Definition of Petty Cash Fund
A petty cash fund is a small amount of money available to pay small amounts without requiring the processing of a business check.
Example of Starting a Petty Cash Fund
If a company wants to start a petty cash fund, a new general ledger account entitled Petty Cash must be opened. (This will be an additional cash account that can be listed separately on the company's balance sheet or its balance could be included with the balances in the other cash accounts.)
Next, a company check is prepared and cashed for the amount the company believes will be best for the small payments it experiences. If the amount is $100, the company check will be coded to debit Petty Cash for $100 and to credit Cash for $100.
One person should be designated to be the petty cash custodian. This person's name will be listed as the payee on the company's $100 check and will be accountable for the $100. At all times the custodian must have a combination of cash and petty cash vouchers/receipts which add up to $100. This is referred to as an imprest petty cash fund.
Whenever the cash in the petty cash fund is low and just prior to issuing financial statements, the petty cash custodian should request cash for the petty cash receipts, which should be the amount to return the cash amount back to $100. This is known as replenishing the petty cash fund.