Why Do Businesses Use Petty Cash Funds?

Businesses frequently encounter minor, immediate expenses not practical to handle through conventional payment methods. Petty cash funds offer a straightforward solution for these everyday transactions. This system involves a small, readily available amount of cash kept on hand, allowing for quick disbursements without the administrative burden of checks or electronic transfers. It facilitates numerous small, day-to-day transactions, keeping operations flowing smoothly.

Understanding Petty Cash

A petty cash fund is a small, fixed amount of cash maintained by a business for minor, incidental expenses. These funds are used for transactions too small or urgent to be paid efficiently by check, corporate credit card, or electronic transfer. Common expenses include postage stamps, small office supplies, urgent delivery fees, or minor reimbursements. The administrative effort for processing a $5 or $10 expense often outweighs the item’s cost, making traditional methods inefficient.

Using petty cash streamlines small transactions, saving time and reducing paperwork for accounting and employees. Funds typically range from $100 to $500, though the precise amount varies based on company needs and expenditure volume. Petty cash operates under an imprest system, an accounting method designed to ensure control and accountability. This system dictates that a fixed amount is initially established, and this amount is consistently restored when funds are disbursed, ensuring that the total of cash on hand and documented expenditures always equals the original fund balance.

Establishing a Petty Cash Fund

Setting up a petty cash fund begins with determining the initial amount needed based on anticipated small expenses. A petty cash custodian, a trusted employee, is assigned to manage the fund. This individual oversees disbursements, maintains records, and safeguards the cash.

The fund is established by writing a check from the company’s main checking account, payable to “Petty Cash” or the custodian, which is then cashed. A petty cash voucher system must be created. These forms document each disbursement, requiring details such as the date, amount, purpose of the expense, the recipient, and the custodian’s signature. The physical fund should be stored securely in a locked drawer or cash box to prevent unauthorized access or loss.

Managing and Replenishing Petty Cash

Once established, the petty cash fund is used for approved expenses through a controlled disbursement process. When an expenditure arises, the custodian provides cash and requires a completed petty cash voucher. A receipt for every expenditure must be collected and attached to its voucher, ensuring a clear audit trail. This practice aligns with general record-keeping principles, as the IRS recommends attaching receipts for proof of payment.

Periodically, or when the fund runs low (typically 25-30% of its original amount), replenishment is required. The custodian gathers all vouchers and receipts, summarizes expenses, and submits them to accounting. The business then issues a check or transfers funds to the custodian for the exact amount disbursed, restoring the fund to its original balance. Expenses are formally recorded in company records at replenishment, not at each individual disbursement.