Petty cash: What it is, how it works, and how your small business can manage it

Published Thursday 27 November 2025

Table of contents

• What is petty cash?
• What is petty cash used for?
• How to set up a petty cash fund
• 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

• Establish a petty cash fund between £50-£200 with a designated custodian who manages cash distribution, collects receipts, and maintains security through a locked storage system.

• Implement a voucher system that requires receipts for every expense, sets maximum spending limits (such as £25), and maintains a petty cash book to track all transactions and running balances.

• Reconcile your petty cash fund regularly by ensuring the remaining cash plus receipts equals the original fund amount, then replenish with the exact amount spent to restore the starting balance.

• Record petty cash transactions properly by debiting your petty cash account when establishing the fund, then crediting petty cash and debiting relevant expense accounts when recording purchases in your general ledger.

What is petty cash?

Petty cash is a small amount of company money you keep on hand for minor business expenses. It acts as a cash float for times when you cannot use a cheque or company card, such as paying for a small delivery or buying milk for the office kitchen.

A petty cash fund makes it easier to handle small, everyday purchases and keep accurate records.

What is petty cash used for?

You use petty cash for small, infrequent purchases that support your daily business needs. While every business is different, some common uses include:

• Reimbursing an employee for buying coffee for a client meeting
• Paying for postage or small courier fees
• Buying minor office supplies like pens, stamps, or stationery
• Covering local travel costs, such as bus fare or parking
• Paying for office refreshments like tea, coffee, and milk

How to set up a petty cash fund

Setting up a petty cash fund is straightforward. Following a few simple steps ensures it's managed correctly from the start.

1. Decide on the fund amount. Start with an amount that makes sense for your business needs, typically between £50 – £200. You can adjust it later.
2. Appoint a custodian. Choose a trusted employee to manage the fund, hand out cash, and collect receipts.
3. Get the cash. Withdraw the chosen amount from your business bank account.
4. Make the first journal entry. Record the withdrawal in your accounting records to show that the money has moved from your bank to your petty cash fund.
5. Keep it secure. Store the cash in a locked box or drawer that only the custodian can access.

How does petty cash work?

Petty cash works through a simple fund and reimbursement system where you set aside money for small expenses, track spending with receipts, and replenish the fund when needed. Most businesses maintain £100 to £1000 in their petty cash fund, depending on their size and expense needs.

When you first create your petty cash fund, you record a debit to your petty cash account and a credit to your bank account in your general ledger.

Example: If you take £200 out of the bank to fund your petty cash, you record the withdrawal from your bank account and note that the funds were for your petty cash.

When employees incur small expenses, they bring a receipt to you or your designated petty cash cashier. The process works like this:

• Receipt collection: The cashier keeps the receipt and notes the expense in a petty cash book or spreadsheet
• Reimbursement: The employee gets reimbursed from the petty cash fund
• Alternative approach: Give employees money upfront from petty cash, then collect the receipt afterwards

When you need to top up the petty cash fund, the cashier checks that the receipts and petty cash book balance. They then send the petty cash book and receipts to the bookkeeper or accounting team who provide more cash from the bank to top up the fund. The cashier updates the petty cash book to reflect the new balance.

The bookkeeper or accounting team also updates the general ledger. They note that cash has been taken out of the bank account and added to the petty cash fund, and they also record the petty cash receipts to the correct expense accounts.

If you run a small business, you may handle petty cash yourself. You will hand out cash, collect receipts, track everything in the petty cash book, get more cash from the bank, and update your accounting records.

How to record petty cash

Recording petty cash means tracking three things: vouchers for each expense, a running balance in your petty cash book, and general ledger entries. Xero accounting software can automate much of this process.

Here's what you need to stay on top of it all.

• note the expense and how it relates to your business, record the employee's name, and collect receipts for reimbursements
• track your fund's cash balance by recording all expenses and cash additions
• credit your petty cash account and debit the relevant expense account

Example of petty cash book or spreadsheet format

A petty cash book is a simple record that tracks all money coming in and going out of your petty cash fund. Here's how it looks:

Best practices for managing petty cash

Good habits help you keep your petty cash in order and avoid problems. Here are some best practices:

• always get a receipt for every purchase, no matter how small
• use a voucher system for every withdrawal, stating the amount, reason, and recipient
• set a maximum amount for petty cash purchases, such as £25; use your normal expense process for larger amounts
• reconcile the fund rfor exampleularly, making sure the cash plus receipts equals the starting amount
• replenish the fund with the amount spent to return it to its original balance, and record all expenses in your accounting software

Managing petty cash with accounting software

While a physical cash box is traditional, you can use accounting software to manage small expenses more simply and securely. Instead of handling cash, your team can use tools that make tracking spending easy.

For example, with the Xero Expenses management tool, employees can take a photo of a receipt with their phone, and the details are automatically captured. You can then review and approve the expense online and reimburse employees through payroll using Xero accounting software. This creates a clear digital trail, reduces the risk of losing receipts, and saves you time on manual data entry.

By moving away from physical cash, you get better control and real-time visibility over your business spending. If you want to simplify expense management, sign up for a free trial of Xero accounting software.

FAQs on petty cash

Here are answers to some common questions about petty cash.

How much petty cash is allowed in the UK?

Most small businesses find that a float between £50 – £200 is enough to cover minor expenses.

Is petty cash an asset or expense?

The petty cash fund is a current asset on your balance sheet because it is cash your business owns. However, when you use the money to buy something, that purchase is recorded as an expense. For example, the £100 in your cash box is an asset, but the £5 you spend from it on stationery is an office supplies expense.

What is a petty cash journal entry?

There are two main types of journal entries for petty cash. To set up the fund, debit the petty cash asset account and credit your bank account. To replenish the fund and record expenses, debit the relevant expense accounts (such as office supplies or travel) and credit your bank account for the total amount you add back to the fund.