What Is Petty Cash? Definition & Best Practices (2026)

You’ve probably worked out what your business’s major expenses are—but what about the small stuff? That’s where petty cash comes in. 

Petty cash is the term for a small amount of cash kept on hand by businesses to cover minor, day-to-day expenses when writing a check or using a credit card would be inefficient or impractical. Think your colleague’s birthday cake, taxi fares for urgent meetings, refreshments for staff or clients, or postage for last-minute mailings. For purchases so small that formal payment processing doesn’t make sense, your petty cash fund comes in handy.

The amount of petty cash you need depends entirely on your business. Small businesses typically maintain $50 to $100 in the cash box, while a department in a large company might start with up to $500 to cover more frequent small expenses. The key to a petty cash fund is having enough for convenience without creating unnecessary risk.

In this guide, you’ll learn exactly how to set up and manage a petty cash fund, implement internal controls to prevent misuse, and explore modern alternatives that might better suit your business needs.

What is petty cash?

Petty cash is physical currency your business keeps readily available for immediate, small-dollar transactions that don’t justify the time or expense of formal payment processing. It’s the business equivalent of the spare change you keep in your car for parking meters—except with proper documentation and controls.

The fund typically sits in a locked cash box or drawer, managed by one designated employee who tracks every penny that comes and goes. Unlike other business expenses that flow through accounts payable or credit cards, petty cash transactions happen instantly, in cash, without approval delays or processing fees.

Petty cash vs. cash on hand

While these terms sound similar, they serve different purposes in business accounting: 

• Petty cash is a small, fixed amount of physical currency kept at your business location specifically for minor expenses. 
• Cash on hand encompasses all readily available funds your business can access, including money in bank accounts and cash registers, as well as your petty cash fund.

Think of it this way: Petty cash is always cash on hand, but cash on hand isn’t always petty cash. Your petty cash fund is just one small component of your total liquid assets.

Why businesses need petty cash

Despite the rise of digital payments, cash accounted for 14% of all consumer payments in 2024, and certain business situations still demand immediate cash transactions. Your delivery driver needs to pay for parking while making a time-sensitive drop-off. A client visits unexpectedly, and you want to order lunch for the meeting. The office printer runs out of ink during a critical project deadline.

These scenarios share common threads: urgency, small dollar amounts, and vendors who might not accept cards. Processing a purchase order for a $5 parking fee wastes time and resources, and asking employees to pay out of pocket and wait for reimbursement hurts morale. Instead, provide your team with instant purchasing power by establishing a petty cash fund they can easily access for legitimate business needs. 

For retail businesses, petty cash serves another critical function: making change when your register runs low on small bills. Nothing frustrates customers faster than hearing, “Sorry, we can’t break a twenty,” so make sure your cash till always stocks small bills to balance transactions and support customer satisfaction. 

Advantages and disadvantages of petty cash

Like any business tool, petty cash comes with trade-offs. Understanding its pros and cons will help you decide if it’s right for your operation.

The disadvantages aren’t dealbreakers—they’re risks to manage through proper controls and procedures, which we’ll cover next.

How to set up a petty cash fund

Creating a petty cash system takes less than an hour and saves countless headaches down the road. Here’s a step-by-step road map:

1. Determine your petty cash amount

Start by tracking your small cash expenses for a typical month. How often do situations arise where petty cash would help? What amounts are involved? Small businesses with infrequent needs might manage with $50 to $100, while busy offices or retail locations might need $150 to $500.

The sweet spot for petty cash balances convenience with risk—enough to avoid constant replenishment, but not so much that loss would hurt your bottom line. You can always adjust later based on actual usage patterns.

2. Appoint a petty cash custodian

Choose one responsible employee to be your custodian and manage the fund. This person handles all disbursements, maintains documentation, and requests replenishment when needed. Pick a trusted person on your team who’s detail-oriented and understands the importance of accurate record-keeping.

