Petty cash fund: What it is and how to manage it

Businesses still keep small amounts of cash on hand for quick, low-value expenses that aren’t practical to run through cards or reimbursement systems. These purchases come up unexpectedly, and having a simple way to pay for them can help keep everyday operations moving smoothly. Even so, managing petty cash requires clear processes to prevent errors and keep your records accurate.

What is a petty cash fund?

A petty cash fund is a nominal amount of money a business keeps on hand for small expenses. It's usually held in cash in amounts up to $500. Larger corporations often make petty cash disbursements by department, putting each team in charge of its own funds. You’d list petty cash as an asset on your balance sheet.

You typically wouldn’t use petty cash to cover recurring expenses like bill payments. Instead, petty cash is meant to cover infrequent expenses like taxi rides, coffee, office supplies, client gifts, or employee lunches.

Note that having a petty cash fund isn’t the same as having a cash register or other cash system where large volumes of money are transacted. In theory, petty cash funds shouldn’t amount to significant company spend.

Examples of petty cash expenses

Petty cash is typically used only for quick, low-value purchases that don’t warrant a card payment or reimbursement request. Common examples include:

• Office supplies such as pens, paper, or tape
• Postage for small mailings
• Refreshments for meetings
• Short-distance transportation costs like parking or taxi fares
• Tips for delivery or service personnel
• Emergency items needed immediately for an event or task
• Minor repairs or maintenance needs
• Other small, unexpected expenses that support day-to-day operations

How petty cash differs from other business funds

Petty cash differs from other business spending methods because it relies on physical currency, requires manual tracking, and offers little real-time visibility into expenses. Other options, such as corporate cards or reimbursement systems, capture transactions automatically and provide clearer controls.

You typically use petty cash only for small, immediate purchases that don’t justify formal approvals or card-based payments. In contrast, corporate credit cards work well for predictable or higher-value expenses, while reimbursement systems support employees who pay out of pocket and later submit receipts. Petty cash is the simplest option, but it also offers the least transparency and oversight.

Advantages and disadvantages of petty cash funds

Petty cash funds offer quick access to physical cash, but they also introduce challenges around tracking, accuracy, and control. Understanding both sides can help you decide whether a fund still makes sense for your team.

How to set up a petty cash fund

Setting up a petty cash fund involves choosing the right amount, assigning responsibility, and making sure the cash is stored securely.

1. Determine the appropriate fund size for your business: Consider your typical monthly small expenses and transaction frequency. Most businesses start with $100 to $500 depending on how often employees need quick access to cash.
2. Choose a custodian and defining responsibilities: Select a trustworthy employee to manage the fund, track all transactions, and maintain receipts. This person becomes your single point of accountability for the cash.
3. Set up the physical storage: Store your petty cash in a locked container kept in a secure location with limited access. A fireproof safe, lockbox, or locked drawer works well.

Once you've completed these steps, document your policies and train employees on proper petty cash procedures.

Determining your petty cash fund amount

The right petty cash amount depends on how often you make small purchases and how much cash you typically need at one time.

Start by reviewing the past few months of small expenses that would have been easier to pay with cash. Look at items such as parking fees, low-cost office supplies, emergency postage, and occasional meeting snacks. Add up these costs to estimate your monthly need.

Smaller teams with fewer than 10 employees usually maintain $100 to $200. Medium-sized offices may need $200 to $500, while larger or multi-department operations sometimes keep $500 to $1,000 on hand.

Review your fund usage quarterly and adjust the amount if you're constantly replenishing or if cash sits unused for weeks. The fund should cover about 2–4 weeks of small expenses without requiring frequent withdrawals.

Petty cash accounting and recording

Petty cash accounting centers on keeping the fund at a set amount and documenting every withdrawal with clear, accurate records.

Most businesses use the imprest fund system, which keeps the fund at a fixed amount. When you establish a $200 fund, it remains at $200: cash decreases as you spend it, and petty cash receipts accumulate to account for each dollar until replenishment brings it back to the original total.

The accounting process is straightforward. You record one journal entry when creating the fund, then make additional entries only when replenishing it. Each replenishment entry categorizes the receipts collected since the last refill, debiting the appropriate expense accounts and crediting cash.

