What is petty cash?

Published Thursday 23 July 2026

Table of contents

• What is petty cash?
• Types of petty cash
• Common petty cash expenses
• How does petty cash work?
• How to record petty cash transactions
• How to reconcile petty cash
• Petty cash rules and best practices
• Advantages and disadvantages of petty cash
• Petty cash vs cash on hand
• Petty cash in Australia
• Simplify your petty cash tracking with Xero
• FAQs on petty cash

Key takeaways

• Petty cash is a small fund of physical money kept on hand to cover minor, everyday business expenses like postage, office supplies and small reimbursements.
• A dedicated custodian should manage the fund, keep receipts for every transaction and reconcile regularly to prevent discrepancies and fraud.
• In Australia, the ATO requires you to keep records of all petty cash transactions, and you can only claim tax deductions for expenses backed by receipts.
• Using accounting software to track petty cash transactions saves time, reduces errors and gives you a clear audit trail when it counts.

What is petty cash?

Every business has small, unexpected costs that pop up during the day. Petty cash is a simple way to handle them without the paperwork of a full purchase order or bank transfer.

Petty cash is a small amount of physical money kept on your business premises to pay for minor, day-to-day expenses. It typically sits in a locked box or drawer and is managed by 1 designated person, known as the custodian.

The word "petty" comes from the French petit, meaning small. That sums up the idea: petty cash covers low-value purchases that aren't worth processing through your regular accounts payable system. Think stamps, milk for the office kitchen or a last-minute taxi fare. For a deeper look at setting up and running a fund, see the guide on managing a petty cash account.

The amount you keep in petty cash is called the float. Most small businesses set a float somewhere between $100 and $500, depending on how often small expenses come up. When the float runs low, you top it back up from your main bank account.

Types of petty cash

Not every business manages petty cash the same way. Here are 4 common approaches you can use, depending on your needs.

• General petty cash: the most flexible option. You keep a set amount of cash on hand and use it for any small business expense. There's no fixed replenishment schedule; you simply top up the float when it gets low.
• Imprest petty cash: a more controlled system where you start each period with a fixed float. At the end of the period, you replenish the fund back to exactly the same amount. This makes reconciliation straightforward because the cash plus receipts should always equal the original float.
• Emergency petty cash: a separate fund reserved for urgent, unplanned expenses. You only dip into it when something unexpected comes up, like a broken lock that needs a same-day locksmith.
• Discretionary petty cash: set aside for non-essential spending at the manager's or owner's discretion. This might cover team morning teas, birthday cards or small morale-boosting purchases.

Common petty cash expenses

Petty cash is designed for small, routine purchases that would be impractical to process through your normal payment channels. Here are the types of expenses it typically covers.

• Office supplies: pens, notepads, printer paper, sticky notes and other stationery you need in a pinch.
• Postage and shipping: stamps, courier charges and small parcel deliveries.
• Catering and kitchen supplies: milk, tea, coffee, biscuits and lunch orders for team meetings.
• Employee reimbursements: paying back a team member who picked up something small for the business out of their own pocket.
• Transportation: taxi fares, parking fees or public transport costs for short business trips.
• Minor repairs and maintenance: replacing a broken power board, buying cleaning supplies or getting a key cut.
• Gifts and cards: birthday cards, thank-you gifts or small tokens for clients and staff.

How does petty cash work?

Setting up and running a petty cash system is straightforward. Here's how the cycle works from start to finish.

Set up the fund. Decide on a float amount that suits your business. Withdraw that amount from your bank account and place it in a secure, locked box or drawer. A float of $100 to $500 works for most small businesses, but yours might need more or less depending on how frequently small expenses come up.

Appoint a custodian. Choose 1 person to manage the petty cash. The custodian is responsible for handing out cash, collecting receipts and keeping the petty cash log up to date. Having a single point of responsibility reduces the risk of errors and misuse.

Disburse cash as needed. When someone needs petty cash, they request it from the custodian, explain what it's for and provide a receipt once they've made the purchase. The custodian records the amount, date, purpose and who received the cash.

Replenish the fund. When the float gets low, the custodian tallies up all the receipts and requests a top-up from the business bank account. The replenishment amount should equal the total of receipts since the last top-up, bringing the float back to its original level.

How to record petty cash transactions

Accurate record-keeping turns petty cash from a potential headache into a reliable system. Here's how to handle the accounting side.

Setting up the fund. When you first create your petty cash float, record a journal entry that debits your petty cash account and credits your bank account. For example, if you set up a $200 float, you'd debit Petty Cash $200 and credit Bank $200.

Recording expenses. Each time someone spends from petty cash, record the transaction by debiting the relevant expense account (for example, Office Supplies or Postage) and crediting the Petty Cash account. Attach the receipt to the entry so you have a clear audit trail. If you're new to journal entries, the small business bookkeeping guide covers the basics.

Replenishing the fund. When you top up the float, debit the Petty Cash account and credit the Bank account for the replenishment amount. After this entry, your petty cash balance should return to the original float.

On your balance sheet, petty cash sits under current assets. It's a small but real asset your business holds, just like your bank balance. Some businesses include it as a line item under "cash and cash equivalents" for simplicity.

How to reconcile petty cash

Regular reconciliation keeps your petty cash accurate and helps you catch problems early. Aim to reconcile at least once a month, or more often if your fund sees heavy use.