Designate a backup custodian for vacations and sick days, but avoid having multiple people access the fund simultaneously. Clear ownership prevents the “I thought you were tracking it” scenarios that lead to discrepancies.

3. Establish petty cash policies

Written policies prevent misunderstandings and misuse of your funds. 

Your petty cash policy document should specify:

• Maximum amount per transaction (typically $25 to $50, but the range for your business might vary)
• Acceptable expense categories (e.g., office supplies, postage, parking, emergency supplies)
• Prohibited purchases (e.g., personal items, gifts without approval, regular recurring expenses)
• Documentation requirements (keep receipts for everything)
• Approval process for exceptions
• Replenishment procedures and timing

Share these policies with all employees who might request petty cash. Clear expectations prevent awkward conversations later.

4. Create your petty cash log

Your tracking system can be as simple as a notebook or as sophisticated as a spreadsheet. 

Each entry in your petty cash log should include:

• Date of transaction
• Amount disbursed
• Purpose/description of purchase
• Person receiving funds
• Receipt number or reference
• Running balance of petty cash fund

Keep the log with the cash box, and require entries before money changes hands. This real-time tracking prevents memory lapses and lost receipts.

Tracking petty cash

One person—your petty cash custodian—takes responsibility for tracking every dollar that leaves the fund and replenishing it when it runs low. 

How your petty cash custodian tracks these expenses can vary widely, so the key is consistency—choose one method and stick to it. That could mean keeping a simple handwritten ledger or using spreadsheet software to track transaction dates, amounts, and all other transaction details (see above). Generally, your petty cash tracking sophistication should match the rest of your company’s procedures. For instance, if you use accounting software for the rest of your financial management, you might want to keep your petty cash log in that software as well. Regardless of how you choose to log transactions, it’s best practice to always require and track receipts as part of the process. 

Since petty cash can be tempting for misuse, smart companies also build in safeguards when accounting for these funds. Common controls include capping the amount anyone can take at once, requiring receipts for everything, and having someone other than the custodian conduct monthly audits to ensure the numbers add up. When the fund starts running low, the custodian requests a check from the appropriate auditor before replenishing. The auditor then tracks this cash flow by recording it in a general ledger account labeled “petty cash.”

Recording petty cash transactions

Accurate recording starts the moment someone requests funds. Before handing over cash, your custodian should complete the log entry and have the recipient sign for the money. This creates accountability from the start.

When the person returns with a receipt, attach it to a petty cash voucher and file it sequentially. Number each voucher to match your log entries—this numbering system makes monthly reconciliation much simpler. If someone loses a receipt, require a written explanation signed by both the employee and their supervisor.

From an accounting perspective, petty cash is a current asset with a normal debit balance. When establishing the fund, you debit petty cash and credit your cash account. During replenishment, you debit the relevant expense accounts (e.g., office supplies, postage, etc.) and credit petty cash to bring the fund back to its original amount.

Using petty cash vouchers

Petty cash vouchers create a paper trail when receipts aren’t available or need additional context. These simple forms capture essential transaction details and provide space for approval signatures.

Pre-printed vouchers from office supply stores work fine, or create your own with these fields:

• Voucher number (sequential)
• Date and amount
• Detailed description of purchase
• Account to charge
• Recipient signature
• Custodian signature
• Approver signature

Treat completed vouchers like receipts—they’re your proof that funds were used appropriately.

Maintaining receipts and documentation

Every petty cash transaction needs a receipt—no exceptions. Train employees to request receipts even for tiny purchases like parking meters that print tickets. When receipts truly aren’t available, recording a voucher is critical.

Store receipts and vouchers in date order inside an envelope or folder marked with the month and year. This organization speeds up reconciliation and provides clean documentation for audits. Keep these records for at least three years, or longer if your accountant recommends it for tax purposes.

How to reconcile petty cash

Regular reconciliation catches errors before they compound and deters potential misuse. Think of it as balancing a tiny checking account—the cash plus receipts should always equal your starting amount.

