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