Decide if you need one
Many businesses have no need for petty cash. A business debit card or company card leaves a better trail. If you do keep a fund, make it small and keep it for a purpose, so a lost box or a mistake is not a big event.
Choose an amount that covers a few weeks of small purchases. If you replenish it daily, the fund is too small or cash is being used when it should not be.
Setting it up
Write one check from the bank to cash for the fund amount, cash it, and put the money in a locked box. In the books, move the amount from the bank to a petty cash asset account. The fund is now a separate small balance.
Name one person as custodian. Only that person has the key, and they are responsible for the full amount at all times.
Vouchers and receipts
Every time money leaves the box, a slip goes in. The slip shows the date, amount, purpose, who received it and the signature. Attach the receipt. At any time, the cash in the box plus the slips should equal the fund amount.
No receipt means no reimbursement, except for rare cases that the owner approves and notes. Do not let people borrow from the fund, even for a day.
Replenishing and recording
When cash runs low, total the slips by category. Write a check for the exact total spent and bring the cash back to the full amount. Only now are the expenses entered in the books, in the right categories, with the check as the payment.
The petty cash asset account stays the same except when you change the fund size. If you see the balance in your books move often, entries are being made incorrectly.
Surprise counts and closing the fund
Count the box on a random day each quarter, ideally by someone other than the custodian. Any difference, over or short, is recorded to an over and short expense account and explained.
If the fund is no longer used, deposit the cash back in the bank and close the asset account. Keep the voucher records with your other files for the standard retention period.
Digital alternatives worth considering
If the fund is only used for tiny purchases, a prepaid card or a dedicated debit card with a low balance may serve better. It produces a statement automatically, avoids handling cash and can be topped up from the bank when needed. The bookkeeping is the same as any bank account, with each transaction coded to a category and a receipt attached. For businesses with employees running errands, this is often simpler to supervise than a cash box.
Worked example with numbers
You fund petty cash with a $200 check, recorded as debit petty cash $200 and credit checking $200. At month end the box holds $64 in cash and receipts for postage $41, snacks $37 and parking $50, totaling $128. Cash plus receipts is $64 + $128 = $192, so $8 is missing.
To replenish back to $200, write a check for $136, which is $128 of receipts plus the $8 shortage. Record debit postage $41, meals $37, parking $50, cash over/short $8, and credit checking $136. The fund is back at $200 and the shortage is visible instead of buried.
Mistakes that cost money
Allowing withdrawals with no receipt turns the fund into a slush account. Letting the same person hold, spend and record the cash removes any check. Letting the float creep up each time makes the fund large enough to be a control problem. Lending from the box to staff or the owner mixes personal and business. Never counting it means shortages are found months later.
Check your work
Count the fund on a set day each month with someone else watching if possible. Cash plus receipts should equal the fixed float every time.
Common questions
How much should a petty cash fund be?
Whatever covers a few weeks of genuine small purchases. Keep it small enough that a loss is not damaging.
Can the owner take money from petty cash?
Treat it as a draw and record it as such. Mixing owner use with business spending clouds the books.
Is petty cash still needed with debit cards?
Often not. Cards give automatic records, though some vendors or tips still call for cash.
This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation.
