Petty cash
Learn what petty cash is, how it works, and how to set up and manage a petty cash fund for your business.
September 2023 | Published by Xero
Published Thursday 23 July 2026
Table of contents
Key takeaways
- Petty cash is a small amount of cash you keep on hand to cover minor, everyday business purchases without using a card or bank transfer.
- Most businesses run petty cash as a float, or imprest system, where a custodian looks after the money and tops it back up to a set amount.
- Petty cash counts as a current asset on your balance sheet, so you record what you spend and keep receipts for every purchase.
- Clear rules, a spending limit, and a simple log keep petty cash organised and easy to reconcile.
What is petty cash?
Petty cash is a small amount of cash a business keeps on hand for minor, everyday purchases. It covers small costs where paying by card or bank transfer isn't practical, such as milk for the office, postage, or parking.
Because these are genuine business costs, petty cash spending is usually tax-deductible. To claim it, you need to track each purchase and keep the receipt, so the money stays accounted for.
Types of petty cash
Not every business runs petty cash the same way. Here are the main types you're likely to come across:
- General petty cash: a single fund used for a range of small, everyday expenses
- Imprest petty cash: a fixed float that you top back up to the same set amount after each round of spending
- Emergency petty cash: money set aside to cover unexpected or urgent costs
- Discretionary petty cash: funds a custodian can spend at their own judgement within agreed limits
How does petty cash work?
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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.
Petty cash usually works as a float, often called an imprest system. You start with a fixed amount, spend against it, then top it back up so the fund returns to its original balance.
One person, the custodian, looks after the cash and the paperwork. They hand out money for approved purchases, collect a receipt each time, and record what was spent and why.
When the float runs low, the custodian totals the receipts and requests a top-up that matches what's been spent. Each expense is then coded to the right category in your chart of accounts and posted to the general ledger, so your records stay accurate.
How to set up and manage petty cash
Setting up petty cash takes a few simple steps, and clear rules keep it running smoothly. Follow these steps to get started:
- Choose a custodian to look after the cash and keep the records
- Set an initial float, for example $200, based on how much small spending you expect
- Store the cash securely in a locked box, drawer, or safe
- Set a spending limit per purchase and write a short policy covering what petty cash can be used for
- Keep every receipt and record each purchase in a petty cash log
- Reconcile the log against the cash regularly and replenish the float when it runs low
Good habits make the money easy to track. For tips on recording transactions accurately, keep your log up to date and match it to receipts before you top up.
How to record petty cash
Recording petty cash keeps your books accurate and your spending traceable. The process is simpler than it sounds once you break it into a few stages.
When you set up the fund, you move money from your bank into petty cash. This is recorded as a debit to the petty cash account and a credit to your bank account, so the total cash on your balance sheet stays the same.
As money is spent, you record each purchase against the right expense category using the receipts. When you replenish the float, you post those expenses and move fresh cash from the bank to bring petty cash back to its set amount.
Is petty cash an asset?
Petty cash is something your business owns and can use straight away, so it's classed as an asset. On your balance sheet it sits as a current asset under cash and cash equivalents, alongside your bank balances.
Because it's ready money, petty cash forms part of the physical cash that supports your day-to-day cash flow.
Petty cash vs cash on hand
Petty cash and cash on hand are related, but they aren't the same thing. Knowing the difference helps you report your cash position correctly.
Cash on hand is all the physical cash and liquid assets your business holds, including till floats and undeposited takings. Petty cash is a subset of that: a small amount you set aside specifically for minor, everyday purchases.
Manage petty cash and more with Xero
Petty cash is a small part of your finances, but it still needs to be tracked, reconciled, and coded correctly. Xero brings your cash, bank transactions, and everyday admin together in one place, so your records stay accurate with less manual work.
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FAQs on petty cash
Here are answers to some frequently asked questions about petty cash.
What type of account is petty cash?
Petty cash is a current asset account, because it holds cash your business owns and can spend at any time. It's grouped with your other cash and cash equivalents on the balance sheet.
How much petty cash should a business keep?
There's no fixed rule, so base the amount on how much small spending you expect over a week or two. Many small businesses keep a float between $100 and $500 and adjust it as needed.
What are the rules for managing petty cash?
Set a spending limit, keep a receipt for every purchase, and record each transaction in a log. Assign one custodian and reconcile the fund regularly to catch any gaps early.
Why do businesses use petty cash?
Petty cash covers small costs quickly without the delay of a card payment or bank transfer. It saves time on low-value purchases while keeping the spending documented.