The Short Answer
Petty cash is a small amount of cash a business keeps on the premises to pay for minor expenses where raising an invoice or making a card payment would be more trouble than it is worth. Milk for the staff kitchen, a book of stamps, a car park, a window cleaner who only takes cash.
It is usually kept in a locked tin or a small safe, looked after by one named person, and topped up from the business bank account when it runs low. Every payment out should be backed by a receipt or a signed voucher.
That is the textbook version. The practical version is that petty cash is the one corner of the bookkeeping where small, careless habits quietly become wrong numbers, lost VAT and, now and again, an awkward conversation with HMRC. Most of this guide is about stopping that.
How Petty Cash Works: The Imprest System
Nearly every well run petty cash tin uses the imprest system. The name is old, the idea is simple.
- Pick a fixed float. Say £250. You draw that from the bank once and put it in the tin.
- Pay small expenses out of it. Each time cash goes out, a receipt goes in. If there is no receipt, the person fills in a petty cash voucher instead.
- At any moment, cash plus receipts should equal the float. If the tin holds £140 in notes and coins, there should be £110 of receipts beside it.
- Top it back up to the float. At the end of the week or month, total the receipts, record them, and draw exactly that amount from the bank. The tin is back to £250 and the cycle starts again.
The beauty of it is the built in check. Because the float is fixed, the top up always equals what was spent. Anyone can count the tin in two minutes and know whether something is missing.
The alternative, topping up with "another £100" whenever the tin looks light, is how petty cash goes wrong. Without a fixed float there is no figure to check against, and nobody can say what the balance should be.
Setting Up a Petty Cash Float
How big should the float be? Large enough to last a month, small enough that losing it would not matter much. For most small offices that lands somewhere between £100 and £300.
A rough rule we give clients: if you are topping up every week, the float is too small. If the same £50 notes have been sitting untouched for three months, it is too big, and that money would be better back in the bank.
Who looks after it? One named person, the custodian. Not "whoever is in the office". The custodian pays out, collects receipts and keeps the record. Someone else, ideally the owner or the bookkeeper, counts the tin and approves each top up. That split matters for exactly the same reason it matters in a bank reconciliation: the person handling the money should not be the only person checking it.
What can it be used for? Write it down. A one page petty cash policy listing what is allowed (refreshments, postage, small stationery, parking, emergency cleaning supplies) and what is not (wages, loans to staff, anything over £50 without sign off, personal purchases "paid back on Friday") saves a lot of argument later.
Petty Cash Vouchers and Receipts
A petty cash voucher is a small form that records a payment when there is no proper receipt, or sits on top of the receipt to add what the receipt does not say. It should show:
- the date
- the amount
- what it was for, in words a stranger would understand
- the name and signature of the person who received the cash
- the approver's signature if the amount is above your limit
- a sequential number, so missing vouchers are obvious
Number your vouchers. It sounds fussy. It is the only way to spot that voucher 47 never made it back to the tin.
The Petty Cash Book
The petty cash book is the record of every payment in and out of the tin. Paper books with analysis columns still exist, but most businesses now keep petty cash as its own cash account in Xero, QuickBooks or Sage and post each receipt to it the same way they would post a bank payment.
Whichever you use, each line needs the date, the voucher number, the description, the gross amount, the VAT if any, and the expense category from your chart of accounts. The analysis columns are what turn a pile of receipts into numbers that land in the right lines of your profit and loss account.
A Worked Example: A Small Print Shop in Whetstone
Whetstone Print & Copy Ltd keeps a £250 imprest float. It is VAT registered. Here is one fortnight of petty cash.
| No. | Date | Description | Gross | VAT | Net | Category |
|---|---|---|---|---|---|---|
| 101 | 1 Oct | Milk, tea and biscuits | £8.45 | £0.00 | £8.45 | Staff welfare |
| 102 | 2 Oct | Postage stamps | £17.40 | £0.00 | £17.40 | Postage |
| 103 | 3 Oct | Window cleaner (not VAT registered) | £30.00 | £0.00 | £30.00 | Cleaning |
| 104 | 6 Oct | Printer cable | £14.99 | £2.50 | £12.49 | Office equipment |
| 105 | 7 Oct | Car park, client delivery | £6.60 | £1.10 | £5.50 | Travel |
| 106 | 8 Oct | Taxi with urgent artwork | £22.00 | £0.00 | £22.00 | Travel |
| 107 | 10 Oct | Cleaning supplies | £11.94 | £1.99 | £9.95 | Cleaning |
| Total | £111.38 | £5.59 | £105.79 |
Food is zero rated, stamps are exempt, and the window cleaner and taxi driver are not VAT registered, so only three receipts carry VAT the company can reclaim.
The tin should now hold £250 less £111.38, which is £138.62. When the director counts it, there is £136.12. The tin is £2.50 short.
Recording It
In double entry terms, the original float was:
- Debit petty cash £250, credit bank £250
The fortnight's spending is posted as:
- Debit the expense accounts £105.79 in total (staff welfare £8.45, postage £17.40, cleaning £39.95, office equipment £12.49, travel £27.50)
- Debit VAT £5.59
- Credit petty cash £111.38
The shortage is written off on its own line:
- Debit cash shortages (or sundry expenses) £2.50, credit petty cash £2.50
Then the top up brings the tin back to the float:
- Debit petty cash £113.88, credit bank £113.88
£111.38 of receipts plus the £2.50 shortage is £113.88. The petty cash account is back at exactly £250, which is what the tin now holds. That is the imprest system doing its job.
What We Would Do About the £2.50
Nothing dramatic. A couple of pounds of loose change going missing over a fortnight is almost always a lost receipt or a miscounted coin. Write it off, note it, move on.
