When a company needs to make a small purchase, a petty cash book or account is often used. Petty cash is a small amount of money, usually less than a hundred dollars, which is held in the form of cash by a custodian. When an employee makes a purchase with petty cash funds, an entry is made in a ledger called a petty cash book.
Since company credit cards are usually issued to a small percentage of employees, petty cash might be required for a variety of expenses. A common example would be an office manager using petty cash to buy office supplies for the company. There is less liability for a company to allow a small amount of money to be released at a time rather than to issue a corporate credit card to the office manager.
In addition, there is time and cost associated with writing a check for expenses rather than using petty cash. Just like with debit cards or credit cards, there are usually a limited number of people with check writing and signing privileges. It is much easier to take money from a petty cash account than to go through the check-writing process.
It is vital that all monies taken from a petty cash account be substituted with specific vouchers or receipts and recorded appropriately in the petty cash book. This serves a dual purpose. First, it ensures that each expense is debited to the appropriate account, e.g., office supplies, landscaping, etc. Second, it allows for the simple reconciliation of the account, which means that the amount of cash on hand plus any receipts or vouchers should equal the total shown in the petty cash book.
Some office supply warehouses sell petty cash envelopes instead of petty cash books. These are large, sealable envelopes which hold both the money and receipts and has a journal entry form printed on the outside. Each debit to the petty cash account is recorded on this form, and it is an easy way to keep track of the money. A new envelope can be used periodically, like once a month or quarter, or when new money is added to the account after it has been reduced to a certain level.
In these modern times, petty cash accounts can also be recorded in a computer accounting program rather than a petty cash book. The custodian of the account must be careful, to make sure that each reduction in petty cash is recorded into the computer. It must also be charged to the right account, just as if a check were issued.