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Petty Cash Fund

Petty cash fund is a relatively small amount of cash that businesses keep on hand for the purpose of small transactions such as providing change to customers, postage expenses, highway tolls etc. In such transactions, the use of checks is time consuming, costly or illogical. Usually a custodian is appointed to administer the petty cash and it is his/her duty to account for the expenses incurred out of petty cash fund.

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Whenever the custodian makes any payment from the fund to an employee or a customer etc. he or she must record the amount being disbursed, the name of the person to whom the payment is being made and the reason for the disbursement. Following are the typical transactions connected to petty cash fund. 1. Creation: Petty cash fund may be created by drawing a check on the company’s checking account and handing it over to the custodian of the fund. The journal entry is to debit petty cash and credit cash at bank. 2. Disbursements: Individual disbursements from petty cash are not recorded via a journal entry.

Instead journal entry is passed at the time of each replenishment and at the end of the period for the total amount disbursed. 3. Replenishment: When the balance in petty cash becomes low, a journal entry is passed debiting various expense accounts and crediting petty cash for the sum of disbursements made. Then petty cash is replenished usually via a check. 4. Raising Fund Level: When the volume of transactions to be handled by the petty cash grows, the fund level is raised. The journal entry is to debit the petty cash and credit cash at bank.

Steps Familiarize yourself with the purpose of the petty cash fund. The fund should be used for very small expenses, like buying stamps or envelopes, paying a small delivery fee, or paying a cab fare. It should not be used for large purchases; these should be paid for by check in order to leave a record. Decide on the amount of the petty cash fund. The fund should generally not hold more than a few hundred dollars; 100 dollars is a common amount for many small businesses. Keeping too much cash in the fund makes it a target for theft and misuse.

Assign responsibility for the petty cash fund to someone. This person is called the petty cash custodian. Write a check to the petty cash custodian to establish the fund. The custodian should cash the check and keep the cash in a locked cash box. Spend money from the petty cash fund. To do this, employees should request the necessary cash from the custodian. The custodian will then fill out a voucher for the amount disbursed and place it with the remaining cash. Place the receipt from the purchase into the cash box.

The receipt should be attached to its corresponding voucher. No journal entries need to be made for cash spent out of the petty cash fund ? this is the entire point of maintaining the fund. Replenish the petty cash fund when it gets low. The custodian will take the vouchers to whomever writes the checks to fill the fund. The vouchers should be examined for legitimacy, and then a check should be written to the custodian for the total amount of the vouchers. When this check is cashed, the cash is placed in the locked cash box.

Continue to spend money from the petty cash fund, replenishing the fund when necessary. Debit- withdrawal, deductionpetty-little/smalldisbursed-payout, spend,expend Petty cash fund is a relatively small amount of cash that businesses keep on hand for the purpose of small transactions such as providing change to customers, postage expenses, highway tolls etc. In such transactions, the use of checks is time consuming, costly or illogical. Usually a custodian is appointed to administer the petty cash and it is his/her duty to account for the expenses incurred out of petty cash fund.

Whenever the custodian makes any payment from the fund to an employee or a customer etc. , he or she must record the amount being disbursed, the name of the person to whom the payment is being made and the reason for the disbursement. Another internal control is to keep as little cash on hand as possible. It is often necessary, however, to keep some cash on hand. Cash kept on hand at a business to pay for small items such as postage due, a birthday card, or fuel expenses is known as Petty Cash.

Petty Cash is generally kept in a petty cash drawer and payments are made for miscellaneous items out of this cash. Petty Cash is paid out in exchange for a petty cash voucher signed by both the recipient of the cash and the petty cash controller. The voucher should indicate the amount of cash paid out and the purpose of the disbursement. The recipient of the cash should provide a receipt for the purchase made out of petty cash which will be attached to the petty cash voucher.

Replenishing Petty Cash At some point the Petty Cash fund must be replenished. It is at this point that the petty cash fund will also be reconciled. The procedure to replenish and reconcile petty cash begins by counting the cash remaining in the Petty Cash drawer. Next, all vouchers are totaled. The combined total of remaining cash and Petty Cash Vouchers should equal the established value of the Petty Cash fund. Finally, the Petty Cash vouchers should be organized into expense categories.