What we would do is keep the shortage on its own line rather than hiding it in "sundries". If cash shortages are £2.50 a month for a year, fine. If they creep up to £40 a month, the separate line tells you, and that is a conversation worth having early. Losses through an employee's dishonesty are generally deductible for tax as a trading loss. Money taken by a director or owner is not, and HMRC treats it very differently.
VAT on Petty Cash Receipts
This is where petty cash quietly costs VAT registered businesses money, in both directions.
You need evidence to reclaim VAT. For purchases up to £250 including VAT, a supplier can give a simplified invoice: their name, address and VAT number, the date, a description, the total and the VAT rate. Most till receipts from VAT registered shops meet that. A card machine slip on its own does not.
A few small purchases need no invoice at all. HMRC's VAT Notice 700 lets you reclaim VAT without an invoice on purchases of £25 or less including VAT for car park charges, road tolls, phone calls from payphones and purchases from coin operated machines. That is a short list. It is not a general rule that anything under £25 is fine without a receipt.
Do not reclaim VAT that was never charged. The common mistake runs the other way. Someone enters every petty cash slip at 20 percent "to be safe", and the business reclaims VAT on stamps, milk, the window cleaner and the taxi. On our example that would be £18.56 claimed instead of £5.59. Small on one fortnight, repeated across a year and spotted on a VAT inspection it becomes an error with interest and potentially a penalty. Our VAT guide covers the rates in more detail.
Our honest view is that petty cash should be posted line by line with the VAT taken from the actual receipt, never estimated or averaged. If a receipt is missing, the VAT is lost. That is the price of a missing receipt and it should stay that way.
Things That Go Wrong
These are the patterns we see most often when we pick up a new client's books.
Paying expenses straight out of the till. Cafés, shops and salons do this constantly. The window cleaner is paid from the takings and the takings recorded are what is left. The result is that sales are understated and the expense is missing too. Profit might come out about right, but your revenue figure is wrong, your margins look odd, and in a cash business HMRC pays close attention to gross takings. Record the full takings first, then record the payment out as a separate petty cash expense.
The director tops it up from their own pocket. Very common in small companies, and fine, as long as it is recorded. If the director puts £100 of their own money in the tin, the company now owes them £100. That is a credit to the director's loan account, not income, and not a gift. Forget to record it and the director loses track of money they could take back tax free.
"Paid back on Friday." A member of staff borrows £20 from the tin until payday. Now and then is harmless. As a habit it means the tin is never right, and loans to employees can raise benefit in kind questions if they grow. Ban it in the policy.
Wages out of petty cash. Cash paid to a casual helper is still pay. It needs to go through PAYE or be properly invoiced by someone genuinely self employed. Paying people from the tin and calling it "sundries" is the single most serious petty cash problem we come across.
Year end count never happens. The balance sheet shows petty cash of £250 every year because nobody has opened the tin since 2023. Count it at the year end and adjust the books to what is actually there. It goes on the balance sheet as cash, so it should be real.
Do You Still Need Petty Cash?
For a lot of small businesses, honestly, no.
When we set up a new client, our starting position is a company debit card or a prepaid expense card, linked to an app that photographs the receipt at the till and pushes it straight into the accounting software. Every payment is dated, matched to a bank line, and the receipt is attached before anyone has a chance to lose it. There is no tin to count, nothing to go missing and no float sitting idle.
Petty cash still earns its place in some businesses:
- shops, cafés and salons that handle cash takings anyway
- trades and building sites where some suppliers and labour still prefer cash
- charities, schools and community groups where many people spend small amounts and not everyone can hold a card
- businesses with a few staff who need to make small purchases but should not have a company card
If you are in one of those groups, keep the tin and run it on the imprest system. If you are a consultancy of four people who use petty cash twice a month for coffee, close it, bank the float and give the office manager a card with a £100 limit. You will save more in bookkeeping time than you ever spent on milk.
Records You Must Keep
Petty cash is not exempt from the record keeping rules because the amounts are small.
- Limited companies must keep accounting records that show the day to day money received and spent, under section 386 of the Companies Act 2006. HMRC expects them kept for six years from the end of the accounting period.
- Sole traders and partnerships must keep records for at least five years after the 31 January filing deadline for the tax year.
- HMRC can charge a penalty of up to £3,000 for failing to keep adequate records.
Under Making Tax Digital, VAT registered businesses and, from April 2026, sole traders and landlords with qualifying income over £50,000 must keep their records digitally. Petty cash transactions count. A paper tin is still allowed, but the entries have to end up in your software, not just in an exercise book.
How IAK Can Help
Petty cash is rarely anyone's favourite job, which is why it so often ends up as a shoebox of crumpled receipts at the year end. We set up petty cash properly as a separate account in your software, post each receipt with the right category and VAT, record director top ups through the loan account, and reconcile the float to a physical count so the balance sheet figure is real.
Often the more useful conversation is whether you need a tin at all. For many of our clients across North London and Hertfordshire, switching to a company card with receipt capture removes the problem entirely. If you would like help with either, take a look at our bookkeeping service, read about how we support small businesses, or get in touch.
Sources
- VAT Notice 700: the VAT guide, HMRC, for the simplified invoice limit of £250 including VAT and the purchases of £25 or less for which no VAT invoice is required.
- Record keeping for VAT (VAT Notice 700/21), HMRC, for the records a VAT registered business must keep to support input tax claims.
- Companies Act 2006, section 386, for the duty to keep accounting records containing day to day entries of all sums received and expended.
- Running a limited company: company and accounting records, GOV.UK, for the six year retention period and the £3,000 penalty for failing to keep records.
- Business records if you're self-employed, GOV.UK, for the five year retention rule for sole traders.
- Imprest system, Wikipedia, for the background to the fixed float method.