Petty Cash is set up as a Bank-type account in your chart of accounts, usually with the detail type Cash on hand, even though no actual bank is involved. It behaves exactly like a bank account you reconcile: money goes in when you fund it, money goes out when it's spent, and the balance should always match what's physically sitting in the drawer or box.
1. Create it as a Bank account. Go to Settings > Chart of Accounts > New, choose Bank as the account type and Cash on hand as the detail type, and name it Petty Cash.
2. Fund it with a transfer, not an expense. Move money from checking into Petty Cash using + New > Transfer. That keeps it recorded as cash moving between your own accounts, not as something the business spent.
3. Record what comes out of it as regular expenses. Each purchase made from petty cash is an Expense, with Petty Cash selected as the payment account, the same way you'd record a purchase made from a checking account.
4. Reconcile it the same way you'd reconcile a bank account. Periodically count the actual cash on hand and compare it to the QuickBooks balance. There's no monthly statement to check against, but the Reconcile tool still works the same way, using your own physical count as the source of truth instead.
5. Replenish it when it runs low. Transfer more from checking the same way you funded it the first time, which keeps the balance from quietly drifting below what it's actually supposed to cover.
Card payments and bank transfers leave their own digital trail whether or not someone logs them that day. Petty cash doesn't; a purchase made with a $10 bill from the drawer leaves nothing behind except a receipt, if anyone bothers to keep one.
The gap shows up slowly: a few unrecorded purchases here, a receipt that got lost there, and eventually the drawer total and the QuickBooks balance stop agreeing by an amount nobody can fully explain. It rarely gets caught until someone actually sits down to reconcile it, which for petty cash often means it doesn't get caught for months.
Whoever takes petty cash for a purchase snaps a photo of the receipt right then, creating the matching QuickBooks expense immediately instead of a shoebox of receipts someone sorts through weeks later.
The running petty cash balance gets compared against logged receipts on a set schedule, flagging a mismatch while it's still small enough to trace, instead of discovering it during an annual reconciliation.
A notebook by the drawer, nothing at all, something in between: tell us the real setup and we'll tell you if it's worth tightening up.
Tell us how petty cash actually gets tracked in your business right now, and we'll tell you honestly whether it's worth automating or just worth a better habit. Petty cash is a small example of drift that goes unnoticed; it's worth checking whether anything bigger is doing the same thing.
Let's talk →Count the actual cash on hand, then run the Reconcile tool against the Petty Cash account using that physical count as your ending balance instead of a bank statement. Any difference between the count and what QuickBooks shows points to an unrecorded purchase or a missing receipt somewhere.
Transfer additional money from checking into the Petty Cash account, the same Transfer transaction used to fund it originally. Replenish based on what's actually been spent since the last top-up, not a fixed amount, so the account doesn't drift from what it's meant to cover.
They're not related. Petty Cash holds physical cash the business keeps on hand to spend. Undeposited Funds is a temporary holding account for payments received that haven't been grouped into an actual bank deposit yet. One is money going out in small amounts; the other is money coming in, waiting to be deposited.
You could categorize them to a regular expense paid from checking, but then there's no account tracking how much cash is actually supposed to be on hand, which makes it impossible to reconcile the drawer against anything. A dedicated Petty Cash account is what makes that check possible in the first place.