Petty Cash: Definition
A petty cash fund is established by transferring a specified amount of cash from the general checking account to a person who is given custodial responsibility for the fund.
Petty Cash: Explanation
In most companies, there are many occasions when a small amount of cash must be spent at short notice. Generally, it is inconvenient (and costly) to ask for a check and wait for it to be written against the general checking account.
Although it would be preferable if all disbursements were made by check and all receipts were deposited intact, most firms usually maintain a small amount of cash on hand for miscellaneous expenditures.
These expenditures include items such as postage, delivery expense, and minor office supplies (e.g., coffee).
The greatest degree of internal control can be maintained when a petty cash fund under the control of one individual is established to handle these expenditures. A petty cash fund is a small fund whose purpose is to make small disbursements of cash.
Creating a Petty Cash Fund
To create a petty cash fund, a check is written to cash for a set amount such as $75 or $100. The size of the fund depends on the company’s needs, but it should be large enough to last at least three to four weeks.
The check is cashed and the money is placed under the control of one designated individual. This ensures that one individual can be held responsible for all the cash in the fund.
The entry to record the establishment of fund $100 petty cash fund is:
Making Disbursements From the Fund
The custodian of the petty cash fund is in charge of approving and making all disbursements from the fund.
The custodian must create a petty cash voucher for all expenditures. This voucher indicates the purpose of the expenditure, the date, and the name of the person receiving the cash.
The voucher is attached to the receipt, which is stamped “paid” to ensure that it is not used again.
Because a petty cash voucher is made out for all disbursements, the total of the vouchers and the remaining cash should always equal the amount of the fund (in this case, $100).
Replenishing the Fund
In any given month, a custodian will make various disbursements from the petty cash fund. At some point, the fund will have to be replenished.
For example, assume that during April disbursements totaling $84.32 were made from the $100 petty cash fund previously established.
Analysis of the petty cash vouchers indicates that the disbursements were for the following expenses: postage, $24.10: delivery expense, $16.31; supplies, $15.39; and taxi fares, $28.52.
Actual cash remaining on hand is $15.48, indicating a shortage of $0.20 ($100 $84.32 $15.68, which is the amount that should be on hand; because only $15.48 is on hand, there is a $0.20 shortage).
The shortage is recorded in a Cash Over and Short account. To replenish the petty cash fund to its $100 balance, a check is drawn for $84.52 and cashed. The following entry is made:
Notice that the appropriate expense accounts are debited and that cash is credited.
There is no need to make an entry to the petty cash account because it still shows a balance of $100. Another entry to petty cash is not made unless the firm wants to increase or decrease the fund above or below $100.
For example, if the firm decided to increase the petty cash from $100 to $150, it would make the following entry:
In this way, the petty cash fund is replenished as needed. However, it should be replenished at the end of the accounting period in order to ensure that all expenses are properly recorded.
Finally, surprise petty cash counts should be made to maintain good internal control over the fund.
Small payments are often needed for postage, delivery charges, office supplies, or entertainment expenses. A petty cash fund provides an efficient way of handling these payments.
The job of a custodian is to approve expenditures, maintain records, and request reimbursements for the fund when the remaining cash is low.
To accomplish the reimbursement, the treasurer’s office provides the requested amount (by check or currency) to the custodian. The entry to record the reimbursement would debit the expense accounts reported by the custodian.
Petty Cash Journal Entries
To establish a $200 petty cash fund for Sample Company, the following journal entry is made:
No other entry would be made until reimbursement is requested and supported by whatever documentation is needed; then, an entry like the following would be made to summarize all the petty cash transactions.
The custodian would use the $176 to restore the amount of cash to $200.
Management should be concerned about controlling the proper use of petty cash. Whatever steps are deemed necessary (such as surprise counts) should be performed to assure that controls are adequate.
Financial accountants (and independent auditors) are generally not concerned with petty cash because of the immateriality of the amounts.
For example, if there are un-reimbursed expenditures from petty cash at the end of the year, expenses are understated and cash overstated.
While it would be precise to update these items with an adjusting entry, this step is frequently omitted because of the lack of materiality.