Petty cash is a small amount of physical cash a business keeps on the premises to pay for minor, everyday expenses, such as postage, parking or office snacks. Xero says most small businesses keep between $100 and $500, and CFI puts the range at $50 to $500 (their US examples, as of October 2026).
The word comes from the French petit, meaning small, as Xero points out. CFI describes it as hard currency kept on hand for miscellaneous and unexpected items, usually spent over a month or two and topped up when it runs low. On the balance sheet, petty cash is a current asset, grouped with your general cash account under cash and cash equivalents.
The four types of petty cash fund
Xero describes four ways to run a fund. Most small businesses only need the second one.
| Type (Xero) | How it works | The trade-off |
|---|---|---|
| General petty cash | An open fund, topped up as needed | Flexible, but harder to track |
| Imprest | A fixed amount, replenished back to the original balance | The most common; every dollar is accounted for by a receipt |
| Emergency | A separate reserve for urgent expenses | Kept apart from day-to-day spending |
| Discretionary | Funds a manager can use for non-essentials, like team lunches | Needs clear limits |
How to set up a petty cash fund
Xero's set-up comes down to five decisions, and I'd add the last two as the routine that keeps it honest:
- Set the fund amount by estimating your small expenses over 2 to 4 weeks.
- Name one custodian, the person who looks after the cash.
- Write a short policy: what can be bought, the maximum per purchase, who can ask for cash and what paperwork they need.
- Keep the cash in a locked box or drawer.
- Track every payment and keep the receipt.
- Reconcile regularly: cash plus receipts should equal the original fund.
- Replenish the fund and book the expenses.
Xero's best practice is a per-purchase limit, for example $50, and a receipt for every transaction. Its own small example is an office manager at a consulting firm who takes $35 from the box for printer ink and puts the receipt in the petty cash envelope. That's the whole system working as it should.
The catch: setting up the fund isn't an expense
This trips up a lot of people. When you create the fund, you haven't spent anything. You've just moved cash from your bank account into a box. CFI explains that the fund is drawn from the business checking account and the cash handed to the custodian, so there's no expense involved. The expenses only reach the general ledger when you replenish the fund.
Here are the two journal entries Xero gives, using its US dollar examples:
| Event | Debit | Credit |
|---|---|---|
| Create a $200 fund | Petty Cash $200 | Cash $200 |
| Replenish after $90 of spending | Office supplies $45, Postage $30, Parking $15 | Cash $90 |
In between those two entries, the individual purchases are logged in a petty cash book, not posted to the ledger one by one. When you top up, you debit each expense category with what was spent and credit Cash for the total. In Xero's example that's $90, which brings the fund back to its original $200. That's the imprest system: the fund always returns to the same fixed amount.
How to reconcile petty cash
Reconciling sounds grand, but it's a simple test. Xero's steps are:
- Count the cash left in the box.
- Add up the receipts and vouchers since the last top-up.
- Check that cash plus receipts equals the original fund balance.
- Investigate any difference. Xero says the usual causes are missing receipts, maths errors and transactions nobody wrote down.
- Write down any discrepancy you can't explain.
- Request the replenishment.
CFI uses the same test: the ending balance plus the receipts should equal the original balance. If it doesn't, you find out now, while the amounts are small and people still remember what they bought.
Controls that stop petty cash going missing
CFI's advice is that no matter how small the balance, you need a system that tracks every penny in and out. Anyone taking cash writes down their name, the date, the time, the amount and a description, usually on a petty cash voucher or worksheet. And one person in the office should be responsible for it. Shared responsibility for a cash box means nobody's responsible.
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Xero's guide also ties receipts to keeping accurate records for tax and IRS compliance. That's a US reference, so check what your own tax authority expects, but the principle travels: no receipt, no record. If you're tightening up your bookkeeping generally, these simple bookkeeping habits will help.
Petty cash vs cash on hand
Xero draws a clear line between the two. Petty cash is a specific small fund with a fixed purpose, a custodian and a replenishment process. Cash on hand is broader: it includes the petty cash fund, the contents of a cash register, undeposited checks and any other physical currency. All petty cash is cash on hand, but not all cash on hand is petty cash.
Small cash expenses still have to be posted somewhere, and general ledger explains where.
My verdict
Keep it small, keep it locked, keep every receipt, and make one person own it. The fund isn't an expense when you set it up, so don't book it as one. The expenses go through when you top it up. If you'd rather not juggle a paper cash book, most bookkeeping software for small businesses can record the top-ups and categorise the spending for you. The practice itself is the same wherever you trade.
Frequently asked questions
How much should a business keep in petty cash?
Xero says most small businesses keep between $100 and $500, and CFI gives a range of $50 to $500. Xero suggests basing it on your small expenses over 2 to 4 weeks.
Is petty cash an asset or an expense?
The fund itself is a current asset, grouped with cash on the balance sheet. The purchases become expenses when you replenish the fund.
What is the journal entry to set up petty cash?
Debit Petty Cash and credit Cash. In Xero's example a $200 fund is a $200 debit to Petty Cash and a $200 credit to Cash.
What is an imprest petty cash system?
A fund with a fixed amount that's topped back up to the original balance each time, with every amount spent backed by a receipt. Xero calls it the most common type.
How do you reconcile petty cash?
Count the cash, add up the receipts, and check that the two together equal the original fund. Investigate any difference before you top it up.
