Petty cash explained: how to set up, track and top up

Published Friday 27 March 2026

Table of contents

• What is petty cash?
• How does petty cash work?
• Setting up a petty cash fund
• When to use petty cash
• How to record petty cash
• How to replenish petty cash
• Best practices for managing petty cash
• Xero helps you manage petty cash with confidence
• FAQs on petty cash

Key takeaways

• Set your petty cash fund to cover two to four weeks of typical small expenses, keeping the amount between $100 and $500 for most small businesses, so you always have enough on hand without leaving large sums sitting idle.
• Require a receipt for every petty cash transaction and record it straight away, not at the end of the week, so your fund stays easy to reconcile and your records hold up at tax time.
• Assign one person as petty cash custodian and store cash in a locked box, limiting access to that individual alone to reduce the risk of errors or misuse.
• Reconcile your petty cash at least once a week by tallying all receipts against your petty cash book and investigating any gaps before topping the fund back up, so small discrepancies don't quietly grow into bigger problems.

What is petty cash?

Petty cash is a small reserve of physical money that businesses keep on hand for minor, everyday expenses. It gives you quick access to funds without processing formal payment requests or writing cheques.

Common petty cash expenses include:

• Office supplies: Pens, paper, printer ink
• Staff amenities: Tea, coffee, cleaning supplies
• Minor repairs: Replacement parts, emergency fixes
• Postage and delivery: Stamps, courier tips
• Employee reimbursements: Small out-of-pocket purchases

Most small businesses keep between $100–$500 in petty cash, though the right amount depends on how often you need it and what you typically spend on.

How does petty cash work?

Petty cash works on a simple fund-and-reimburse system. You set aside a fixed amount, typically $100–$1,000 depending on your business needs, and replenish it when funds run low.

When you create your petty cash fund, record the transaction in your general ledger:

• Debit your petty cash account
• Credit your bank account

For example, if you withdraw $200 to start your petty cash fund, record the $200 leaving your bank and entering petty cash.

Here's how the day-to-day process works:

• Employee makes a purchase: They pay out of pocket or request cash in advance
• Receipt collection: The employee brings the receipt to the petty cash custodian
• Record the expense: Note the amount, date, and purpose in your petty cash book
• Reimburse or reconcile: Pay back the employee or mark the advance as used

Replenishing the fund involves two roles.

Petty cash custodian

The custodian handles the day-to-day reconciliation before the fund is topped up:

• Tally all receipts against the petty cash book
• Confirm the balance matches remaining cash
• Submit receipts and records to the bookkeeper

Bookkeeper or accounting team

Once the custodian submits the records, the bookkeeper takes over:

• Withdraw cash from the bank to replenish the fund
• Record expense categories in the general ledger
• Update the petty cash account balance

Running a small team? You'll likely handle all these tasks yourself: distributing cash, collecting receipts, tracking expenses, and updating your records. The process stays the same, just with fewer handoffs.

Setting up a petty cash fund

Getting your petty cash system right from the start saves you time and prevents headaches later. Follow these steps to create a petty cash system for your business:

1. Determine your fund amount: Review your typical small expenses over the past few months and set a fund size that covers two–four weeks of purchases
2. Designate a custodian: Assign one person to manage the cash, collect receipts, and maintain records
3. Set up secure storage: Use a locked cash box or drawer in a secure location
4. Create your petty cash book: Set up a simple spreadsheet or ledger to track every transaction
5. Record the initial entry: Debit your petty cash account and credit your bank account for the starting amount
6. Establish clear policies: Define spending limits, approved expense types, and receipt requirements

When to use petty cash

Petty cash works best for small, routine expenses that need immediate payment. Here's when to use it and when to choose another payment method.

Use petty cash for

Petty cash makes sense for:

• Purchases under your set limit
• Urgent supplies needed the same day
• Small reimbursements to employees
• Cash-only vendors or situations
• Minor repairs and maintenance items

Don't use petty cash for

Some expenses are better handled through your regular accounts payable process:

• Regular, recurring expenses
• Large purchases over your set limit
• Personal expenses or loans to employees
• Anything without a receipt
• Payments that need a clear audit trail

Set a clear spending limit per transaction and require receipts for every purchase. This keeps your records clean and your fund easy to reconcile.

