Petty cash
Learn what petty cash is, how to set up and record a fund, and how to keep it accurate for LHDN.
September 2023 | Published by Xero
Published Wednesday 30 September 2026
Table of contents
Key takeaways
- Petty cash is a small amount of cash your business keeps on hand for minor purchases, such as office staples or supplies for a cafe
- An imprest fund stays at a fixed amount and gets topped up based on the receipts for what was spent
- Every payout needs a voucher or receipt, and regular counts keep the petty cash book and the cash box in agreement
- Keep petty cash records, including vouchers and receipts, for seven years after the year you file your tax return, in line with LHDN guidance
What is petty cash?
Petty cash is a small amount of cash your business keeps on hand for minor purchases. Think of a box of staples for the office or an emergency block of cheese for a cafe.
Picture a cafe that runs out of cheese in the middle of the lunch rush. A staff member takes cash from the tin, buys a block from the shop next door and drops the receipt in the box. Nobody waits for a cheque to clear.
On your books, petty cash is part of your cash balance. In International Accounting Standard 7 (IAS 7), cash covers cash on hand and demand deposits. Petty cash is cash on hand, so it’s a current asset.
Even though each spend is small, you still need to track it. A clear record backs up your expense claims at tax time and shows you exactly where your cash goes.
Types of petty cash
Petty cash funds usually fall into four types, depending on how you use the money. Most small businesses start with a general or imprest fund.
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.
General petty cash
A general fund covers a mix of occasional expenses. It suits most small offices and shops that need cash for odd purchases now and then.
Imprest petty cash
An imprest fund holds a set amount of cash for a defined period, and that amount stays the same. In an imprest system, a fixed amount goes into the fund and receipts decide each top-up.
Say you start each fortnight with the same fixed amount. When the fortnight ends, the receipts show how much was spent, and you top up by exactly that figure.
Emergency petty cash
An emergency fund is set aside for urgent, unplanned costs. It might cover supplies that run out suddenly or a supplier payment that bounced because of insufficient funds.
Discretionary petty cash
A discretionary fund pays out only for expenses a manager or owner approves. It gives you tighter control when several people might ask for cash.
What can petty cash be used for?
Petty cash is for small, occasional business costs that are quicker to settle in cash. Typical petty cash expenses include:
- stationery and office supplies
- postage and courier charges
- parking fees for business trips
- minor repairs around the workplace
- refreshments for staff meetings or visiting clients
- small gifts, such as birthday cards for employees
Larger or regular payments are easier to track when they go through your business bank account. Pay these from the bank instead:
- salaries and wages
- rent, utilities and other recurring bills
- equipment and other large purchases
- personal spending by owners or staff
How much petty cash should you keep?
Keep enough petty cash to cover a few weeks of your typical small spending. The right figure depends on your business, so base it on your own receipts.
Look back over recent cash purchases to see what you usually spend in a fortnight or a month. Set the fund at that level with a small buffer, then adjust it once you see how it runs.
If you’re topping up every few days, raise the amount. If cash sits untouched for months, lower it and keep more money in the bank, which helps with managing cash flow.
How to set up a petty cash fund
You set up a petty cash fund by choosing a fixed amount and putting clear rules around it. Follow these steps to get started.
- Choose the fund amount. Base it on a few weeks of your usual small cash spending.
- Add a petty cash account to your chart of accounts. It sits under current assets alongside your bank accounts.
- Appoint a custodian. This person holds the key, hands out cash and keeps the records.
- Write a short petty cash policy. Set a limit per transaction and list what the fund can pay for.
- Withdraw the cash from your business bank account. Store it in a lockable cash box inside a secure drawer or safe.
- Start a petty cash book. Record the date and opening balance before the first payout.
How to record petty cash
You record petty cash with a voucher for each payout and a petty cash book that tracks the running balance. Your accounts then need journal entries when you create the fund and each time you top it up.
Petty cash vouchers
A petty cash voucher is a slip that records a single payout. It shows the date, amount, purpose and the name of the person who received the cash.
Attach the shop receipt to the voucher whenever you have one. If a supplier can’t give you a receipt, a simple receipt template helps you capture the same details.
