What Is Petty Cash Used For? Definition & Examples
Understand petty cash: its definition, critical function in business operations, and practical management for handling minor, day-to-day expenses.
Businesses frequently encounter minor, day-to-day expenses requiring immediate payment. Petty cash serves as a practical solution, allowing companies to handle these incidental costs without resorting to more complex payment methods. It provides a quick and accessible way to cover common expenditures that arise unexpectedly.
Defining Petty Cash and Its Purpose
Petty cash refers to a small, fixed amount of currency kept on hand by a business for minor, incidental expenditures. Its purpose is to provide readily available funds for small purchases that are impractical or inefficient to process through traditional payment methods like checks or electronic transfers. Businesses maintain a petty cash fund to enhance operational efficiency and convenience. Processing small payments through traditional methods can be time-consuming and costly.
Maintaining a petty cash fund streamlines the payment process for small sums, avoiding lengthy approval processes or complex accounting entries. This allows employees to quickly acquire necessary items or cover immediate costs without disruption, contributing to smoother daily business activities.
Everyday Uses of Petty Cash
Petty cash is commonly used for various small, recurring expenses in daily business operations. This includes purchasing minor office supplies like pens or printer ink, and postage for small mailings. It also covers unexpected travel incidentals for employees, such as local transit fares or snacks during business trips. Minor emergency repairs or maintenance issues, like replacing a light bulb, can also be paid for. Additionally, petty cash might cover small charitable donations, employee morale initiatives like purchasing coffee for a team meeting, or parking meter fees for company vehicles or client visits.
Establishing and Replenishing a Petty Cash Fund
Establishing a petty cash fund begins with determining an appropriate initial amount, which can range from $50 to $500, depending on the business’s size and the anticipated frequency of small expenditures. A designated individual, known as the petty cash custodian, is then appointed to be responsible for the fund’s safekeeping and disbursement. Each expenditure from the fund requires documentation through a petty cash voucher or a detailed log, which records the date, amount, purpose of the expense, and the signature of the recipient.
When a payment or reimbursement is made from the fund, the custodian collects the corresponding receipt for the purchase. These receipts, along with the completed vouchers, are crucial for accurate record-keeping and subsequent reconciliation. This documentation is necessary for proper accounting entries and for supporting business expense deductions for tax purposes.
The fund is replenished when its balance reaches a predetermined minimum level or on a scheduled basis, such as weekly or monthly. To replenish, the custodian submits all accumulated vouchers and receipts to the accounting department. The accounting department reviews these documents, verifies the expenditures, and issues a check or electronic transfer to restore the fund to its original fixed amount, a process often referred to as operating on an imprest system. Prior to replenishment, a reconciliation ensures that the cash remaining in the fund plus the total of all vouchers equals the initial amount established.