To reconcile petty cash, add up the signed vouchers from the period, count the physical cash in the box, compare that count against the float minus the vouchers, and then cut a replenishment check that posts each expense to its proper account. The whole cycle takes about 15 minutes when the paperwork is in order. Most of the trouble people run into is not arithmetic; it is missing signatures, missing receipts, and journal entries booked to the wrong account.
Gather the Paperwork First
Before you touch the cash, put three things on the desk.
- The authorized float. This is the fixed starting balance set by management, usually between $100 and $500, documented in an internal memo or your accounting policy manual.
- The petty cash log for the current period, showing the date, amount, purpose, and recipient of every disbursement since the last replenishment.
- The vouchers and any store receipts that back up each log entry. A voucher is a short form listing the date, amount, business purpose, and the signature of the person who received the cash.
Every voucher needs the recipient’s signature. Without it, you have no proof the money went where the log says it did, and federal tax law requires every business to keep records sufficient to establish its tax liability.1Office of the Law Revision Counsel. 26 USC 6001 – Notice or Regulations Requiring Records, Statements, and Special Returns
On receipts specifically: IRS Publication 463 says documentary evidence is not required for expenses under $75 other than lodging.2Internal Revenue Service. 2025 Publication 463 – Travel, Gift, and Car Expenses Most petty cash purchases fall well below that, so the log and signed voucher can technically stand alone. Keep the receipt anyway when you have one. If a deduction is ever questioned, a stapled store receipt is far stronger evidence than a voucher signed by someone who left the company two years ago. Lodging and gifts require receipts regardless of amount.3Office of the Law Revision Counsel. 26 USC 274 – Disallowance of Certain Entertainment, Etc., Expenses
Calculate the Expected Balance
Take the authorized float and subtract the total of the vouchers. If the float is $300 and the vouchers add to $215, the drawer should hold $85. That figure is your book balance.
Do this before you open the box. Counting first invites the temptation to make the arithmetic match whatever you find, which defeats the point of the reconciliation.
Count the Cash and Compare
Open the drawer, sort by denomination, tally each stack, and write down the total. Set that number next to your book balance. In a clean period they match. In practice, small differences show up all the time from bad change at a register or a receipt logged at the wrong figure.
Have a second person witness the count. Dual verification is a basic internal control. It protects the custodian from any accusation of pocketing cash and gives the company a witness to the numbers. Both people sign the reconciliation form once the count is settled.
Separate from the routine reconciliation, run a surprise count at least twice a year with someone other than the custodian doing the counting. That catches the pattern a scheduled count would miss, such as a custodian who takes cash between counts and replaces it before the regular review.
Record Shortages and Overages
When the count and the book balance disagree, the difference goes to an account called Cash Short and Over. Expected $85 and found $83? That is a $2 shortage. Found $86 instead? A $1 overage. The account acts as a catch-all for these small routine discrepancies.
A net debit balance in Cash Short and Over at period end shows up as a miscellaneous expense on the income statement. A net credit balance shows up as miscellaneous revenue. In most businesses the amounts are trivial and land with other insignificant items.4cerritos.edu. ACCT 100 – Introduction to Accounting Chapter 9 – Bank Accounts and Cash Funds
Persistent or sizable shortages are a different matter. A pattern of missing cash points to either weak controls or theft, and most companies treat it as grounds for a formal look. Before assuming the worst, tighten the process: require a receipt for every transaction, limit who has access to the box, and increase the frequency of surprise counts.
Write the Replenishment Check and Book the Entry
Once the reconciliation is signed, the custodian sends the log and the supporting vouchers to accounting. Accounting reviews the documentation, confirms each expense fits company policy, and issues a check for the total spent. The check is made payable to the custodian or to “Petty Cash,” cashed at the bank, and the currency goes back into the locked box to restore the float.
The journal entry is where the expenses actually hit the books. Through the spending period, the Petty Cash account on the balance sheet sat untouched at the float amount. At replenishment, debit each expense account for the amounts spent and credit the checking account for the total. If the period’s spending included $60 in office supplies, $35 in postage, and $25 in delivery fees, the entry is:
- Debit Office Supplies Expense $60
- Debit Postage Expense $35
- Debit Delivery Expense $25
- Credit Cash (checking account) $120
If the count came up $2 short, add a $2 debit to Cash Short and Over and increase the credit to Cash to $122. If it came up $1 over, credit Cash Short and Over for $1 and increase the credit to Cash by that same $1. The Petty Cash account itself is not touched during a routine replenishment. It stays at the authorized float. Cash moves from checking into the drawer, and the expenses move onto the income statement.
What About Year-End?
If the fiscal year closes between replenishments, unreimbursed expenses are sitting in the drawer that have not yet been recorded on the income statement. Under accrual accounting, those expenses belong to the year in which they were incurred, not the year the fund happens to be topped up. Skipping the adjustment understates expenses in the closing year and overstates them in the new one.
Post an adjusting entry at year-end: debit the appropriate expense accounts for the documented spending and credit an accrued liability such as Accrued Accounts Payable. Reverse the accrual when the fund is replenished in the new year. The Petty Cash asset account stays at the float amount throughout; the adjustment only moves the expenses into the correct period. This matters most when the petty cash balance is material or the financial statements are audited.
Keep the Fund IRS-Compliant
A petty cash fund is really an employer reimbursing employees for business expenses, and the IRS treats it the same way it treats any expense reimbursement arrangement. Follow the rules and the money is tax-free to the employee. Fail to, and it becomes taxable wages. The line is whether the fund qualifies as an accountable plan.5eCFR. 26 CFR 1.62-2 – Reimbursements and Other Expense Allowance Arrangements Three conditions have to be met:
- Business connection. Every disbursement is for a legitimate business expense, not a personal purchase and not an advance against future pay.
- Adequate accounting. The employee substantiates the expense with a receipt, voucher, or other documentation within a reasonable time.
- Return of excess. If an employee receives more cash than the expense cost, the difference comes back to the fund promptly.
Meet all three and reimbursements stay out of wages and out of payroll tax. Fail one, and the IRS can reclassify the disbursements as compensation, triggering income tax withholding, Social Security, and Medicare that nobody budgeted for. The reconciliation process is what keeps the fund on the right side of that line.
The same logic sets the boundary on what belongs in petty cash at all. Personal loans, cashing employee checks, travel and entertainment expenses that carry their own substantiation rules under the tax code,3Office of the Law Revision Counsel. 26 USC 274 – Disallowance of Certain Entertainment, Etc., Expenses and any purchase above the company’s per-transaction ceiling (commonly $50 to $150) all belong in accounts payable, not the cash box. Splitting a single purchase across two vouchers to slip under the ceiling is a red flag in any audit.