How to record petty cash

You need three key documents to record petty cash properly: a petty cash voucher, a petty cash book, and general ledger entries. Using accounting software like Xero can make this even easier to handle.

Here's what each one does:

• Petty cash voucher: Document each expense with the amount, business purpose, date, and employee name if reimbursing
• Petty cash book: Track your running balance by recording every expense paid and every replenishment received
• General ledger entries: Credit petty cash and debit the appropriate expense account for each transaction (for example, $20 on pencils means credit petty cash $20, debit office supplies $20)

Example of petty cash book or spreadsheet format

A petty cash book tracks every transaction in and out of your fund. Here's an example format you can use:

How to replenish petty cash

Replenish your petty cash fund when it runs low. Working through these steps in order keeps your records accurate and your fund balanced:

1. Gather all receipts: Collect every receipt from the petty cash box
2. Reconcile the balance: Add up all receipts and confirm they match the difference between your starting balance and remaining cash
3. Identify any discrepancies: Investigate if the numbers don't match before proceeding
4. Calculate the replenishment amount: Determine how much cash you need to restore the fund to its original level
5. Withdraw cash from the bank: Get the exact replenishment amount
6. Record the accounting entries: Credit your bank account and debit each expense category based on your receipts
7. Update your petty cash book: Note the replenishment date and new balance

Best practices for managing petty cash

A few simple habits help keep your petty cash accurate and your business protected. Here's what to put in place.

Security measures

Keep your cash physically secure:

• Store cash in a locked box or drawer
• Limit access to one designated custodian
• Keep petty cash separate from other funds

Documentation requirements

Good records protect you at tax time and during audits:

• Require receipts for every transaction
• Record expenses immediately, not at the end of the week
• Use pre-numbered vouchers to track each disbursement

Reconciliation habits

Regular reconciliation helps you catch problems before they grow:

• Count and reconcile weekly, or more often if you have high transaction volume
• Have someone other than the custodian perform occasional spot checks
• Investigate discrepancies before replenishing

Policy enforcement

Clear rules make it easier for everyone to follow the process correctly:

• Set clear spending limits per transaction
• Define which expense types are approved
• Document your petty cash policy in writing

Xero helps you manage petty cash with confidence

Managing petty cash can be simple and straightforward. With the right system in place, you can track every dollar, stay audit-ready, and spend less time on admin.

Xero's accounting software makes it simple to record petty cash transactions, categorise expenses, and keep your books balanced. You'll clearly see where your money goes, without the manual hassle.

Ready to simplify your small business finances? Get one month free and see how Xero can help.

FAQs on petty cash

Common questions about managing petty cash in your business.

How much petty cash should my small business keep?

It depends on your spending patterns. Look at how often you make small cash purchases and what you typically spend in a month, then set a fund amount that covers two–four weeks without running dry or sitting idle.

What expenses are appropriate for petty cash?

Petty cash suits small, immediate business purchases like office supplies, postage, minor repairs, and employee reimbursements. If an expense is recurring, large, or needs a formal approval process, use your regular accounts payable instead.

How often should I reconcile my petty cash fund?

Reconcile at least once a week, or every time you replenish the fund. The more frequently you check, the easier it is to spot a missing receipt or a recording error before it becomes a bigger problem.

Are petty cash expenses tax deductible?

Legitimate business expenses paid from petty cash can be tax deductible, but you need proper receipts and records to back up your claims. Whether a specific expense qualifies depends on your local tax rules, so check with your accountant if you're unsure.

What should I do if my petty cash doesn't balance?

Start by recounting the cash and adding your receipts again to rule out a simple arithmetic error. If the numbers still don't match, check for missing receipts or entries recorded in the wrong amount. Document any unexplained difference and adjust your records before replenishing the fund.