How a petty cash fund works, how to set one up with the imprest method, the controls that stop shortages, and how to reconcile and record it every month.
Most business spending goes through bank accounts, cards and invoices. But almost every location still has small, unplanned costs: a few dollars of postage, cleaning supplies when the order has not arrived, parking for a delivery, coffee for a client visit, a small tip for a courier. Petty cash covers these without anyone having to use their own money and wait for reimbursement.
A petty cash fund is not a slush fund. It should be small, used only for approved types of expenses and accounted for every time it is used. Handled well, it takes a few minutes a week. Handled loosely, it is a common source of shortages, arguments and small-scale theft.
The imprest system is the standard way to run petty cash. You decide a fixed amount, for example $200, and that amount never changes in your accounts unless you deliberately increase or decrease the fund. When money is spent, it is replaced by a receipt. So at any time:
When cash runs low, you count the box, total the receipts, and write a check or withdraw cash for exactly the amount spent. That brings the fund back to its fixed amount. The expenses are recorded in your books at that point, by category.
Petty cash goes missing in predictable ways: payments without receipts, IOUs that are never repaid, cash mixed with register money and counts that are skipped. Simple controls prevent most of it:
Controls in place. Your petty cash fund is set up properly.
If your business also handles cash at a register, keep the two completely separate. Our cashier closing checklist covers register procedures.
Reconcile the fund at least monthly and every time you replenish it. It takes a few minutes:
A cafe keeps a $250 petty cash fund. At the end of the month, the custodian counts $63.40 in the box and has receipts totaling $184.60: $72.10 for cleaning supplies, $48.00 for postage, $41.50 for small repairs and $23.00 for a delivery tip.
| Item | Amount |
|---|---|
| Cash counted | $63.40 |
| Receipts total | $184.60 |
| Cash + receipts | $248.00 |
| Fixed fund amount | $250.00 |
| Cash short | $2.00 |
The fund is $2.00 short. The cafe records $184.60 of expenses by category and $2.00 as cash over and short, then writes a replenishment check for $186.60 to bring the box back to $250. A small difference now and then is normal, especially when change is given. A pattern of shortages, or one large one, needs investigation.
With the imprest system, the petty cash account in your books only changes when the fund is created, enlarged or reduced. Individual purchases are not recorded one by one as they happen. Instead, when you replenish, you record each expense category (supplies, postage, repairs and so on) and any cash over or short, with the credit going to your bank account. This keeps the books simple while still putting every expense in the right category.
Keep vouchers and receipts with the reconciliation sheet for each period. Small business tax records generally need to support the expenses you deduct, so store them with your other records for as long as your accountant recommends.
Petty cash receipts are tax records like any others. The IRS says to keep records that support an item of income, deduction or credit until the period of limitations for that return runs out (IRS: How long should I keep records). For most small businesses, that means keeping each year’s petty cash log, vouchers and receipts together with that year’s tax file.
A practical routine is to scan or photograph the vouchers at each replenishment and file them in a folder named by month. If the paper copies fade or go missing, the scans are still there, and a reviewer can match each replenishment check to its receipts in minutes.
Many businesses now replace most or all petty cash with company cards with low spending limits or a simple expense reimbursement process. Cards create an automatic record and remove the risk of holding cash. Petty cash still makes sense where suppliers only take cash or where employees regularly need to pay small amounts in the field.
Whichever you use, a clear expense reimbursement policy sets the rules. EZTime’s expense management feature lets employees submit expenses with a photo of the receipt from their phone, so receipts are captured when the money is spent rather than lost in a pocket.
Base it on what you actually spend on small items over two to four weeks. Many small businesses keep between $100 and $500. If you replenish more than a few times a month, the fund may be too small; if cash sits unused for months, it may be too large.
One named custodian, with a backup for absences. The custodian should not approve their own expenses or sign the replenishment check.
Payroll or wage advances, personal loans or IOUs, large purchases that should go through normal purchasing, and anything that would normally be paid by invoice.
At least monthly and every time the fund is replenished. Occasional surprise counts by someone other than the custodian add an extra check.
Record the difference as cash over and short, recheck the count and receipts, and ask the custodian about any missing vouchers. Small occasional differences are common; repeated or large shortages need a closer review of controls.
Yes. Petty cash is cash on hand, so it is reported as a current asset on the balance sheet, usually combined with other cash. The fund amount stays fixed under the imprest system; expenses are recorded when the fund is replenished.
A petty cash voucher is a small form filled out for each payment: date, amount, purpose, who received the money and who approved it. The receipt is stapled or photographed with it. Vouchers plus remaining cash should always add up to the fund total.
As soon as you have hourly staff, two jobs take more time than most owners expect: recording hours accurately and building a schedule everyone can see. Under the federal Fair Labor Standards Act (FLSA), employers must keep accurate records of hours worked and pay non-exempt employees overtime for hours over 40 in a workweek, and some states add daily overtime or meal-break rules. This is general information, not legal advice.
EZTime covers all three with a time clock app, employee scheduling and payroll-ready exports, from $2 per employee per month. See pricing and start a 14-day trial.
Small purchases are easier to track when employees snap the receipt on the spot. EZTime’s expense management lets staff submit expenses with a photo, so you see what was spent and why.