Petty cash

What is 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.

Explanation

In most companies, there are many occasions in which a small amount of cash must be spent on short notice. Generally, it would be inconvenient (as well as costly) to request and wait for a check 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 such items as postage, delivery expense, and minor office supplies such as 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

In order 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 firm’s needs but should be large enough to last at least three to four weeks. The check is cashed and the money put 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:

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Petty Cash Creation journal entries

Making Disbursements from the Fund

The custodian of the petty cash fund is in charge of approving and making all disbursements from the fund and must make out 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 has been 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

During the month the custodian will make various disbursements from the petty cash fund, and at some time 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, which indicates a shortage of $.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 $.20 shortage). The shortage is recorded in a Cash Over and Short account. In order to replenish the petty cash fund to its $100 balance, a check is drawn for $84.52 and cashed. The following entry is made:

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Replenishing the fund

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:

Explanation

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

For example, small payments are frequently needed for postage, delivery charges, office supplies, or entertainment expenses. To provide a more efficient way of handling these payments, a petty cash fund is created.

The custodian approves the expenditures, keeps records, and requests reimbursement 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.

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Petty Cash Journal entries

This journal entry would be made to establish a $200 petty cash fund for Sample Company:

Petty cash journal entry

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.

Petty cash journal entry

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.

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