Petty Cash: How It Works, Best Practices, and Easy Tracking

Published Tuesday 13 January 2026

Table of contents

• What is petty cash?
• Types of petty cash
• How does petty cash work?
• How to record petty cash
• Best practices for managing petty cash
• Managing petty cash with accounting software
• FAQs on petty cash

Key takeaways

• Implement an imprest system for your petty cash fund by starting with a fixed amount (typically $100-$500) and replenishing it with the exact amount spent in exchange for receipts, as this provides better tracking and security than a general fund approach.
• Assign one person as the petty cash custodian to manage the fund, distribute money, collect receipts, and reconcile the balance regularly to maintain clear accountability and prevent discrepancies.
• Maintain three essential records for every petty cash transaction: a petty cash voucher documenting the expense and business purpose, a petty cash book tracking the running balance, and general ledger entries that properly categorise expenses for tax and reporting purposes.
• Reconcile your petty cash fund weekly or monthly by ensuring that remaining cash plus receipts always equals your starting float, and store the fund in a locked box or drawer to prevent theft or loss.

What is petty cash?

Petty cash is a small amount of physical money businesses keep on hand for minor, unexpected expenses. These expenses typically include office supplies, employee recognition items, or emergency purchases that are impractical to pay by other methods.

You need to track all petty cash expenses, even small ones. Key benefits of tracking:

• Tax deductions: Many petty cash expenses are tax deductible
• Financial visibility: Better understanding of where your cash goes
• Compliance: Proper record-keeping for audits and reporting

Types of petty cash

Businesses typically manage their petty cash using one of two systems. The one you choose will depend on how much control and flexibility you need.

• Imprest system: This is the most common and secure method. You start with a fixed amount of cash, called a float. When the money is spent, you replenish the fund with the exact amount needed to bring it back to the original float, in exchange for the receipts. This makes it easy to track spending and spot discrepancies.
• General fund: This system is more flexible. You top up the fund with varying amounts of cash whenever it runs low. While simpler, it can be harder to track expenses and manage the balance accurately over time.

How does petty cash work?

Most businesses maintain $100 to $500 in petty cash depending on their size and expense frequency. Small businesses typically start with $100 to $200, while larger operations may need $500 or more.

Setting up petty cash requires a simple accounting entry when you first create the fund.

Initial setup steps

• Debit: Record the amount in your petty cash account
• Credit: Record the same amount as a withdrawal from your bank account
• Documentation: Note that the bank withdrawal was specifically for petty cash funding

Two common petty cash reimbursement methods

Method 1 - Employee pays first:

• Employee action: Purchases item and brings receipt to cashier
• Cashier action: Records expense in petty cash book and reimburses employee
• Documentation: Receipt kept with petty cash records

Method 2 - Advance payment:

• Cashier action: Provides cash upfront for approved expenses
• Employee action: Makes purchase and returns receipt
• Documentation: Receipt confirms proper use of advance

Petty cash replenishment process:

1. Reconcile: Check that receipts match petty cash book entries.
2. Submit: Send the petty cash book and receipts to your bookkeeper.
3. Replenish: Your bookkeeper withdraws cash from the bank to restore the fund.
4. Update: Record the new balance in the petty cash book.
5. Document: Your bookkeeper updates the general ledger so the bank withdrawal and petty cash expenses are recorded in the right accounts.

If you run a one-person business or have only a couple of employees, you will probably handle petty cash yourself. You hand out the cash, collect the receipts, track everything in the petty cash book, go to the bank for more cash, and update your accounting records.

How to record petty cash

Recording petty cash is straightforward if you keep three key types of documentation. Modern accounting software can simplify the process by automating calculations and categorising expenses.

Three essential petty cash records:

• Petty cash voucher: Documents each expense with business purpose, employee name, and receipt
• Petty cash book: Tracks running balance of all expenses and fund additions
• General ledger entries: Records credits to petty cash account and debits to specific expense categories

Example transaction: If you spend $20 on pencils, you record a $20 credit to petty cash and a $20 debit to office supplies.

Example of petty cash book or spreadsheet format

A petty cash book is a simple record that tracks all petty cash transactions, showing dates, amounts, purposes, and running balances. Here's how it works:

Best practices for managing petty cash

A good petty cash process protects your money and keeps your records accurate. Here are a few tips to help you manage your fund effectively.

• Set a clear limit: Decide on a maximum amount for the fund and for individual purchases. This prevents the fund from being used for large expenses that should go through a formal approval process.
• Assign a custodian: Make one person responsible for managing the petty cash box, distributing funds, and collecting receipts. This creates clear accountability.
• Keep it secure: Store your petty cash in a locked box or drawer to prevent theft or loss.
• Reconcile regularly: Balance your petty cash fund weekly or monthly. The total of your receipts plus the remaining cash should always equal your starting float.

Managing petty cash with accounting software

While petty cash involves physical money, tracking it does not have to be a manual job. Using Xero online accounting software makes it easier to keep your records straight and see where your money is going.

You can set up a dedicated petty cash account in your chart of accounts. When you replenish the fund, you can easily record the transfer from your main bank account. As you enter receipts, you can categorise each expense, which gives you a clear picture of your spending. This simplifies bank reconciliation and ensures your financial reports are always accurate, without the need for manual spreadsheets.

Try Xero for free to see how it can simplify your financial management.

FAQs on petty cash

Here are answers to some common questions you may have about petty cash.

How much petty cash is allowed?

The amount of petty cash you need depends on your business. A small business might keep between $50 and $100, while a larger department could need up to $500 to cover more frequent expenses. Aim for an amount that reduces trips to the bank while still keeping your cash secure.

Why do people say petty cash?

The term is a holdover from a time when businesses commonly used physical cash for small, incidental purchases. It was called 'petty' because the amounts were too small to justify formal invoices and payment processes. Even though many businesses now use digital payments, the phrase has stuck around.

Is petty cash still necessary?

With the rise of company debit cards and digital payment apps, some businesses find they no longer need a physical cash fund. However, petty cash can still be useful for businesses that frequently deal with cash-only vendors, need to provide immediate reimbursements, or operate in areas with poor internet connectivity.