A petty cash fund is a certain amount of money, in cash, that is set aside specifically to pay for minor business expenses. In a home-based business, you would operate the petty cash fund yourself. In a small business with more than one person, the petty cash fund would be assigned to a single person who is responsible for holding the fund, handing out cash as necessary, and keeping records of disbursements. The amount of the petty cash fund will depend on the nature of the business - how many cash disbursements are made, for how much, and how often. The idea is to have sufficient cash in the petty cash fund to cover minor expenses over a certain period of time, for example a month.
The petty cash fund is initially set up by drawing a check to cash or made out to the person who will be responsible for the fund, called the custodian, for the pre-defined amount. This check is recorded on the general ledger in a separate account called Petty Cash. This check is then cashed by the fund custodian and the cash is kept in a small cash box, locked desk drawer, or other safe place.
Using the Petty Cash Fund
The procedures for handling a petty cash fund are quite simple and generally work as follows:
Each time cash is needed to run an errand, make a purchase, or pay some minor expense, the petty cash fund custodian hands out the amount of cash requested, and places a voucher in the cash box stating the name of the person, date and amount. The voucher can be a simple slip of paper, and if you as the business owner are operating the petty cash fund yourself, the voucher would basically be a reminder for you.
When the person who requested the petty cash returns, he or she gives the petty cash custodian the receipt and the difference between the amount of cash requested and the actual amount spent, per the receipt, is settled with the person. The change is returned to the petty cash fund if the actual expense was less than the amount requested, or cash is taken out of the petty cash fund to reimburse the person for the difference, if the actual expense was more than the amount requested. Here again, if you are the owner and are handling the fund, you would do this yourself.
At any given time, the total of cash, receipts and vouchers pending receipts in the cash box should equal the total petty cash fund amount.