What it is:
Petty cash is money kept on-hand, generally, by businesses for making change for clients and to cover minor costs.
How it works (Example):
Petty cash is commonly associated with storefront-type businesses who deal with clients who may pay in cash. A petty cash supply allows such business to more easily make change for large denominations of currency. Petty cash may also be used for small ad hoc costs that arise (e.g. light bulbs, soap, pens, etc.).
To illustrate, suppose store XYZ keeps a collection of petty cash on hand. A client is purchasing an item that costs $50 and is paying with a $100 bill. The store only has $100 bills in the register. The cashier can offset the difference by giving the client $50 from the petty cash supply.
Why it Matters:
Petty cash allows businesses dealing in cash to operate more efficiently by allowing them to provide their cash-paying client with change. Additionally, a petty cash supply allows businesses to easily cover small, but often immediate, needs.