A change fund is a fixed amount of cash a business keeps in each register drawer for the sole purpose of making change for cash-paying customers. The amount stays constant day to day. It is placed in the drawer before the first sale, kept separate in concept from sales revenue collected during the shift, and pulled back out at closing so the remainder can be reconciled against the day’s rung sales.
How a Change Fund Differs From Petty Cash
The two are often confused and they are not the same thing. Petty cash is a small pool used to pay for minor business expenses like office supplies or postage; it gets spent down and replenished. A change fund never gets spent. It should not be used to buy supplies, cash personal checks, lend money to employees, or cover travel. The dollar total stays the same unless management formally decides to raise or lower it.
Choosing the Amount and Denomination Mix
The right size depends on how you take cash. A coffee shop running hundreds of small tickets needs a different fund than a furniture store where most customers pay by card. Think about daily cash transaction volume, average ticket size, and what bills customers typically hand over. A business where people pay for $4 items with $20s needs plenty of small bills and coins on hand.
Most small retail operations start somewhere between $100 and $300 per register. Busy restaurants and convenience stores may need more. The test is whether a cashier can get through a full shift without running short on any denomination. If cashiers are constantly breaking bills from the fund just to make change for other large bills, the fund is either too small or poorly balanced.
A workable mix for a $200 fund includes a roll of pennies, two rolls of nickels, three rolls of dimes, four rolls of quarters, about $40 in singles, $50 in fives, $40 in tens, and the balance in twenties. Adjust from experience. If you keep running out of quarters, add a roll and drop something else; the total holds, only the mix shifts. Your bank can supply rolled coins and specific denominations, though some charge small fees for coin orders.
Opening and Closing the Drawer
Every shift begins with a count. The person taking the drawer physically counts every bill and coin, confirms the total matches the established fund, and logs it. Skip this and a shortage found at closing becomes unassignable: you cannot tell whether the money went missing during the shift or was already gone before it started.
At closing, the cashier counts the whole drawer, removes exactly the fund amount in the right denominations, and secures it for the next day. Whatever remains is the shift’s cash sales and should match what the point-of-sale system says was collected. That reconciliation, done daily, is where problems surface early enough to do something about them.
Controls That Keep the Fund Intact
One person should be responsible for each fund at any given time. When custodians change, the incoming person counts the fund before accepting it. Shared drawers make it nearly impossible to assign responsibility when money is missing.
Separate duties where you can. The person handling the cash should not also be the one recording transactions in the accounting system. Someone other than the custodian should perform occasional surprise counts, at irregular intervals so no one can predict when the next one is coming.
Physical security matters as much as procedure. When the fund is not in an active register, it belongs in a locked safe or fireproof cabinet with restricted access. It should never leave the premises or go home with anyone overnight. Written procedures covering access, storage, and shift changes remove the ambiguity that most losses depend on.
Shortages and Overages
When the closing count does not match the fund amount, you have either a shortage (less cash than there should be) or an overage (more). Overages are not good news. They usually mean a customer was shortchanged, which is both a service problem and a sign of sloppy handling.
Document every discrepancy, however small, with the date, amount, shift, and cashier’s name. A one-time fifty-cent shortage is likely a counting error. The same cashier coming up short three times a week is something else. Chronic discrepancies point to a process problem worth investigating: cashiers making change without ringing the sale, miscounts during rushes, weak training on the register, or, occasionally, theft. The paper trail is what lets you tell those apart.
Accounting for a Change Fund
On the balance sheet, a change fund is a current asset. It may sit inside the general Cash account or on its own line, depending on how detailed the chart of accounts is. Because the amount is fixed, the balance does not move unless the fund itself is formally resized.
When you first set it up, debit an account called Change Fund (or similar) and credit Cash in Bank for the same amount. Nothing hits income or expense; cash is simply moving locations on the balance sheet.
Daily shortages and overages are recorded in an account called Cash Over and Short. A $2 shortage is a $2 debit to Cash Over and Short; a $1 overage is a $1 credit. At period end, the net balance flows to the income statement. A net debit (more shortages than overages) reports as a miscellaneous expense; a net credit reports as miscellaneous income, though most businesses see small net shortages over time. The amounts are usually small enough to fall under “other expenses.”
Adjusting the Fund Amount
A fund should not stay at its original size forever by default. If you have added registers, extended hours, or seen more cash coming in, the original amount may no longer cover a shift. If customers have shifted heavily to cards, you may be tying up cash you do not need.
To increase the fund, use the same entry as the initial setup: debit Change Fund and credit Cash in Bank for the added amount. To decrease it, reverse the entry. Either way, get a written authorization from management on file so there is a clear record of why the amount changed. Reviewing the fund once or twice a year against your discrepancy logs and denomination shortfalls is a reasonable habit; both are signals that the size or the mix needs updating.