So, you want to learn
Bookkeeping!
Cash
by Bean Counter's Dave Marshall

Lesson 2
Petty Cash


Introduction Lesson 1 Lesson 2 Lesson 3 Lesson 4 Lesson 5 Lesson 6
Bean Counter

What is Petty Cash ?

Another name that is sometimes used to refer to Petty Cash is an "imprest fund". This is just a fancy name that describes a special fund that is set up to handle special payments. The special payments in this instance are small cash payments for unexpected expenditures or payments where access to a check is not readily available.

Normally, it's a good business practice to write a check or in this day and age use a credit card to pay all business expenditures. Like almost everything in life there is an occasional exception to the rule. Small expenditures such as stamps, quickly needed office supplies, unplanned for Cash On Delivery (COD) shipments, a business lunch or , or miscellaneous supplies such as bathroom supplies are often paid out of petty cash. Petty Cash is just a "fund" where cash is available for paying small and unexpected expenditures. The funds are often advanced to an individual who "settles up" with the custodian by presenting the supporting documents such as an invoice or receipt and returning any change or getting reimbursed for any amounts greater than the amount originally advanced.

The petty cash (actual cash and all the supporting vouchers and receipts) is normally kept in a locked drawer or box and one individual is assigned or designated as the custodian of the fund. The custodian is responsible for all the petty cash activity. Individuals should also be designated who have the authority to approve payments using petty cash. This could also be the custodian of the fund.

How Do You Set Up A Petty Cash Fund ?

Determine the balance or amount of cash needed during a month to handle cash payments for such items as stamps, COD shipments, office supplies, or any other types of payments where writing a check is not practical.

Designate an individual and a backup person as custodian of the fund. In this case "many hands do not make light work". If everyone had "free" access to the fund no one individual can be held accountable for what happened to the money. Why do you need a backup person ? If the main custodian is sick, you need someone else that is also authorized to make payments from the fund.

Individuals should also be designated who have the authority to approve payments using petty cash. This could also be the custodian of the fund.

A check is then made payable to the Petty Cash Custodian for the amount determined to be needed (fund balance) and is cashed by the custodian and the currency is placed in a locked drawer or box. The check is recorded in the Cash Disbursements Journal by debiting Petty Cash and crediting Cash.

How Do You Operate The Petty Cash Fund ?

All petty cash disbursements are made from this fund. A book or worksheet is maintained that records all the payments made and why and what for they were made. Your chart of accounts is used to determine what account(s) to charge the payment to.

A pre numbered ticket or voucher is approved, signed by the person receiving the cash, and prepared for each expenditure made from the fund and any supporting documents such as an invoice or receipt is attached when the voucher is settled for.

The total of the cash in the fund plus the total of all the tickets and vouchers should always equal the balance established for the fund. In other words if your petty cash fund amount is $500, the total of the tickets paid and the currency on hand should equal $500.

Surprise counts of petty cash should occasionally be performed in order to make sure that employees are not "borrowing" this cash.

How Do You Replenish The Petty Cash Fund when it "runs out" of cash ?

At the end of a month or whenever the amount of currency (actual cash) in the fund becomes low a summary is prepared of all the settled vouchers assigning the payments made to the appropriate expense or other categories (accounts) which is used to record the debits to the expense and other accounts and the total credit to the cash account in the Cash Disbursements Journal.

The current balance of the fund should also be checked by adding up all the currency still on hand and the total of all the vouchers and tickets. This total should agree with the balance assigned to the fund. In other words, if the fund's assigned balance is $500 the total of all the tickets and vouches and currency should equal to $500.

If the balance is more or less what do you do ?
If the calculated balance is less or more, you charge (assign) the amount of the shortage or overage to an account named Petty Cash Over or Short.

A check is then prepared and made payable to the Petty Cash Custodian and recorded in the Cash Disbursements Journal and the tickets are "canceled" or mark as replenished in order that they can't be used again as supporting documents for the fund.

The "canceled" petty cash documentation (vouchers, invoices and receipts) are attached to the Petty Cash Summary and filed away.

How Do You Increase or Decrease The Fund Balance ?

To increase the Petty Cash fund balance, you simply prepare a check made out to the Petty Cash Custodian for the amount of the increase to the Petty Cash Fund. For example, if your current fund balance is $100.00 and you want to increase the Petty Cash fund to a balance of $200.00, you would issue a check for $100.00 and record the check in your Cash Disbursements Journal as a debit to your Petty Cash Account and a credit to your Cash In Bank Account.

Calculation:
Petty Cash Fund Balance Desired 200
Less:Current Petty Cash Fund Balance 100
Increase In Fund Balance 100
Issue Check To Custodian and record check in Cash Disbursements Journal as a debit to the Petty Cash Fund Account and a credit to the Cash In Bank Account. 100

What if you had a Current Fund Balance of $500.00 and wanted you to reduce the balance to $300.00 ?