Proper documentation protects your business from errors and potential fraud. Every petty cash transaction needs a dated receipt or voucher showing the amount spent, business purpose, and recipient signature. The custodian reconciles these receipts with the remaining cash daily or weekly, depending on transaction volume. Missing receipts should be resolved before any replenishment occurs.

Essential petty cash log components

A clear petty cash log ensures every withdrawal is documented, approved, and easy to reconcile later.

• Date, amount, purpose, and recipient fields: Record the transaction date, dollar amount, specific business reason for the expense, and the name of the person receiving the cash. This creates an audit trail for every withdrawal.
• Receipt attachments: Attach original receipts to the corresponding log entry. For small purchases under $10 with no receipt available, require a written voucher approved by the custodian.
• Running balance tracking: Update the remaining cash balance after each transaction to make reconciliation faster and to spot discrepancies early
• Approval signatures: Collect both the recipient and custodian signatures for each entry. For expenses above your internal threshold, add a manager approval before releasing funds.

Here’s a simple example of what a petty cash log entry might look like:

Journal entries for petty cash

Recording petty cash activity comes down to three types of entries: setting up the fund, replenishing it, and making any necessary year-end adjustments.

Initial fund setup entry

When establishing a $300 petty cash fund:

This entry moves money from your main cash account into the dedicated petty cash account.

Replenishment entries

When replenishing the fund after accumulating $275 in receipts:

This brings your physical petty cash back to $300 while properly categorizing all expenses.

Year-end adjustments

If unreplenished expenses exist at year-end, record them even without cash replenishment:

This prevents understating expenses on your financial statements and temporarily reduces the petty cash asset account until the next replenishment.

Creating a petty cash policy

A written petty cash policy sets expectations for how the fund should be used and helps prevent confusion or misuse. A clear policy outlines who manages the fund, what expenses qualify, and how transactions should be documented. This ensures employees understand how to access the cash and what their responsibilities are when they do.

Policy components

Your petty cash policy should cover these essential elements to give employees clear direction:

• Fund amount and location: Specify the total fund amount and where employees can access it, such as a locked desk drawer or reception area safe
• Spending limits and approved expense categories: Set maximum amounts per transaction and outline acceptable expense types such as postage or office supplies
• Eligible and ineligible expenses: Clarify what qualifies for petty cash and what should go through other spending channels
• Documentation requirements: Describe what receipts or vouchers are required and who must approve them
• Reconciliation schedule: Explain how often the fund will be counted, who performs the count, and how discrepancies are handled

Petty cash reconciliation process

Regular reconciliation keeps your petty cash fund accurate and helps catch errors or theft before they become serious problems:

1. Count all physical cash remaining in the fund and record the exact amount
2. Gather all receipts and vouchers collected since the last reconciliation
3. Add up the total from all receipts and vouchers
4. Add the cash on hand to the receipt total—this should equal your original fund amount
5. If the numbers don't match, recount the cash and recalculate receipt totals
6. Document any discrepancy amount and investigate the cause immediately
7. Record the reconciliation date, cash balance, receipt total, and reconciler signature in your log
8. File receipts in chronological order for future reference and audits

High-traffic funds with daily transactions need weekly reconciliation to catch problems quickly. Smaller operations with occasional petty cash use can reconcile monthly, though bi-weekly checks provide better control.

Schedule reconciliations on the same day each period, like every Friday or the last business day of the month, to establish routine and accountability.

How to handle discrepancies and shortages

When the total of your cash on hand and receipts doesn’t match the fund amount, start by recounting the cash and reviewing each receipt to confirm amounts are correct. Small discrepancies often come from simple mistakes like transposed numbers or missing vouchers.

If the difference persists, document the shortage or overage and notify the fund custodian or supervisor. They may need to follow up with employees who used the fund or review recent transactions for accuracy. Consistently unresolved discrepancies can signal process issues and should prompt a review of your petty cash controls.

Best practices for maintaining accuracy

A few consistent habits can make petty cash reconciliation faster and more reliable. Reconcile the fund more frequently rather than less; weekly reviews catch errors earlier than monthly ones. To maintain checks and balances, someone other than the custodian should perform each reconciliation.

