The Petty Cash fund can be thought of as a tin of money, in which small amounts of money received from clients are placed, and from which small business expenses are paid.
If a client pays you a sum of a few pounds you might place this money in petty cash. Alternatively, if you need a book of stamps or some emergency supplies you might pay for these expenses out of petty cash.
The Petty Cash fund is separate from either your business bank account or your personal bank account.
Theoretically the petty cash fund is a convenient and time-saving way to deal with small sums. If you receive a small sum of money, for instance £5, you can leave this in the petty cash tin and draw on this fund when you have a small expense such as a book of stamps.
However, the problem comes when a small sum of money, sometimes only a few pence, is unaccounted for: spending hours attempting to account for £0.50 can be a frustrating experience!
If you wish to make payments into and out of a petty cash fund, it is your responsibility to keep meticulous records and be very careful indeed!