Petty Cash Expenses: What Counts and What Doesn't
A practical guide to what actually belongs in petty cash, the limits that make sense, and how it interacts with KRA deductions.
Every business has a petty cash box and every business has someone arguing that a particular expense belongs in it. Some of those arguments are reasonable. Most are not.
This is a practical guide to what actually belongs in petty cash, what does not, and how the whole category interacts with tax deductions.
What petty cash is for
Petty cash is for small, immediate, business-related expenses that cannot reasonably go through a purchase order.
The three tests for whether an expense belongs:
Small. Above a few thousand shillings, it goes through the regular process. Immediate. Cannot wait for a supplier invoice or a bank transfer. Business. The expense is genuinely for the business, not for the owner personally.
An expense that fails any one of the three tests should not be paid from petty cash.
What belongs in petty cash
Six categories cover 90 percent of what most Kenyan businesses legitimately put through petty cash.
Transport and travel. Fuel for a work vehicle, matatu fares for staff on errands, parking fees. These are small, immediate, and clearly business. Usually the highest-volume petty cash category.
Office supplies. Airtime for the office phone, stationery when it runs out, printer paper, cleaning supplies. Small amounts, immediate need.
Refreshments. Tea, water, snacks for staff or for a client meeting. Small amounts, but this category is often abused because the lines are blurry.
Courier and delivery. Sending documents, samples, or small items within town. Usually under KES 1,000 per transaction.
Small repairs. A broken chair, a leaking tap, a lightbulb replacement. Below the threshold for a formal repair job.
Client hospitality. Small things offered to a visiting client: tea, water, parking for their vehicle. Rarely more than a few hundred shillings per visit.
What does not belong
The reverse list is where most disputes happen. These do not belong in petty cash, and every one of them has a reason.
Salaries and salary advances. These go through payroll. When they go through petty cash, they become untraceable and often untaxed. This is one of the most common compliance issues in small Kenyan businesses.
Stock or inventory purchases. If the business buys stock, it goes through the purchasing process and into the inventory system. Petty cash purchases of stock distort both the accounting records and the inventory counts.
Personal expenses of the owner or directors. Even if the business is a one-person operation, personal expenses are not petty cash expenses. They are drawings. Mixing them destroys both the books and the tax position.
Large purchases of any kind. Above the petty cash limit, the expense goes through the regular approval process. If the limit is KES 5,000 and the item costs KES 6,000, it does not become a petty cash expense because it is convenient.
Anything that should be on a purchase order. If the expense is recurring, or with a specific supplier, or over a certain amount, it should go through the purchasing process. Petty cash is a bypass, not a shortcut.
Anything without a receipt. If the vendor cannot provide a receipt, the expense cannot be claimed as a business deduction. It can still be paid from petty cash, but it should be recorded as an unrecoverable business expense and its tax treatment is limited.
Setting the limits
Every category should have a limit. The limits vary by business size and category, but the following are reasonable starting points for a Kenyan SME.
Per-transaction limit. KES 2,000 to KES 5,000. Anything above goes through the regular process.
Daily limit per custodian. KES 10,000 to KES 15,000. This prevents a single day of spending from emptying the box and forces the custodian to plan ahead.
Monthly total. The fixed float itself acts as a natural monthly limit. If the float is KES 20,000 and reimbursements happen twice a month, the monthly petty cash ceiling is KES 40,000.
Category limits. Transport might allow up to KES 1,000 per transaction, meals up to KES 1,500 per person, office supplies up to KES 3,000 per purchase. These limits should be in writing and posted at the front desk.
The exact numbers matter less than the existence of the limits. A business with clear limits that are sometimes too low can adjust them. A business with no limits has no control at all.
Petty cash and KRA
This is where the category becomes a compliance issue.
For income tax. Petty cash expenses are deductible if they are business related and documented. A receipt or voucher is not strictly required by KRA but the absence of one means the deduction is very likely to be challenged if the business is audited.
For VAT. Most petty cash expenses do not carry recoverable VAT, because most of them are small cash purchases from non-VAT-registered vendors. A few might have VAT, especially if the purchase is from a VAT-registered business. Those should be claimed if the ETR receipt is available. The key rule is that VAT can only be claimed with a valid ETR receipt showing the supplier’s PIN.
For PAYE. If petty cash is being used to pay salaries or advances, the business has a compliance problem that extends beyond petty cash. KRA treats unreported salaries as taxable income, and the penalties for failing to withhold and remit PAYE are steep.
For the annual return. Petty cash expenses flow into the annual P&L and reduce taxable profit. The deduction is legitimate if the expenses were genuine business costs and documented. The absence of documentation does not eliminate the deduction, but it makes it very likely to be challenged.
The documentation standard
What KRA expects for petty cash expenses, in practice:
- A voucher showing the date, amount, purpose, and who received the payment
- A receipt attached to the voucher, if one was issued
- A simple note if no receipt was issued (for small vendors who cannot provide one)
- Evidence that the expense was business related
That is the minimum. Businesses that do more than the minimum have cleaner deductions and easier audits. Businesses that do less than the minimum usually have a series of small problems that become one large problem during an audit.
The realistic outcome
A business with clear categories, clear limits, and clear documentation has petty cash that is genuinely petty. It covers the small immediate expenses it was designed for, and it stops being used for anything else.
A business without those three has a petty cash box that is a workaround for the purchasing process, and its losses are invisible until the books are reconciled at year end, at which point it is too late to fix.
The difference is roughly one day of setup. Write down the categories, write down the limits, and get the custodian to acknowledge both in writing. That single act changes the way petty cash is used from that week forward.
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