Petty Cash: How It Works, Controls, and Journal Entries

Petty cash is a small fund of physical cash a business keeps on hand to pay for minor expenses that are not worth running through accounts payable: the $12 of postage, the $40 of donuts for the client meeting, the cab fare when someone had to get across town. One person holds it, every disbursement needs a receipt, and the fund is topped back up to its original balance on a schedule.

The accounting is simple. The controls are where companies get sloppy, and petty cash is one of the few places in finance where cash literally sits in a drawer with a single person's name attached to it. Below is how the fund is supposed to work, the journal entries that go with it, and an honest look at whether you should still be running one in 2026.

How does petty cash work?

Petty cash runs on what accountants call an imprest system. The fund is established at a fixed amount, say $300. As cash goes out, receipts go in, so at any moment the cash plus the receipts should equal $300. When the cash gets low, the custodian submits the receipts, and the fund is replenished back to exactly $300. The fund balance in your general ledger never changes. Only the expenses change.

That fixed balance is the entire control. Because the total is supposed to be constant, any shortfall is immediately visible. If you count $180 in cash and hold $95 in receipts, you are $25 short and you know it that day, not at year end.

Petty cash journal entries

There are three moments that produce entries, and only two of them touch expenses.

1. Establishing the fund. You write a check or transfer $300 to create it.

This is not an expense. You moved cash from one asset account to another. Both sides are on the balance sheet.

2. Spending from the fund. Nothing. There is no entry when the custodian hands over $12 for postage. The receipt goes into the box, and the expense is not recorded yet. This surprises people, but it is correct: you record the expenses when you replenish, in one batch.

3. Replenishing the fund. The custodian has $95 in cash left and $205 in receipts: $120 office supplies, $60 meals, $25 postage. You cut a check for $205.

Notice that the Petty Cash account is untouched. It stays at $300 forever unless you deliberately raise or lower the fund size.

What if the cash does not reconcile?

It usually will not, exactly. Someone forgot a receipt, or the change was wrong. The difference goes to an account called Cash Over and Short, and it is one of the more useful accounts in your ledger because it quantifies how leaky your fund is.

If the custodian has $90 in cash and $205 in receipts, the fund should hold $295, so you are $5 short. You replenish $210 to get back to $300 and record a $5 debit to Cash Over and Short. A persistent shortage in that account is not an accounting problem. It is a people problem, and it is telling you something.

Petty cash controls that actually matter

• One custodian, named. Not the department. A person, accountable for the balance, with a backup who is formally handed the fund when they are out.
• Locked, and not in a shared drawer. A cash box in an unlocked desk is not a control, it is an invitation.
• A receipt for every disbursement, no exceptions. An IOU note counts for nothing at audit and is how funds quietly leak.
• A cap per transaction. Typically $50 or $100. Anything larger goes through accounts payable where it gets approved and matched like a real expense.
• Surprise counts by someone who is not the custodian. If the count is scheduled, the count is theater.
• Coding at replenishment, not at year end. A shoebox reconciled in December means eleven months of misstated expenses.

Segregation of duties is the one people skip. The person who holds the cash should not also be the person who approves the replenishment check. If both roles sit with the same employee, the fund is self-approving, and the size of the loss is limited only by how often you replenish. This is a smaller version of the same principle that governs the whole payables function, which is covered in accounts payable internal controls.

What is petty cash used for?

Legitimately: postage, small office supplies, parking and tolls, minor delivery charges, employee reimbursements too small to run through expense reports, emergency supplies. The common thread is that the amount is small and the vendor will not invoice you.

Not legitimately: employee loans, cash advances, paying a contractor, anything that avoids a purchase order, anything that avoids an approval, and anything that would be taxable to the employee. If a request feels like it is being routed through petty cash to avoid scrutiny, it is.

How much petty cash should a business keep?

Enough to cover roughly two to four weeks of legitimate small expenses, and no more. Most small businesses land between $100 and $500. A larger fund does not buy you convenience, it buys you exposure, and it means the fund gets reconciled less often, which is exactly backwards.

Size the fund from your actual replenishment history. If you have been replenishing $60 a month, a $500 fund is eight months of float sitting in a drawer.

Petty cash vs company cards

Be honest about where this table leads. The original reason petty cash existed was that small vendors did not take cards and cutting a check for $12 was absurd. The first half of that is no longer true. A locked-down card, or a single-use virtual card issued per purchase, gives you everything petty cash gave you and produces a clean, coded, reconciled transaction record without anyone counting anything.

The reconciliation argument is the strongest one. Card spend arrives as data. Petty cash arrives as a bag of thermal-paper receipts that fade, and someone has to type them in. Even if you keep the fund, the receipts still have to become expense records, which is why teams increasingly photograph them and let software pull the merchant, date, and total straight off the receipt image rather than keying them at replenishment.

When to shut the fund down

Close the fund if any of these are true: the Cash Over and Short account has been consistently negative, the fund goes months without reconciliation, the custodian left and nobody formally took the box, or the disbursements have crept above the transaction cap. Any one of those means the control has already failed and the fund is now just cash of uncertain ownership sitting in your office.

Closing it is straightforward. Reconcile it one last time, record the remaining expenses, deposit the residual cash back into the operating account, and credit the Petty Cash account to zero. Then move the underlying spend to cards with limits, where the same purchases produce their own audit trail.

Is petty cash an asset?

Yes. Petty cash is a current asset, reported on the balance sheet as part of cash and cash equivalents. It is not an expense. The expense is recognized when the fund is replenished and the receipts are coded to their expense accounts, which is why a fund that goes unreplenished for months quietly understates expenses in every one of those months.

Where petty cash fits in accounts payable

It sits outside AP by design, and that is precisely its risk. Every dollar that leaves through petty cash is a dollar that skipped approval routing, skipped duplicate checking, and skipped the audit trail that accounts payable software maintains for every other payment you make. That is an acceptable trade for a $12 postage charge and a terrible trade for anything larger.

The discipline is to keep the fund small, keep the cap low, and make sure nothing that belongs in the payables process gets routed around it. If you find real vendor spend flowing through the cash box, that is not a petty cash problem. That is people telling you your invoice approval process is too slow to use.