Petty cash is a small amount of cash that is kept on the premises of a business in order to make incidental cash purchases and reimbursements, such as for delivered meals. Petty cash can mitigate the effects of the more cumbersome accounts payable process.
The essential petty cash process is to authorize the payment of a certain amount of cash (such as $300 in bills and coins) into a petty cash fund, which is then controlled by a petty cash custodian, such as the office manager.
The petty cash custodian pays out cash as requested in exchange for some form of evidence, such as a receipt or a voucher. The aggregate total of all remaining bills, coins, and evidence of receipt in the petty cash fund should always match the authorized amount of cash for that fund. Once the amount of bills and coins in the fund runs low, the custodian takes the receipts and vouchers to the accounting department and swaps them for a replacement amount of bills and coins. This cash replacement brings the total amount of cash in the fund back up to the originally authorized amount of cash.
Petty cash was initially viewed as a way to avoid the considerably more cumbersome check authorization, printing, and signing process. However, petty cash has its own problems, since it is subject to theft, requires close oversight by a petty cash custodian, and can involve only slightly fewer accounting steps than what is required for the processing of check payments.
A more streamlined alternative to petty cash is the use of company credit cards to make purchases, or reimbursing employees for cash payments that they make on behalf of the company.