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 Petty Cash Distribution 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.
What Type Of Payments Are Made From Petty Cash ?
- Office Supplies
- Coffee & Snacks
- Fuel & Parking For Work Trips
- Cleaning Supplies
- Other Small Miscellaneous Expenses
The procedure for recording expenses and replenishing the Petty Cash Fund is:
Credit- Cash In Bank
Credit- Cash In Bank
Replenish Petty Cash Fund Example Entry:
Debit-Office Supplies 50
Debit-Cleaning Suppies 15
Petty Cash Expense Distribution Form used to record the expenses incurred.
A check is made out to Cash and the cash is cashed and placed in the petty cash "box".
This entry is normally recorded in the Cash Disbursements Journal.
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.
|Petty Cash Fund Balance Desired||200|
|Less:Current Petty Cash Fund Balance||100|
|Increase In Fund Balance||100|
What if you had a Current Fund Balance of $500 and wanted to reduce the fund balance to $300 ?
|Petty Cash Fund Balance Desired||300|
|Less:Current Petty Cash Fund Balance||500|
|Decrease In Fund Balance||<200>|
Prepare a Deposit Slip in the amount of $200 and Record In Cash Receipts Journal as a debit to Cash In Bank and a credit to the Petty Cash Fund.
What Records and Forms do you use with a Petty Cash Fund ?
Petty Cash Book or Worksheet-used to keep a running balance of the fund. Similar to a checkbook.
Petty Cash Voucher-form used to explain the purpose of the payment and any needed signatures.
Petty Cash Count Sheet-form used to periodically count the actual cash.
Petty Cash Approval Forms-form used to approve petty cash expenditures and any needed signatures.
Petty Cash Expense Distribution Form-used to record the expenses incurred.
Invoices-documentation proving the validity of the payment.
Receipts-documentation proving the validity of the payment.
Sample Petty Cash Book
|Petty Cash Book|
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||Petty Cash Fund Account|
Cash In Bank Account
|Increase Petty Cash Fund|
Petty Cash Fund Account
Cash In Bank Account
|Decrease Petty Cash Fund||Cash Receipts||Cash In Bank Account|
Petty Cash Fund Account
|Replenish Petty Cash Fund|
|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.
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.
What's next ?
Cash General Controls