Petty cash for small business is a small fund of cash you keep on hand for minor, everyday purchases. Maybe you need stamps, a delivery fee, or a last-minute supply run, and writing a check would take more time than the purchase is worth. A petty cash fund solves that problem, but cash is also one of the hardest assets to control. A few simple rules keep the fund accurate and your books clean.
This guide explains what a petty cash fund is, how to set one up, how to track and replenish it, and how to handle shortages. It includes a worked example with sample numbers. This article is general information, not accounting or tax advice.
What Is Petty Cash for Small Business?
A petty cash fund is a set amount of cash held on hand to pay for small, day-to-day purchases. It works as an imprest fund. That means the fund holds a fixed amount, and you refill it as you spend so it returns to that same balance.
Petty cash is useful when a formal payment is not practical, such as when no one is available to sign a check for a small, unexpected expense. The purchases should be small enough that they are not material to your results.
On your books, petty cash is an asset. If you use an account list, our guide to chart of accounts for small business explains where an account like this fits.
Why Petty Cash for Small Business Needs Controls
Cash is easy to lose track of. For that reason, every payment from the fund should leave a record. The standard control is a petty cash voucher, which is a short form that shows the date, the amount, what the money was for, and who approved it.
At any moment, the fund should add up to its full amount. The cash in the box plus the receipts and vouchers for money already spent should equal the fund total. That simple check makes mistakes easy to spot.
Expenses paid from petty cash still need support. The IRS lists cash register receipts among the supporting documents for business expenses, and you can read its IRS guidance on supporting documents for details. Our guide to small business receipt management explains how to organize them.
How to Set Up Petty Cash for Small Business
Step 1: Choose the Amount
Pick a fund size that covers your small purchases for a normal period, such as a month. If you find that the fund runs out well before the period ends, you can increase it.
Step 2: Fund It From Your Bank Account
Write a check from your business checking account, cash it, and place the cash in a petty cash box. You then record the transfer in your books. The entry debits Petty Cash and credits Cash for the same amount.
Step 3: Assign One Custodian
Put one person in charge of the box. That person hands out cash, collects receipts, and signs each receipt when the purchase is made.
Step 4: Require a Voucher for Every Payment
Each time cash leaves the box, fill out a voucher, attach the receipt, and get approval from the responsible manager.
How to Replenish Petty Cash
Replenishing means refilling the fund to its original amount. Many small businesses do this monthly, which keeps expenses in the right accounting period. You can also replenish sooner if the cash runs low.
- Count the cash that remains in the box.
- Add up the receipts and vouchers.
- Compare the total with the fund amount. The cash and the receipts should add up to the fund.
- Write a check for the amount spent, and place the cash in the box.
- Record the expenses. Debit the right expense accounts for what the receipts show, and credit Cash for the check amount.
Notice that the Petty Cash account itself does not change during replenishment. It stays at the fund amount until you decide to change the fund. Our guide to small business expenses explains how to categorize the costs you record.
Petty Cash for Small Business Example (Hypothetical)
Here is a simple example. These numbers are hypothetical.
A small business sets up a $200 petty cash fund. It writes a check for $200, cashes it, and records this entry:
- Debit Petty Cash: $200
- Credit Cash: $200
During the month, the custodian pays for these items and keeps each receipt:
- Postage: $32
- Office supplies: $18
- Delivery fee: $15
- Parking: $8
Total spent: $32 + $18 + $15 + $8 = $73.
At month-end, the box should hold $73 in receipts and $127 in cash, which adds up to $200. The business writes a check for $73 to replenish the fund and records this entry:
- Debit Postage Expense: $32
- Debit Office Supplies Expense: $18
- Debit Delivery Expense: $15
- Debit Travel Expense: $8
- Credit Cash: $73
The fund is back to $200.
What If the Count Is Off?
Suppose the custodian counts only $125 in cash instead of $127. The box is $2 short. To bring the fund back to $200, the business writes a check for $75. It records the expenses of $73 and the $2 shortage in an account called Cash Over and Short:
- Debit the four expense accounts: $73 in total
- Debit Cash Over and Short: $2
- Credit Cash: $75
A shortage is recorded as a debit, which has the same effect as an expense. An overage works the other way. You would record it as a credit, with the same effect as revenue.
Changing the Size of the Fund
If you replenish the fund often before the period ends, consider making it larger. To raise the fund from $200 to $250, you debit Petty Cash $50 and credit Cash $50. To lower the fund, you reverse the process.
Petty Cash Best Practices for Small Business
- Keep the amount small. Petty cash is for minor purchases, not large ones.
- Store the box in a secure place. Limit who can access it.
- Use one custodian. One person is easier to hold accountable.
- Require a voucher and a receipt every time. No receipt means no clear record.
- Count the fund on a regular schedule. A routine count catches small errors early.
- Set a limit for a single purchase. Decide in advance what the fund may cover.
- Watch for repeated shortages. If the fund is consistently short, it may signal that the controls need to be tighter.
- Reconcile your bank account. Our guide to bank reconciliation for small business explains how to match your records to the bank.
Cash vs. Prepaid Card
Some businesses replace the cash box with a prepaid or debit card that employees can use for small purchases. Each option has trade-offs. Cash is quick for tiny purchases, but it is harder to control. A card leaves a record of every transaction. Choose the option that fits how your business actually buys things.
Common Petty Cash Mistakes
- Spending without a receipt. You lose the record of what the money bought.
- Letting several people use the box. Responsibility becomes unclear.
- Skipping the count. Small differences grow when no one checks.
- Using petty cash for large purchases. Bigger payments belong in your normal payment process.
- Mixing personal spending with the fund. It makes your records unreliable.
- Forgetting to replenish. Expenses may land in the wrong period.
Frequently Asked Questions
What is petty cash?
It is a small, fixed amount of cash kept on hand to pay for minor, day-to-day business purchases.
What is an imprest fund?
It is a fund with a fixed balance. You refill it by the amount you spend so it returns to its set amount.
How do I record petty cash?
When you set up the fund, debit Petty Cash and credit Cash. When you replenish it, debit the expense accounts shown on the receipts and credit Cash.
How often should I replenish petty cash?
Many small businesses do it monthly, and you can do it sooner if the cash runs low.
What is Cash Over and Short?
It is the account you use to record a difference between the expected cash and the actual cash. A shortage is a debit, and an overage is a credit.
Do I still need receipts for petty cash purchases?
Yes. Expenses paid from petty cash still need supporting documents, and a petty cash voucher helps you track each payment.
Conclusion
Petty cash for small business can save time on small purchases, as long as you control it. Set a fixed fund, put one person in charge, require a voucher and receipt for every payment, and replenish it on a regular schedule. Count the box often, and look into shortages quickly. For more detail on the accounting, see the OpenStax Financial Accounting chapter on petty cash. This guide is general information and not accounting or tax advice.