Petty cash: what it is, how it works, and key tips

Published Thursday 2 April 2026

Table of contents

• What is petty cash?
• Common petty cash expenses
• How does petty cash work?
• How to set up a petty cash fund
• How to record petty cash
• Best practices for managing petty cash
• Manage petty cash with confidence using Xero
• FAQs on petty cash

Key takeaways

• Establish a petty cash fund with $100 to $500 to cover small, everyday business expenses like office supplies, postage, and employee reimbursements without processing formal payments.
• Designate one person as the petty cash custodian to manage the fund, collect receipts for every transaction, and maintain a tracking log or spreadsheet with running balances.
• Set clear spending limits of $50 to $100 per transaction and store the cash securely in a locked box or drawer with limited access to prevent misuse.
• Reconcile your petty cash weekly or fortnightly by counting the physical cash and comparing it to your records, then replenish the fund when it drops below your set threshold.

What is petty cash?

Petty cash is a small reserve of physical money that businesses keep on hand to pay for minor, everyday expenses. Instead of writing cheques or processing card payments for small purchases, you simply pay with cash from the fund.

Most small businesses maintain between $100 and $1,000 in petty cash, depending on how often they need it. A designated person, called a petty cash custodian, manages the fund and tracks all transactions.

Petty cash works well for expenses that are:

• too small to justify formal payment processing
• needed immediately without time for approvals
• easier to handle with physical cash

Common petty cash expenses

Petty cash covers small, routine purchases that come up during normal business operations. Here are typical expenses businesses pay from their petty cash fund:

• Office supplies: pens, notebooks, folders, and printer paper
• Postage and shipping: stamps, small package fees, and courier tips
• Employee reimbursements: parking fees, public transport fares, and small meal expenses
• Minor repairs: replacement light bulbs, cleaning supplies, and small tool purchases
• Client hospitality: coffee, tea, and refreshments for meetings
• Emergency purchases: last-minute items needed to keep operations running

Petty cash isn't suitable for larger expenses, recurring payments, or anything that requires a formal audit trail. For those, use standard payment methods that integrate with your accounting system.

How does petty cash work?

Petty cash works as a simple cycle: You fund the account, pay for small expenses, collect receipts, and replenish when funds run low. Most businesses keep between $100 and $1,000 on hand, depending on their size and needs.

Here's how the petty cash cycle works:

• Set up the fund: Withdraw cash from your bank account and record it as a debit to petty cash and a credit to your bank account.
• Pay expenses: When employees need to cover small costs, they either get reimbursed with a receipt or take cash upfront and return with proof of purchase.
• Track everything: The petty cash custodian logs each expense in a petty cash book or spreadsheet and keeps all receipts.
• Reconcile and replenish: When funds run low, tally the receipts against the cash balance, then top up the fund from your bank account.

If you're a solopreneur or have just a few employees, you'll likely handle all these steps yourself.

How to set up a petty cash fund

Setting up a petty cash fund creates a simple system for your business. Follow these steps to get started:

1. Determine your fund amount. Review your typical small expenses and set a starting balance that covers a few weeks of purchases. Most small businesses start with $100 to $500.
2. Designate a custodian. Assign one person to manage the fund, distribute cash, collect receipts, and keep records.
3. Create your voucher system. Design a simple form to capture the date, amount, purpose, and recipient for each transaction.
4. Withdraw cash and record it. Take the starting amount from your bank and record it in your general ledger as a debit to petty cash and a credit to your bank account.
5. Set up your tracking log. Create a petty cash book or spreadsheet to record every expense and deposit.
6. Establish clear policies. Define spending limits per transaction, which expenses qualify, and how often you'll reconcile the fund.

How to record petty cash

Recording petty cash requires three key documents: vouchers, a tracking log, and general ledger entries that align with formal accounting principles like the International Accounting Standard (IAS) 7 Cash Flow Statements. Here's what each one does:

• Petty cash voucher: Record the expense amount, business purpose, employee name (if reimbursing), and attach the receipt.
• Petty cash book or spreadsheet: Track every expense paid and every deposit made, maintaining a running balance of funds available.
• General ledger entry: Credit the petty cash account and debit the appropriate expense account (for example, $20 spent on pencils means credit petty cash $20 and debit office supplies $20).

Example of petty cash book or spreadsheet format

A petty cash book tracks each transaction with the date, description, amount, and running balance. Here's an example format:

Best practices for managing petty cash

Managing petty cash effectively prevents misuse and keeps your records accurate. Follow these practices to maintain control:

• Store funds securely: Keep petty cash in a locked box or drawer with limited access.
• Set transaction limits: Cap individual expenses at $50 to $100 to prevent misuse of the fund.
• Require receipts for every transaction: No exceptions, even for small amounts, as it can take companies an average of 15 months to uncover cash fraud.
• Reconcile regularly: Count the cash and compare it to your records weekly or fortnightly.
• Separate duties when possible: Have different people handle disbursements and reconciliation.
• Replenish at consistent intervals: Top up the fund when it drops below a set threshold rather than waiting until it's empty.
• Use accounting software: Track petty cash digitally to reduce errors and simplify reconciliation.

Manage petty cash with confidence using Xero

Petty cash doesn't have to mean messy paperwork. With a clear system for tracking expenses and regular reconciliation, you can maintain control over every dollar.

Xero's accounting software makes it simpler to manage petty cash by integrating your records into one place. Track expenses, reconcile accounts, and see where your money goes, all from a single dashboard. Get one month free and see how Xero can streamline your small business finances.

FAQs on petty cash

Here are answers to common questions about managing petty cash.

What are common examples of petty cash expenses?

Typical petty cash expenses include office supplies, postage, employee parking reimbursements, minor repairs, and refreshments for client meetings.

How much should I keep in my petty cash fund?

Most small businesses keep between $100 and $500, enough to cover two to four weeks of minor expenses without needing to replenish frequently.

Is petty cash an asset or an expense?

Petty cash is an asset on your balance sheet because it represents money your business owns. You record the purchases made from petty cash as expenses.

What's the difference between petty cash and cash on hand?

Petty cash is a specific fund set aside for small business expenses, while cash on hand refers to all physical currency a business possesses, including till floats and other reserves.

How often should I reconcile my petty cash?

Reconcile your petty cash weekly or fortnightly to catch discrepancies early and maintain accurate records.