Petty cash is the small stash of currency a business keeps on hand for minor purchases — postage, a box of coffee filters, a parking meter, a last-minute part from the hardware store. It sounds too small to matter, and that is exactly why it causes trouble. Unlogged petty cash is one of the most common reasons a cash balance in the books stops matching reality, and every untracked purchase is a deduction you may not be able to support.
The fix is a simple, well-established method called the imprest system. Here is how to set it up and how each step shows up in your books.
Step 1: Set up the fund
Pick a fixed amount that covers a few weeks of small purchases without leaving a large sum sitting in a drawer. Write a check or make a withdrawal from the business bank account for that amount, and record it as a transfer from your checking account to a separate asset account called Petty Cash. It is not an expense yet. You have only moved money from one asset to another.
Assign one person as custodian. They keep the cash in a locked box, hand it out, and collect receipts. One person accountable for the box makes it far easier to trace a shortage than a drawer anyone can open.
Step 2: Log every payment with a receipt
Every time money leaves the box, something goes in to replace it: the store receipt, plus a short petty cash slip showing the date, amount, what was bought, the business purpose, and who took the cash. If there is no receipt, such as a parking meter, the slip itself becomes the record, so make it specific.
At any moment, the cash in the box plus the receipts and slips should add up to the fixed fund amount. That one rule is the whole control. Anyone can count the box and know immediately whether it balances.
Keep petty cash for genuinely small business purchases. Payroll, payments to contractors, owner draws, and personal loans to employees should never come out of petty cash. Contractor payments in particular need to be tracked by vendor for 1099 purposes, and cash out of a drawer makes that easy to lose.
Step 3: Replenish and record the expenses
When the cash runs low, or at the end of each month, total the receipts by category: postage, office supplies, meals, repairs, and so on. Write a check or make a withdrawal for the total spent, which brings the box back to its fixed amount. In the books, that replenishment is recorded as expenses to each category, with the credit coming from your checking account.
Notice that under the imprest system the Petty Cash account balance in your books does not change during normal use. It only changes if you decide to make the fund bigger or smaller. If you see the Petty Cash balance drifting month to month, expenses are being booked against it inconsistently.
Replenish at month end even if the box is not empty. Otherwise the expenses sitting in the box as receipts are missing from that month's profit and loss statement.
Overages, shortages, and keeping it honest
Small differences happen. If the receipts plus cash come up a few dollars short, record the difference to an account called Cash Over and Short, which works like a minor expense. If it comes up over, the same account takes the credit. A difference now and then is normal. A shortage every month, or a large one, is a signal to look harder.
Have someone other than the custodian count the box occasionally, ideally without warning. Store receipts with the replenishment record for each period so you can show what every dollar was for. If petty cash keeps getting messy, consider replacing most of it with a business debit card, which leaves a bank record of every purchase.
If your petty cash, or your books in general, have drifted out of balance, Evolv Bookkeeping can sort it out with a cleanup at $199 for each month behind, finished in 2 days and guaranteed in writing. After that we reconcile everything every month for $199 flat, with 1099 prep at year end. No contracts, cancel anytime. Get an instant quote on our homepage.