviewed before coding, not reconstructed from memory), and lower fraud risk.
For businesses that must handle cash (retail, hospitality), petty cash may still be necessary. For office-based businesses, going cashless is worth considering as part of the next system review.
The ATO's View on Petty Cash
The ATO expects petty cash expenditure to be supported by receipts. In a review, claims for expense deductions without supporting documentation — which petty cash often produces — are disallowed. The imprest system, properly run, creates the documentation trail the ATO expects. An informal cash tin with no vouchers or records creates exactly the kind of unverifiable claim that attracts scrutiny.
Run the imprest system. Keep the receipts. Reconcile monthly. It's a small compliance overhead for a process that otherwise carries meaningful audit risk.