Petty cash involves expending small amounts of cash for small owed amounts where it would not be prudent to write a check. For such a small amount, the added cost and inconvenience of writing and cashing a check would not be preferred. Petty cash is involved in payments such as small amounts of office supplies, business lunches, or stamps. So, a petty cash fund is created to compensate for small, unplanned costs and is directed by a petty cash custodian.
A petty cash fund is created using the imprest system, where a fixed amount is submitted, which will be refilled when spent. When established, a certain amount will be submitted to the petty cash fund, such as $50, to cover minor, unexpected costs. For accounting purposes in this initial deposit, the petty cash fund would be debited, while the corresponding bank account would be credited. The petty cash custodian will reimburse employees as expenses arise and will receive a petty cash voucher and a receipt or invoice in exchange for funds. As the fund is depleted, the petty cash custodian submits the received vouchers in order for the initial balance to be restored. The amount required to refill the balance is debited.
However, the petty cash fund can be abused. Records should be created for each expenditure within the fund and a backup custodian should be designated to ensure that random charges to the account are not made. The fund should be checked at random for any unapproved charges.