Petty Cash Policy
However, the difference is so minor that it is completely immaterial to the results in the financial statements. Thus, the difference is only reconciled when the petty cash box must be replenished. Petty cash or a petty cash fund is a small amount of money available for paying small expenses without writing a check.
The petty cash journal entry is a debit to the petty cash account and a credit to the cash account. Companies assign responsibility for the petty cash fund to a person called the petty cash custodian or petty cashier. To establish a petty cash fund, someone must write a check to the petty cash custodian, who cashes the check and keeps the money in a locked file or cash box. The journal entry to record the creation of a petty cash fund appears below.
A custodian can request to replenish the fund even before the end of the month if the petty balance drops below a preset level. The petty cash receipts along with the remaining petty cash balance should equal the initial petty cash fund amount — meaning the original amount that was placed in the petty cash drawer or box. Sometimes, the petty cash custodian makes errors in making change from the fund or doesn’t receive correct amounts back from users. These errors cause the cash in the fund to be more or less than the amount of the fund less the total vouchers.
With a petty cash box, there’s no need to give employees access to credit card information for small purchases. If you want to avoid wasting time setting up a transaction log and find an easy way to track your petty cash transactions, then make sure you download our free petty cash log template below. When you open the petty cash fund, the money can be transferred between the accounts with no effect on the balance of your assets. Once QuickBooks the petty cash fund becomes its own entity, then you need to keep track of it as a separate account. If you go with the second option, make sure the person assigned is available to every individual who might need to use the petty cash. Once approval is received to increase your petty cash/cash drawer, complete a DV, payment reason “Z”, for the additional funds using the employee record instead of the Petty Cash Vendor record.
To permit these cash disbursements and still maintain adequate control over cash, companies frequently establish a petty cash fund of a round figure such as $100 or $500. The petty cash account is a current asset and will have a normal debit balance . Here is a video of the petty cash process and then we will review the steps in detail. Policies should be established regarding appropriate expenditures that can be paid from petty cash. When a disbursement is made from the fund, a receipt should be placed in the petty cash box. The receipt should set forth the amount and nature of expenditure. At any point in time, the receipts plus the remaining cash should equal the balance of the petty cash fund (i.e., the amount of cash originally placed in the fund).
It cuts down on the amount of work involved and results in fewer transactions. Money in a petty cash fund can be used for many purposes in the regular operations of a business. For instance, most businesses need to buy random supplies such as postage stamps, envelopes, paper or pens.
Once approval has been received from Accounting, request a new petty cash/cash drawer account. Attach to the request the email approval you received from Accounting. Annually certifying with Accounting the petty cash/cash drawer balance, and that they periodically audit the balance and reconciliation. Maintaining receipts and detailed records to support all transactions. Periodic unannounced audits of the petty cash/cash drawer fund should be conducted by the supervisor. All small amounts of cash funds should be locked in a box and kept in a secure place.
Small or large companies maintain 2 types of Petty Cash Book for all cash transactions of a business. Two types of Petty Cash Book maintained by small or large companies for easy, quick and accurate recording of all cash transactions. If you mail them out as statements, begin a new ledger sheet every month.
Making Disbursements From The Fund
Here $6,000/- is a lower end, and the withdrawal amount shall always be $14,000/- only. If you’re administering petty cash appropriately, you shouldn’t have any problem balancing your transactions. But if there’s a shortage, you’ll need to account for the loss by making an additional debit in the general ledger. Conversely, if there’s an overage, record it as an additional credit to account for the gain. A neutral person is engaged to check whether the petty cashier uses the petty cash properly. Petty Cash fund reduces for every petty cash receipt kept in the petty cash box.
The cashier uses the vouchers and ledger account to check if the amount left in the account matches with the money in hand. At any time, the sum of the vouchers or receipts plus the money left should be equal to the original balance in the fund. The custodian approves the expenditures, keeps retained earnings 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 to the custodian. The entry to record the reimbursement would debit the expense accounts reported by the custodian.
Petty Cash Accounting
Also, a business must decide on a timeline when it would replenish the fund. It could be monthly, or when the fund balance falls below a set threshold. Companies maintain a petty cash ledger account to record all such transactions. Also, the companies maintain petty cash vouchers to keep a record of each payment made, including the amount, item, and date. Along with the custodian, a company may also have a petty cashier.
If a good deal of your business is transacted in cash, such as in a retail store, you should prepare a cash sheet at the end of each day. It’s sound practice to deposit all cash receipts in your bank account daily. Recording petty cash transactions are easy compared to other types of transactions. In this section, we will go over a basic petty cash situation. In the example, the petty cash fund starts off with $100 and is allowed to decrease to $10. If you appoint an employee who doesn’t have strong moral values, they may dip into the petty cash fund for personal expenses. Also, people who intend to steal can cover their tracks by drafting illegitimate receipts.
- Write another check to “Petty Cash” for the total of the expenses.
- For each transaction, record the date, the amount, and what it was for.
- For control purposes, vouchers are sequentially prenumbered and signed by both the person requesting the cash and the custodian.
- Used to reduce the petty cash/cash drawer on hand.This account is not changed unless there is a change in the value of the petty cash/cash drawer.
- Petty cash change funds will be established as required, but for restricted periods coinciding with specific events or cashiering requirements.
Whenever someone in the company requests petty cash, the petty cash custodian prepares a voucher that identifies the date, amount, recipient, and reason for the cash disbursement. For control purposes, vouchers are sequentially prenumbered and signed by both the person requesting the cash and the custodian. After the cash is spent, receipts or other relevant documents should be returned to the petty cash custodian, who attaches them to the voucher. All vouchers are kept with the petty cash fund until the fund is replenished, so the total amount of the vouchers and the remaining cash in the fund should always equal the amount assigned to the fund. Each time the petty cash custodian requests and receives new petty cash funds, in exchange for the receipts, journal entries must be made in the general ledger to record the transaction. Specifically, record the petty cash expenses — which should equal the receipts — as a debit and the replenishment amount as a credit .
Manage Your Business
Having cash in a lock box creates a unique set of challenges, which demands an effective cash management system. Best policy – From the above three policies, float up is mostly used and appreciated by accountants across the globe as it provides flexibility as well as control both over the cash transaction. The range of cash in possession of the accounts department at a given point of time is decided and approved by the management of the company. This practice record all the payments made since the last top-up, as a basis for requesting the next top-up to the authorizer. The use of this method helps signatories to know what amount was spent on before withdrawing more cash from the bank. If cash balance becomes very low, then it is replenished via cheque.
Petty Cash Conclusion
A petty cash fund may not be used to make personal loans or salary advances. Change funds are not to be used for expenditures or reimbursement. They are otherwise managed and controlled in the same fashion as petty cash funds. Change petty cash transactions definition funds are to be distinguished from petty cash funds, and should not be commingled with petty cash funds. A separate custodian must be appointed for a change fund; i.e., a single person may not be custodian for two funds.
When the fund is replenished, the credit to Cash is for the difference between the established amount and the actual cash in the fund. Any discrepancy should be debited or credited to an account called Cash Over and Short.
Secure Petty Fund
When a small purchase is necessary, the authorized party can simply access the box and pay for the expense. Instead of going through a complicated process to utilize other payment methods, a petty cash fund allows you to quickly access funds to reimburse employees or make a business purchase. Replenishing petty cash requires a journal entry just like the original journal entry that established the petty cash account. After the supply and entertainment expenses, we need to put $450 more in petty cash.