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. 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 disbursem*nts 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 disbursem*nts of cash. 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:Petty Cash: Definition
Petty Cash: Explanation
Creating a Petty Cash Fund
Making Disbursem*nts From the Fund
The custodian of the petty cash fund is in charge of approving and making all disbursem*nts 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 disbursem*nts, 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 disbursem*nts from the petty cash fund. At some point, the fund will have to be replenished.
For example, assume that during April disbursem*nts totaling $84.32 were made from the $100 petty cash fund previously established.
Analysis of the petty cash vouchers indicates that the disbursem*nts 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.
Example
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 reimbursem*nts for the fund when the remaining cash is low.
To accomplish the reimbursem*nt, the treasurer's office provides the requested amount (by check or currency) to the custodian.
The entry to record the reimbursem*nt 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 reimbursem*nt 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.
Petty Cash FAQs
If you use a paper ledger, enter the transaction under two headings: "petty cash" and the currency being used. The currency being used would be entered as an asset account under "currency." Under the currency account, debit petty cash for the cost of currency issued, and credit cash for the amount of currency issued.
Petty cash can be handled in different ways. In a simple system, all petty cash expenditures are documented as they happen. The total of these costs is added to the petty cash account monthly, and the monthly amount is entered into the General Ledger as an expense.
The logical first step is to document the reimbursem*nt, for example by writing out a receipt. The next step is to enter both an expense and an asset account on your books under "petty cash". If you are reimbursed $20 for postage expenses, debit postage expense $20 and credit cash $20.
There are different ways of tracking transactions in a petty cash book. Some organizations use a separate cash register for the petty cash, and others just track the transactions on ordinary receipts or invoices. How you track your costs does not matter as long as it is consistent.
For example, when you sell $100 worth of merchandise to customer "a", debit sales for $100 and credit cash for $100.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