Monthly reconciliation process

Set a recurring calendar reminder for month-end reconciliation: 

1. Count the remaining cash in your petty cash box.
2. Add up all receipts and vouchers for the month.
3. Confirm the cash plus receipts equals your fund’s set amount.
4. Investigate any discrepancies and track down ways to resolve them. 
5. Review receipts to ensure they comply with policies.
6. Prepare a summary by expense category for your accountant.
7. Request replenishment to restore the fund.
8. File the month’s documentation.

It’s best practice to also have someone other than the custodian perform occasional surprise counts. This separation of duties is a fundamental internal control that keeps everyone honest.

Handling discrepancies

Despite everyone’s best efforts, discrepancies happen. Missing receipts, math errors, and miscounted change create imbalances. 

When your reconciliation doesn’t balance, here’s what to do: 

1. Recount the cash and double-check your math. (Simple errors are the most common culprits.)
2. Review the log for missing entries or transposition errors. 
3. Ask recent petty cash users if they forgot to submit receipts.

If you still can’t locate the discrepancy, document it clearly. Small overages or shortages (typically considered less than $20) might be written off as “cash over/short,” but patterns of discrepancies signal deeper problems requiring investigation. Significant shortages always warrant immediate review and possible policy changes.

Petty cash management best practices

Strong petty cash management balances convenience with control. Following these proven practices help you maintain that balance.

Internal controls for petty cash

Effective controls prevent problems before they start, so it helps to implement these safeguards to protect your fund:

• Segregation of duties. The person managing petty cash shouldn’t be the same person recording it in your books or approving replenishments.
• Surprise audits. Conduct random counts quarterly to verify the fund balances.
• Secure storage. Keep cash in a locked box within a locked drawer or safe.
• Transaction limits. Set a maximum amount (typically $25–$50) per transaction.
• Prohibited items list. Clearly communicate what petty cash cannot buy.
• Approval requirements. Require supervisor approval for any exceptions.
• Regular replenishment. Replenish as needed and whenever custodians change.

These controls might seem excessive for a small fund, but over time they prevent larger losses and maintain trust among your team.

Common petty cash challenges and solutions

Every business faces petty cash headaches. Here’s how to solve the most common problems:

• Lost receipts plague every petty cash system. Solution: Require receipts before disbursing funds for planned purchases. For unexpected expenses, set a same-day submission deadline. Consider photographing receipts immediately as backup.
• Frequent borrowing for non-business purposes erodes your fund. Solution: Explicitly prohibit personal use in your written policy. 
• Constant replenishment signals your fund is too small or being misused. Solution: Analyze spending patterns for a month. Either increase the fund size or redirect regular expenses to purchase orders or credit cards.
• Custodian turnover creates vulnerability during transitions. Solution: Require a witnessed count and signed transfer document when custodians change. This protects both the outgoing and incoming custodian.

Modern alternatives to petty cash

Traditional petty cash isn’t your only option for managing small expenses. Digital solutions offer better tracking and control while maintaining the convenience factor.

Prepaid business cards

Prepaid business debit cards provide petty cash convenience with digital tracking. Load a set amount monthly, distribute cards to authorized employees, and monitor spending in real time through online portals. Every transaction creates an automatic record, eliminating manual logs and lost receipts.

Most prepaid cards work anywhere credit cards are accepted. You can typically set spending limits, restrict merchant categories, and freeze cards instantly if concerns arise. The main drawback? Some cards charge monthly fees or transaction costs that add up over time.

Expense management apps

Modern expense apps transform smartphones into receipt-capturing, expense-tracking machines. With these apps, employees can photograph receipts immediately, categorize expenses, and submit for approval—all within seconds. These platforms integrate with accounting software, which eliminates the need for manual data entry.

For small, frequent purchases, some apps offer virtual cards that generate unique numbers for each transaction. This approach provides maximum control and security while maintaining the flexibility your team needs. The learning curve and subscription costs might not justify the benefits for very small businesses, but growing companies often find the investment pays for itself through time savings and improved accuracy.