What Does Petty Cash Mean and How Does It Work?

Petty cash is a common financial tool businesses use for minor, day-to-day expenditures. It provides a practical solution for immediate payments too small or inconvenient for traditional banking methods like checks or credit cards. This system helps maintain financial fluidity for incidental costs without disrupting larger accounting processes.

Understanding Petty Cash

Petty cash refers to a small, accessible amount of money kept on hand by a business for minor, immediate expenses. It is distinct from a company’s main operating funds, which are typically held in bank accounts. The purpose of a petty cash fund is to facilitate transactions where issuing a check or using a credit card would be impractical or time-consuming. Businesses often set aside a fixed amount, commonly ranging from $50 to $500, depending on their operational needs. This cash is stored securely, such as in a locked drawer or a designated box, under the care of a responsible individual.

Typical Expenditures

Petty cash is used for low-value items that require immediate payment, offering a convenient alternative to formal payment processes. Common expenditures include small office supplies like pens, paper, or staples. It also covers items such as postage, coffee, snacks, or refreshments for employees or clients. Other uses involve minor transportation costs, such as cab fare or parking fees, and small, unexpected repairs. These are non-recurring expenses that would not warrant the administrative effort of generating a formal purchase order or processing an extensive expense report.

Managing the Fund

Effective management of a petty cash fund involves several steps to ensure accountability and proper record-keeping. Initially, a fixed amount is established for the fund, and a designated individual, known as the petty cash custodian, is assigned responsibility for its oversight. When cash is disbursed from the fund, the custodian collects a receipt or creates a petty cash voucher for each transaction, documenting the date, amount, purpose, and recipient. These records are important for tracking how the funds are used and for maintaining an accurate balance.

When the cash in the fund runs low, or at the end of an accounting period, the fund is replenished. The custodian compiles all receipts and submits them to the accounting department with a request for reimbursement equal to the total spent. A check is then issued for this amount, restoring the petty cash fund to its original fixed balance. This replenishment process ensures that the fund remains available for future minor expenses and that all expenditures are properly accounted for in the company’s financial records.