Use a dedicated calculator to avoid carrying over numbers from unrelated work, and store receipts in an envelope or folder immediately after each transaction. Keeping documentation organized throughout the period helps prevent missing vouchers and reduces errors during reviews.

Common reconciliation mistakes to avoid

Avoiding common errors keeps your petty cash records accurate and prevents small issues from turning into time-consuming investigations.

• Missing receipts: Transactions without receipts create gaps in your records and make reconciliation difficult. Require written vouchers when receipts aren't available and obtain manager approval for any receipt-less transaction over your internal threshold.
• Mathematical errors: Transposed numbers or incorrect addition can create discrepancies that take time to trace. Double-check calculations and use a calculator for reconciliations with multiple transactions.
• Delayed reconciliation: Waiting too long between reconciliations makes errors harder to identify because documentation gets misplaced and memories fade. More frequent reviews improve accuracy and reduce backlogs.
• Inadequate documentation: Recording only dollar amounts without dates, purposes, or recipient names limits your ability to investigate discrepancies. Complete information for every transaction helps maintain audit-ready records.

Staying aware of these pitfalls keeps your reconciliation process smooth and maintains trust in your petty cash system.

Best practices for managing petty cash

Strong controls and consistent habits help you keep petty cash secure and reduce the risk of errors or misuse.

Dual custody provides an added layer of security by requiring two people to access the fund together. This approach works well for larger funds or environments with theft concerns. While it may slow transactions slightly, it offers meaningful accountability.

Surprise audits conducted quarterly or semi-annually by someone outside the normal petty cash process can deter theft and confirm that records are accurate. Compare the physical cash plus receipts to the expected balance and investigate discrepancies immediately.

Segregation of duties prevents any single person from managing all aspects of the fund. The custodian handles daily transactions, a supervisor approves replenishments, and a third party performs reconciliations. For small teams, you can rotate custodian duties or have the owner verify the fund periodically.

Physical security also matters. Store petty cash in a locked box inside a locked drawer or cabinet, limiting access to only two people. Keep the fund in a low-traffic, non-public area, consider a small safe for amounts over $300, and never leave the cash container open or unattended.

Reasons to avoid petty cash funds

Since credit cards and e-payments are more common today, petty cash funds are often unnecessary for healthy business spending. What used to be a convenient solution can now introduce more risks and administrative work than benefits.

They make it hard to keep records

Cash is difficult to track, and petty cash funds require time, attention, and consistent training to maintain accurately. Even with clear processes, manual logs are prone to human error.

You’re spending too much

Petty cash is meant for low-value, occasional expenses, but small purchases add up quickly. For example, a team of five drinking two cups of coffee a day can easily consume hundreds or even thousands of dollars annually, depending on how the office supplies coffee. Without visibility into these frequent purchases, it’s hard to create expense policies that support business goals.

They’re subject to theft and oversights

Because cash isn’t traceable, petty cash funds can disappear without clear explanation. According to the Association of Certified Fraud Examiners (ACFE) 2024 Report to the Nations, cash on hand schemes represented 11% of asset misappropriation cases. Mistakes also happen, such as forgetting to log a purchase or return change, which leaves your business vulnerable.

Cards are commonly accepted

Petty cash funds were useful when many retailers didn’t accept cards. Today, most merchants prefer card payments, and online shopping has made it easier and more cost-efficient to buy last-minute supplies without using cash.

There are better alternatives

Payments made via corporate cards, debit cards, virtual cards, and other electronic options automatically appear in your expense systems. These methods avoid the pitfalls of petty cash, reduce manual work, and give you more visibility and control over spending.

Replace your petty cash fund with Ramp

Instead of having petty cash on hand, your team can use Ramp’s corporate cards to cover everything from recurring bills to the smallest business expenses.

With real-time expense reporting and built-in spending limits by category, you can access all the benefits of a petty cash fund without the risk of human error, fraud, or theft. Best of all, you won’t need a fund custodian to review every little transaction.

Try an interactive demo to learn more about how Ramp saves customers an average of 5% annually across all spending.