1. Count the physical cash remaining in the petty cash box.
2. Add up all the receipts and vouchers since the last reconciliation.
3. Check that the cash on hand plus the total receipts equals your original float. If your float is $200 and you have $45 in cash, your receipts should total $155.
4. Investigate any discrepancies. A small difference might be a rounding error, but larger gaps could point to missing receipts or unauthorised spending.
5. Record any overages or shortages in a "cash over and short" account in your books. This keeps your records honest and gives you a trail to review.
6. Replenish the fund back to the original float and file all receipts for your records.

If you find the fund consistently doesn't balance, review your processes. Common culprits include forgotten receipts, incorrect change and spending without custodian approval.

Petty cash rules and best practices

A few simple rules go a long way towards keeping your petty cash secure and your records clean.

• Appoint a dedicated custodian. 1 person should be responsible for the fund at all times. This creates accountability and makes it easier to trace any issues.
• Set clear spending limits. Define a maximum amount per transaction. Anything above that limit should go through your normal purchasing process.
• Require a receipt for every transaction. No exceptions. If a receipt isn't available, use a signed petty cash voucher instead.
• Reconcile regularly. Monthly at a minimum; weekly or fortnightly if the fund gets heavy use.
• Secure the cash. Keep it in a locked box or drawer. Only the custodian should have the key or combination.
• Separate duties. The person who reconciles the fund should be different from the custodian. This separation of duties is a basic internal control that reduces fraud risk.

Advantages and disadvantages of petty cash

Petty cash is a practical tool, but it comes with trade-offs. Here's a quick look at both sides.

Advantages:

• Convenient for small, immediate purchases that can't wait for a bank transfer or purchase order.
• Fast: no approval chains or payment processing delays for low-value items.
• Flexible enough to cover a wide range of minor expenses.
• Simple to set up and manage, even without accounting experience.

Disadvantages:

• Physical cash is harder to secure than digital payments and can be lost or stolen.
• More vulnerable to fraud or misuse, especially without strong controls.
• Tracking and reconciling manual transactions takes time and effort.
• Receipts can go missing, creating gaps in your records and potential tax issues. For a broader look at keeping costs under control, see the guide on tracking business expenses.

Petty cash vs cash on hand

These 2 terms are related but they don't mean the same thing. Understanding the difference helps you keep your books accurate.

Petty cash is a specific, designated fund set aside for small business expenses. It has a fixed float, a custodian and its own set of records.

Cash on hand is a broader term that covers all the physical cash your business has access to at any given time. This includes petty cash, but also cash registers, safes and any other liquid cash reserves.

In other words, petty cash is a subset of cash on hand. Your petty cash fund is always part of your total cash on hand, but your cash on hand includes much more than just the petty cash box.

Petty cash in Australia

If you run a business in Australia, there are a few specific rules and considerations to keep in mind when managing petty cash.

ATO record-keeping. The Australian Taxation Office (ATO) requires you to keep records of all business transactions, including petty cash. You need to retain receipts, vouchers and a petty cash log that shows the date, amount, purpose and GST component of each transaction. These records must be kept for 5 years.

Tax deductibility. You can claim petty cash expenses as tax deductions, but only if you have the receipts to back them up. Without proper documentation, the ATO may disallow the deduction. This is another reason to enforce the "no receipt, no reimbursement" rule.

Drawings vs petty cash. A common mistake for sole traders and partnerships is coding personal cash withdrawals as "petty cash" in the books. If the money isn't spent on a legitimate business expense, it's a drawing, not petty cash. Mixing these up can create tax problems and misrepresent your business expenses.

GST considerations. If your business is registered for Goods and Services Tax (GST), you need to track the GST component of each petty cash purchase. This ensures you can correctly claim GST credits on your Business Activity Statement (BAS). Good cash flow management starts with tracking every dollar, including petty cash. As of 2026, you need a tax invoice for purchases of $82.50 or more (including GST) to claim GST credits. Check the ATO website for the latest threshold.

Simplify your petty cash tracking with Xero

Managing petty cash doesn't have to mean manual spreadsheets and shoeboxes full of receipts. With Xero's online accounting software, you can record petty cash transactions, reconcile your fund and keep a clear audit trail, all in 1 place. It saves you time, reduces errors and gives you confidence that your records are accurate when tax time rolls around. Get one month free.

FAQs on petty cash

Here are answers to frequently asked questions about petty cash.

Is petty cash an asset?

Yes, petty cash is a current asset on your balance sheet. It's classified under "cash and cash equivalents" because it represents money your business owns, even though it's held as physical cash rather than in a bank account.

Why is it called petty cash?

The word "petty" comes from the French word petit, meaning small. Petty cash refers to a small fund used for minor expenses, distinguishing it from larger business payments processed through bank accounts or credit cards.

How much should a petty cash fund be?

Most small businesses set a float between $100 and $500. The right amount depends on how often small expenses come up and how frequently you want to replenish the fund.

What happens if petty cash doesn't balance?

If the cash on hand plus receipts doesn't match the original float, record the difference in a "cash over and short" account. Investigate the cause; common reasons include missing receipts, incorrect change or unauthorised transactions.

Do you need receipts for petty cash?

Yes. The ATO requires receipts for all business expenses, including petty cash. Without receipts, you risk losing tax deductions and having incomplete records during an audit.