The difference between cash and petty cash is that cash refers to all of a company’s monetary assets, including physical currency, bank accounts, and short-term investments, whereas petty cash is a limited amount of cash set aside specifically for small, routine office expenses.
Cash | Petty Cash | |
|---|---|---|
What It Is | Cash on the balance sheet includes petty cash, checking and savings accounts, and other cash equivalents. | Petty cash refers to actual physical cash kept on the premises, specifically designated to pay minor expenses or reimburse employees for minor expenses. |
Scope | This is all of your accessible money, regardless of its physical location. | This is a predetermined amount of physical currency kept on-site at a business location, usually in a secure box or drawer. |
Location | This includes money in your checking and savings accounts, and what’s in your petty cash fund. | This is separate from the company’s main cash holdings in the bank. |
Amount | The amount of cash you have can vary greatly depending on your income and monthly expenses. | This is typically a limited amount, often ranging from $50 to $500. |
Usage | Cash is used in a variety of methods—including physical currency, paper checks, or electronic transfers. A business uses it to cover everyday expenses, take advantage of opportunities like cash discounts, and build a buffer for emergencies. | This is used for specific purposes—small, everyday business expenses that wouldn’t justify a check or credit card due to the administrative cost. It is useful for expenses like office supplies or employee gifts. |
Tracking & Oversight | A company’s cash flow can be tracked through accounting software. | A designated person is responsible for managing the petty cash fund, and transactions are usually tracked in a petty cash book to ensure accuracy. |
Alternatives | Most expenses are paid with cash from your bank or short-term investment accounts. Rare alternatives include cryptocurrency and barter transactions. | Many businesses are moving away from petty cash due to security concerns and administrative burdens. Alternatives include debit cards for employees. |
How Cash vs Petty Cash Works
Cash and petty cash are interrelated but function in different ways within a business. Essentially, cash is the source, while petty cash is a small, controlled way to use some of that cash for specific needs.
Cash Process
Cash management involves:
- Monitoring cash flow: This involves attention to incoming vs outgoing funds, specifically tracking outstanding receivables and forecasting their collection.
- Managing expenses and payments: This means seeing to it that bills get paid on time, including managing vendor invoices and forecasting when they must be paid.
- Maintaining sufficient cash reserves: This involves ensuring that there is money in reserve for operational needs.
Petty Cash Process
Petty cash management involves:
- Assigning a custodian: It is important to have an employee or bookkeeper responsible for the petty cash fund.
- Maintaining a petty cash journal: This is so that you have a record of all transactions, which you can reconcile with receipts.
- Replenishing the fund: When the funds run low, the custodian uses receipts to justify expenses and to get reimbursed from the main business account to restore the original amount.
How They Work Together
- The business withdraws a specific amount from its overall cash (in the bank) and keeps it on hand to create a petty cash fund.
- The petty cash is used for small purchases, and receipts are collected for each transaction.
- When the petty cash fund dwindles, the custodian uses the receipts as proof of spending and replenishes the petty cash fund.
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Common Use Cases of Cash vs Petty Cash
Here’s a breakdown of common use cases for cash vs petty cash.
When to Use Cash
- Covering everyday expenses: This includes small, frequent costs that petty cash wouldn’t handle, like utility bills, internet service, or office cleaning services.
- Making purchases: Cash can be used for regular inventory purchases, especially when negotiating a cash discount with suppliers.
- Making debt repayments: Businesses may use cash to pay down existing debts, reducing interest expenses and improving their overall financial health.
- Building a cash reserve: A healthy cash reserve acts as a buffer during economic downturns or unexpected events. It allows the business to maintain operations and meet its obligations even when revenue dips.
When to Use Petty Cash
- Paying for small, routine office expenses: This is the most common use case for petty cash. It covers things like office supplies, postage stamps, snacks for the break room, or birthday treats for colleagues.
- Covering for minor travel expenses: Petty cash can come in handy for employees who need to cover small travel costs like bus and taxi fares or parking fees during work errands.
- Making impromptu purchases: Unexpected needs may arise, and petty cash allows employees to address them without needing formal approval for small amounts. Examples include buying batteries for a presentation remote or refreshments for a client meeting.
- Reimbursing employees for small out-of-pocket expenses: If an employee pays for a business-related expense upfront (like a work phone charger), petty cash can be used to reimburse them.
Examples of Cash vs Petty Cash
While cash is used for larger transactions, strategic purposes, and maintaining financial reserves, petty cash is for small, routine office expenses that wouldn’t justify the administrative burden of using checks or credit cards.
Cash | Petty Cash |
|---|---|
Scenario: A business purchases a new printer for $500. It negotiates a 5% discount with the vendor if it pays in cash. Reason for using cash: Saves $25 by taking advantage of the vendor’s cash discount. | Scenario: A client meeting requires refreshments. An employee uses petty cash to purchase $30 worth of pastries at a nearby bakery. Reason for using petty cash: This is a quick way to handle an unexpected expense to ensure a smooth client meeting. |
Scenario: A business experiences a sudden drop in sales and needs to cover payroll of $10,000 for its employees. It uses its cash reserves to meet this short-term obligation. Reason for using cash: Maintains financial stability by using readily available funds to meet payroll obligations during a difficult period. | Scenario: The office runs out of coffee. An employee uses petty cash to buy $25 worth of coffee for the break room and brings the receipt back to the office so that there is a formal record of this expense. Reason for using petty cash: This is a convenient way to handle a small, unexpected expense without needing formal approval. |
Scenario: A restaurant uses cash to purchase kitchen appliances, including a stove, a refrigerator, and an oven. Reason for using cash: These types of transactions can be useful in situations where financing options are limited or the cost doesn’t justify a loan. | Scenario: An employee needs to buy a roll of stamps that cost $50. Reason for using petty cash: Small, routine expense that wouldn’t justify the hassle of writing a check or using a credit card for such a minor purpose. |
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Frequently Asked Questions (FAQs)
Yes. Cash is a current asset that is highly liquid, and it reflects the company’s immediate financial resources. When a business reports cash on the balance sheet, this includes the petty cash fund along with the money in checking accounts and other readily accessible cash equivalents.
Yes, a petty cash fund is considered cash because it is a designated portion of the company’s overall cash holdings.
Both petty cash and cash vouchers are related to managing a company’s cash, but they serve distinct purposes. Petty cash is a designated amount of physical currency set aside for small, routine office expenses, whereas cash vouchers are documents used to record and authorize the disbursement of funds from various sources, not just petty cash.
Two alternatives to petty cash are company cards and virtual cards. Company cards can be used in the form of reloadable debit cards that allow employees to make small purchases. Virtual cards are secured cards with spending limits for specific purchases.
Bottom Line
Understanding the difference between cash and petty cash is crucial for efficient financial management. Think of your company’s cash as your total savings; it encompasses all liquid assets like bank account balances and is integral to a company’s broader financial strategy. Petty cash is like a small allowance you set aside for minor, incidental expenses, keeping the rest of your cash for larger needs; it serves a more specialized role, addressing the day-to-day, minor expenditures that keep operations running smoothly.
