In plain English
Set a float, require receipts and count regularly. Record shortages to cash over/short.
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One person holds the fund and another reviews.
Why it matters
Cash is the easiest asset to lose track of. Without a fixed float and receipts, small purchases go unrecorded, deductible expenses disappear, and nobody can tell whether a shortage is an error or theft. A tidy petty cash fund also shows an outside reviewer that the business has basic controls.
Because the fund is small, owners often ignore it. Over a year, though, many unrecorded purchases add up.
Worked example
A $200 fund holds $64 cash and $128 of receipts, leaving $8 short.
How to handle it
- Write a check or withdraw cash for the fund amount and record it to a petty cash asset account.
- Keep a simple log listing each payout, its purpose and a receipt number.
- When the cash runs low, total the receipts by expense category and record them.
- Replenish the fund with exactly the amount spent, so it returns to the set float.
- Count the fund at month end and record any small difference to a cash over and short account.
Common mistakes
- Recording each cash withdrawal as an expense instead of funding an asset, which loses track of what was actually bought.
- Letting several people take money from the fund, so a shortage cannot be traced to anyone.
- Mixing personal IOUs into the cash box, which turns the fund into an informal loan system.
Not the same as: Clearing account
Petty cash is real money kept on hand for small purchases. A clearing account holds no physical cash; it is a bookkeeping bucket used to route amounts temporarily until they are matched. See Clearing account.
Go deeper
- Petty Cash: How to Set Up and Control a Fund: How to set up a petty cash fund, record vouchers, replenish it and keep it controlled so small cash spending does not become a blind spot.
Related terms
- Prepaid expense: A cost paid in advance that is recorded as an asset and expensed over the period it covers.
- Purchase discount: A price reduction a vendor gives for paying early, such as 2/10 net 30.
- Payroll liabilities: Amounts withheld from pay or owed by the employer that have not yet been remitted.
Common questions
What is petty cash?
A small cash fund for minor expenses, kept with receipts and replenished to a fixed amount.
Can you give an example of petty cash?
A $200 fund holds $64 cash and $128 of receipts, leaving $8 short.
How large should a petty cash fund be?
Set it at roughly what you spend in cash between replenishments, small enough that a loss would not hurt. Many businesses find a modest float easier to control than a large one.
What if an employee loses a receipt?
Have them write and sign a short note with the date, amount, vendor and purpose. Use this sparingly, since frequent missing receipts weaken the control.
General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional.