Calculation:
Petty Cash Fund Balance Desired 300
Less:Current Petty Cash Fund Balance 500
Decrease In Fund Balance (200)
Prepare Deposit Slip and Record In Cash Receipts Journal as a debit to Cash In Bank and a credit to the Petty Cash Fund. 200

What Records and Forms do you use with a Petty Cash Fund ?

Discuss Records and Forms Here

Petty Cash Book or Worksheet

Petty Cash Voucher

Petty Cash Count Sheet

Petty Cash Approval Forms

What formal Journals are used to record Petty Cash transactions ?

Below, I provided you with a simple table that you can use as a guide for determining what entry to make and what journal to use to record the various types of Petty Cash transactions.

Transaction Journal Debit (Increase) Credit (Decrease)
Set Up Petty Cash Fund Cash Disbursements Journal Petty Cash Fund Account Cash In Bank Account
Increase Petty Cash Fund Balance Cash Disbursements Journal Petty Cash Fund Account Cash In Bank Account
Decrease Petty Cash Fund Balance Cash Receipts Journal Cash In Bank Account Petty Cash Fund Account
Replenish the Petty Cash Fund Cash Disbursements Journal Various Expense and Other Accounts Cash In Bank Account

Why did I highlight in yellow the Replenish Petty Cash Fund transaction ?

The reason is that recording this transaction often confuses people. Why don't you debit Petty Cash instead of the various expense accounts ? The reason is that you would inadvertently (erroneously) be increasing the petty cash fund balance and it would look like you had a lot more Cash and Tickets to account for in the Fund than you really do. In actuality the actual cash in the fund has decreased by the amount spent for the various types of expenses such as office supplies and postage. These expenses have to be recorded in your books and the entry to replenish the Petty Cash Fund balance accomplishes this while restoring the actual cash balance in the fund to its original amount.

To make it easy on you, the only times you debit or credit the Petty Cash Fund Account is when you initially set up the fund or increase or decrease the balance of the fund.

If you're still a little confused, don't worry I'll illustrate another method of recording Petty Cash transactions that accomplishes the same thing that you don't often find in text books; but, that may make the entries a little clearer.

The normal way of recording expenses and replenishing the Petty Cash Fund is:
Debit- Expenses
Credit- Cash In Bank

This entry is recorded in the Cash Disbursements Journal.

An alternate method of recording expenses and replenishing the Petty Cash Fund is presented below:

The alternate method is a two step process.

  • Record the Expenses and Decrease the Petty Cash Fund Balance by making an entry in the General Journal
    Debit- Various Expenses and Other Accounts
    Credit- Petty Cash Fund Account

    A journal entry would be prepared and recorded in the General Journal that records the expenses and decreases the Petty Cash Fund by the amounts spent. This entry is based on the fact that expenditures made from Petty Cash decrease the amount of cash in the Petty Cash Fund just as a check written decreases the amount of Cash in the Bank Account.

  • Prepare the check and record the check in the Cash Disbursements Journal
    Debit- Petty Cash Account
    Credit- Cash In Bank Account

    Notice that in this case the debit was made to the Petty Cash Account.

In the alternate method we handled the Petty Cash Fund as a "mini bank account" where instead of writing checks, cash (currency) is paid out. Just like a regular bank account, as cash is paid out, our balance decreases. Instead of using a check as you would with a regular bank account a petty cash voucher (ticket) is used to decrease the fund balance. When you replenish the fund, you summarize the expenses and payments just like you do using the Normal Method but instead of using the Cash Disbursements Journal to record your expenses you prepare a Journal Entry in the General Journal. The other difference is that the Alternate Method debits (increases) the Petty Cash account when the bank check is issued to replenish the fund instead of the various expense and other accounts.

Below, I provided you with another simple table that illustrates the entries made for Petty Cash using my alternate method.

Transaction Journal Debit (Increase) Credit (Decrease)
Set Up Petty Cash Fund Cash Disbursements Journal Petty Cash Fund Account Cash In Bank Account
Increase Petty Cash Fund Balance Cash Disbursements Journal Petty Cash Fund Account Cash In Bank Account
Decrease Petty Cash Fund Balance Cash Receipts Journal Cash In Bank Account Petty Cash Fund Account
Replenish the Petty Cash Fund Cash Disbursements Journal Petty Cash Account Cash In Bank Account
Record Petty Cash Expenses and Payments General Journal Entry Various Expense and Other Accounts Petty Cash Account

Let's compare the two methods by assuming we prepared Journal Entries for both methods.

Normal Method
Account Number Account Name Debit Amount Credit Amount
Various Expense Account Numbers Various Expense Account Names 100  
100 Cash In Bank   100

With the Normal Method when the check is written to replenish the Petty Cash Fund the following entry is made in the Cash Disbursements Journal:

Debit- Various Expenses
   Credit-Cash

Alternative Method
Account Number Account Name Debit Amount Credit Amount
Various Expense Account Numbers Various Expense Account Names 100  
120 Petty Cash Account   100
120 Petty Cash Account 100  
100 Cash In Bank   100

Using my Alternate method the following entry is made in the General Journal to record the petty cash expense.

