What Is Petty Cash? Meaning, Examples and Controls
Petty cash is a small, fixed amount of cash a business keeps on site to pay for minor expenses, such as postage, parking or a few supplies, when a check or card isn't practical. One person, the custodian, looks after it, and every payment out of the fund is backed by a slip and a receipt.
When a maintenance tech at a property management office needs $14 to get keys cut, the office manager pays it from the $200 locked box and drops the returned receipt in, so cash plus receipts still add up to $200.
What petty cash is for
Petty cash covers small, irregular costs where cutting a check would be silly: stamps, a parking meter, a delivery tip, a $9 part from the hardware store down the street. The IRS describes the idea in Publication 583 as a way to make small payments without writing checks for small amounts. Each payment gets a petty cash slip, attached to the receipt as proof.
It is not for payroll, vendor invoices, travel advances, loans to staff or cashing someone's personal check. Payroll and vendor bills belong in their own payment processes, and loans, travel advances and check cashing turn the fund into a drawer full of IOUs.
On the books, petty cash is an asset. It is still the company's money, just sitting in a drawer instead of the bank, so it usually gets its own Petty Cash account on the balance sheet, the report of what the business owns and owes, separate from checking.
How to set up a petty cash fund
A quick note on debits and credits first, for anyone new to them. In double-entry bookkeeping, every entry has two sides that must be equal. A debit increases an asset or an expense account. A credit decreases an asset like your checking account. So a $300 fund means a $300 debit to Petty Cash and a $300 credit to checking.
Setting one up takes an afternoon. Do it in this order:
- Pick the amount. Look at a few months of small purchases and size the fund to last about a month.
- Name one custodian, the person responsible for the box, and a backup for vacations.
- Write a check to "Petty Cash," cash it at the bank and put the money in a locked box.
- Record the setup in your books with a debit to Petty Cash and a credit to your checking account for the full amount.
- Write down the rules, including a per-purchase cap, what the fund can and can't pay for, and how often it gets topped up.
Put the rules in your business expense policy so nobody has to guess whether a team lunch counts.
How the imprest system works
The standard way to run petty cash is the imprest system. Imprest means the fund has a fixed balance that never changes on paper. At any moment, the cash in the box plus the slips should equal that amount. When cash runs low, or on a set date, the custodian totals the slips and gets a check to cover them. The box is back to its full amount.
Publication 583 walks through this with a $50 fund. The owner finds $33 in cash and $17 in slips, writes a $17 check to "Petty Cash," and the fund is back to $50.
The useful part is what happens in the books. The Petty Cash account doesn't move when someone spends from the box. The expenses only reach your books when you replenish, coded from the slips. If you skip the top-up before the month-end close, when the month's books get finalized, that month's small costs sit in a drawer instead of on your profit and loss statement, the report of the month's income and expenses.
If you can't top up in time, your bookkeeper can record the slips as expenses with a credit to Petty Cash, then debit Petty Cash back when the check is written.
Worked example: replenishing the fund
Cedar Ridge Property Group keeps a $300 petty cash fund at its leasing office. At month-end the slips show $46.20 for postage, $38.75 for office supplies, $64.00 for keys and lock parts, $27.00 for parking and $52.30 for cleaning supplies. Together that's $228.25, so the box should hold $71.75 ($300.00 - $228.25). The custodian counts $69.75. That's $2.00 short.
To bring the box back to $300, the office writes a check for $230.25 ($300.00 - $69.75) and records this entry:
| Account | Debit | Credit |
|---|---|---|
| Postage expense | $46.20 | |
| Office supplies expense | $38.75 | |
| Repairs and maintenance (keys, lock parts) | $64.00 | |
| Parking and tolls | $27.00 | |
| Cleaning supplies | $52.30 | |
| Cash over and short | $2.00 | |
| Cash (checking account) | $230.25 |
The five expense lines plus the $2.00 shortage equal the $230.25 credit to checking, so the entry balances. Petty Cash itself isn't in the entry. It was $300 before and it's $300 after.
Cash over and short is the account that catches counting differences. A shortage is a debit and works like an expense. An overage is a credit and works like income. The OpenStax accounting textbook uses the same treatment and adds a fair warning: a shortage that shows up again and again is a sign the controls need work.
If the fund keeps running dry mid-month, make it bigger. Raising it from $300 to $400 is a $100 debit to Petty Cash and a $100 credit to checking.
Petty cash controls that actually work
Cash disappears quietly. These habits keep a petty cash box accurate without turning it into a part-time job:
- One custodian per fund, so a shortage always has an owner.
- A locked box in a locked drawer, with the custodian holding the only set of keys.
- A signed slip for every payout, showing the date, amount, purpose and who took the cash, with the receipt stapled on.
- A per-purchase cap, with anything bigger going on a card or through accounts payable, the process for paying vendor bills.
- Someone other than the custodian approving each replenishment and looking at the slips.
- No IOUs, no personal checks cashed and no "borrowing until Friday."
Surprise counts are the other piece. One state university's petty cash rules let the controller and auditors count a fund unannounced, and require the custodian's supervisor to approve every reimbursement. A small business can copy both. In practice that can be the owner counting the box, without warning, a few times a year.
The slips are also your tax records. If you're unsure what a receipt needs to show, our guide to IRS receipt requirements covers it.
When a business has outgrown petty cash
Petty cash works for one office with one custodian and a few small purchases a week. It starts breaking when cash leaves the building.
You replenish every week or more. Each truck or job site has its own envelope of cash. Shortages show up most months and nobody can explain them. Slips say "supplies" and nothing else, so you can't tell which job or property a purchase belongs to.
At that point, chasing slips and recoding cash takes more time than the fund saves. For a contractor sending crews to supply houses every day, cash is the wrong tool.
Alternatives to petty cash
When the cash box goes, these are the usual replacements, alone or mixed:
- Company cards for the people who buy most often, so every purchase lands on a statement with a date and a merchant.
- Employee reimbursement for the occasional purchase, where the employee pays and gets paid back.
- Charge accounts with the supply houses you use most, paid through accounts payable each month.
Cards and reimbursements both still need receipts, and that is where Clyr fits. It connects to the cards you already have and texts the cardholder at the swipe, and they reply with a photo of the receipt. Out-of-pocket buys come in as employee reimbursements, coded to the job or property, approved on your policy and synced to your books.
FAQs
Enough for about a month of small purchases, and no more. Put a ceiling in writing, too. One state university caps a campus fund at $100, or $250 at other sites. If the cash sits untouched for months, shrink it: cash nobody uses is just something to lose. Deposit the extra back in the bank and credit Petty Cash for that amount.
Yes. It is cash the business still owns, so it sits on the balance sheet as a current asset, usually in its own Petty Cash account next to checking. The purchases made from it don't become expenses in your books until the fund is replenished and the slips are recorded against the right expense accounts.
It is a way of running any cash fund at a fixed amount, topped back up by what was spent. Petty cash is the usual example, but the same setup works for a register's change fund. The sample business in IRS Publication 583 keeps one $50 fund for change and petty cash together, tracked on the same daily summary as its cash sales.
The box can also be over. If the Cedar Ridge count had found $73.75 instead of $69.75, the $2.00 overage would be a credit to cash over and short, and the check would be $226.25, the slips minus the overage. A dollar either way is usually a counting mistake. A big gap, or the same gap every month, means checking who has keys and whether slips go missing.
One named custodian, with a backup for time off. The custodian pays out cash, collects slips and counts the box, but shouldn't approve their own replenishment check or be the one who checks the Petty Cash account in the books. In a small office, that might mean the office manager runs the box while the owner or outside bookkeeper signs off on every top-up.
