The Gibbs and the Boltzmann definition of temperature agree only in the macroscopic limit. The ambiguity in identifying the equilibrium temperature of a finite-sized 'small' system exchanging energy with a bath is usually understood as a limitation of conventional statistical mechanics. We interpret this ambiguity as resulting from a stochastically fluctuating temperature coupled with the phase space variables giving rise to a broad temperature distribution. With this ansatz, we develop the equilibrium statistics and dynamics of small systems. Numerical evidence using an analytically tractable model shows that the effects of temperature fluctuations can be detected in the equilibrium and dynamical properties of the phase space of the small system. Our theory generalizes statistical mechanics to small systems relevant in biophysics and nanotechnology.