Entry to record the various expenses:
Debit - Various Expenses
   Credit - Petty Cash Account

The entry recorded in the Cash Disbursements Journal to record the check replenishing the fund:

The check replenishing the Petty Cash Fund is recorded as follows:
Debit - Petty Cash Account
   Credit - Cash

Notice in the table how the debit and credit amounts to the Petty Cash Account (highlighted in yellow) in the Alternative Method offset each other and you end up with the same equivalent entry that was used by the Normal Method.

Just just shows that the ole saying that there's more than one way to skin a cat is true. Use whichever method that you understand and feel more comfortable with.

Note: If you use a cash register(s) and don't set up and use a petty cash fund, prepare, approve, and use vouchers or tickets with supporting documentation attached for all cash taken from the cash register.

Example of a Petty Cash Fund-using our fictitious business Ma & Pa's Antiques.

Ma had gotten tired of being interrupted and having to give Pa a blank check to go for this and go for that ( that's what a "gofer" does - goes for this and goes for that - most businesses have an individual designated as their "gofer"), so she called her accountant (me) to discuss how she could handle paying for small expenditures without being interrupted and having to get Pa a blank check to get items such as office supplies, postage stamps, and other spur of the moment items.

Ma had heard that by setting up a Petty Cash Fund she could avoid being interrupted and having to get Pa a blank check to take with him to pickup emergency bathroom supplies, stamps, etc. Ma said she was also concerned about Pa running around with a blank check because he had a tendency to lose or misplace things.

Ma and her accountant decided Ma needed to set up a Petty Cash Fund and Ma was provided with the following instructions and tasks to accomplish:

  • Analyze how much she was spending each month for postage, supplies, office supplies, and miscellaneous odds and ends. This would be the amount used to set up the Petty Cash Fund. Ma determined that $150.00 should be a good starting amount.
  • Decide who would have access and be responsible for the Petty Cash Fund. Ma decided that she would do the record keeping but that Pa could get the cash he needed and fill out a voucher (ticket) without bothering Ma.
  • Purchase a cash box, petty cash voucher and ticket book, and forms used to summarize and periodically count and replenish the fund's balance. Ma had Pa get all the needed forms and supplies.
  • Issue and cash a check made out to Petty Cash for the established fund balance. Ma wrote and cashed a $150.00 check made payable to Petty Cash and put the currency in the cash box.

In addition Ma was provided with written instructions on how to fill out the necessary forms and properly record and monitor petty cash payments and replenish the amount of currency when it reached a low balance. In other words, when there was very little cash left in the cash box.

The following Petty Cash Transactions occurred during the month of February.

Date Description Amount
Feb 5, xxxx Check Number 200 issued to Set up Petty Cash Fund 150
Feb 8,xxxx Advertising Brochures Purchased from Quick Printing - Voucher Number 100 25
Feb 12,xxxx Stamps purchased at the Post Office - Voucher Number 101 20
Feb 15,xxxx Bathroom Supplies Purchased at the Dollar Store -Voucher Number 102 15
Feb 18,xxxx Bought lunch for Hot Shot Customer at Homecooking Restaurant - Voucher 103 30
Feb 23,xxxx Purchased Gas for car at Goodmileage Gas - Voucher 104 20
Feb 26,xxxx Purchased office supplies from Small Town Office Supply - Voucher Number 105 16
Feb 27,xxxx Advanced Pa money to buy bathroom supplies -Voucher Number 106
Yeah- you guessed it -toilet paper.
20
Feb 27,xxxx Issued Check Number # 250 to Replenish the fund balance 128

Click below and take a look at how these entries were recorded in Ma and Pa's Petty Cash Book.
Ma & Pa's Petty Cash Book

In order to replenish a Petty Cash Fund an actual count must be made and the balance of the fund must be verified. To see an example of a Petty Cash Fund Count Sheet click below.
Cash Count Sheet

The Check issued to replenish the Petty Cash Fund using the Normal Method is recorded in the Cash Disbursements Journal by debiting the various Expense Accounts and crediting the Cash In Bank Account.

To see how this entry appears in the Cash Disbursements Journal click below.
Illustrated Entry in Cash Disbursements Journal

You should now know that Petty Cash is just a "fund" where cash is available for paying small and unexpected expenditures. The funds are often advanced to an individual who "settles up" with the custodian by presenting the supporting documents such as an invoice or receipt and returning any change or getting reimbursed for any amounts greater than the amount originally advanced.

Hopefully you now know how to:

  • How to set up a Petty Cash Fund.
  • How to Replenish the fund balance when the cash gets low.
  • Know what records are needed and used to administer and monitor the fund.
  • How to increase / decrease the fund balance.

If you need a pause for the cause (need to take a break), now's a good time. The next Lesson Reconciling the Bank Account needs you to be alert and "on your toes".

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Introduction Lesson 1 Lesson 2 Lesson 3 Lesson 4 Lesson 5 Lesson 6
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