The petty cash book
The petty cash book is a running log of every amount paid into and out of the fund. Common columns are date, voucher number, description, amount, expense category and balance.
Splitting payouts by category, such as postage or refreshments, makes each total quick to post to your accounts.
Petty cash journal entries
Petty cash follows double-entry bookkeeping, so every entry has a debit and an equal credit.
To establish the fund, debit petty cash and credit your bank account for the fixed amount. To replenish it, debit each expense account shown on the vouchers and credit your bank account for the total spent.
OpenStax’s guide to petty cash entries also explains the cash over and short account. A shortage is recorded as a debit, which works like an expense, and an overage is recorded as a credit.
How to reconcile and replenish petty cash
You reconcile petty cash by checking that the cash in the box plus your vouchers equals the fixed fund amount. Do it before every top-up and at the end of each month.
Work through these steps each time you reconcile and replenish.
- Count the cash in the box. Include every note and coin.
- Add up the vouchers and receipts. Only include those since the last top-up.
- Compare the combined total with the fund amount. The two figures should match.
- Record any difference in your cash over and short account. Debit a shortage and credit an overage.
- Withdraw the amount spent from your bank account. This brings the fund back to its fixed level.
- Post the expenses and file the vouchers. Match the withdrawal to your bank statement too.
Each top-up then appears as a withdrawal in your bank account. Bank transaction matching links it to your petty cash records, so your ledger and statement agree.
Petty cash controls and record keeping in Malaysia
Good petty cash controls keep the fund accurate and your records ready for a tax audit. In Malaysia, that also means keeping the paperwork for seven years.
Texas Woman’s University’s petty cash policy is a useful model, with one custodian per fund and cash duties split between people. Put these controls in place:
- one custodian with sole access to the cash box
- a voucher and receipt for every payout
- surprise counts by someone other than the custodian
- separate duties, so the person paying out cash isn’t the person reconciling it
- a written limit for each transaction
Record keeping for LHDN
Lembaga Hasil Dalam Negeri Malaysia (LHDN), the Inland Revenue Board, can review your records long after the year ends. According to LHDN’s explanatory notes, you need to keep the records, documents and working sheets used in your tax computation for seven years after the end of the year you submit your return.
That period covers petty cash vouchers, receipts and your petty cash book. Store them somewhere safe and organised, whether that’s a filing cabinet or scanned copies.
E-invoicing and petty cash receipts
Malaysia’s e-invoicing rollout affects how some purchases are documented. According to LHDN’s e-invoice FAQs, businesses with annual turnover or revenue below RM3 million are exempt from issuing e-invoices.
During the transition, a normal receipt can still support a purchase for tax purposes if the supplier hasn’t implemented e-invoicing yet. The threshold has changed more than once, so check LHDN’s latest guidance before relying on it.
Petty cash vs cash on hand
Petty cash is the small fund set aside for minor purchases, while cash on hand is all the cash your business holds.
In everyday business use, cash on hand often includes till takings and money in your bank accounts. Accounting standards such as IAS 7 use the term more narrowly for physical cash, listing bank deposits separately.
For a retail shop, the till float and the day’s takings count as cash on hand. Only the tin in the office drawer is petty cash.
Keep track of petty cash with Xero
A simple petty cash routine keeps small spending visible and your records ready for LHDN. Xero accounting software lets you set up a petty cash account and code each expense. You’ll see it next to the rest of your cash.
Spend less time on paperwork and more time on your business: pick a plan today and get one month free.
FAQs on petty cash
These quick answers cover common questions small business owners ask about petty cash.
Is petty cash an asset or an expense?
Petty cash is a current asset while it sits in the cash box, so the fund appears on your balance sheet. It becomes an expense only when you spend it, and that spending shows on your profit and loss statement.
Is petty cash a debit or a credit?
Petty cash has a normal debit balance, like other asset accounts. The balance changes only when you create the fund or change its size, because top-ups are recorded against expense accounts.
Why is it called petty cash?
“Petty” comes from the French word petit, meaning small. The name reflects the fund’s purpose: small, everyday payments.
Can a sole proprietor use petty cash?
Yes, a sole proprietor can run a petty cash fund, and it helps keep business spending apart from personal money. Record any personal withdrawals as drawings, since only business costs belong in petty cash.