Establishing a Petty Cash Fund Campus Controller’s Office University of Colorado Boulder

Since the replenishment check is drawn for a company’s checking account, the credit journal entry goes to the Cash account. A petty cash fund is a small amount of bills and coins that an organization keeps on the premises to pay for minor expenditures. A petty cash custodian is responsible for this fund, and maintains an up-to-date reconciliation of the amount of bills and coins remaining in it. The fund is typically replenished by the accounting department once a month.

The custodian is typically a bookkeeper or an administrative staff member with the appropriate training, who is present on the business premises most of the time. Most digital and mobile wallets can be connected to a company card, which means that we do not have to carry around a piece of plastic all the time. “Petty cash” and “cash on hand” sound a lot alike, and they do overlap. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology.

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Typically, as the petty cash balance falls to a preset level, the custodian applies for additional cash from the cashier. At this time, the total of all of the receipts is calculated to ensure that it matches the disbursed funds from the petty cash drawer. If new funds are needed, the cashier writes a new check to fund the petty cash drawer and takes, in exchange, the receipts from the purchases that depleted the cash. Every business makes small purchases each day for items such as office supplies, stamps, shipping charges, and other miscellaneous items. Establishing a petty cash fund allows a business owner to maintain control and account for the expenditures with minimal cost and administrative hassle.

Examples of the items that may be paid for from the petty cash fund are flowers, food, office postage, presents, supplies, and taxi charges. There may be a petty cash fund in each major department of a company, so that local cash needs can be more readily met. 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. When the fund is replenished, the credit to Cash is for the difference between the established amount and the actual cash in the fund.

In fact, there is always $100 in the box if you add up all the receipts and the cash (more or less, depending on the cash over/short situation). This system simply delays the recording of small expenses until the end of the accounting cycle or the fund is replenished. It’s not really an adjusting journal entry because there is an actual transaction being recorded. Having a petty cash account is  just more convenient than going to the accounts payable clerk every time someone needs a stamp or a liter of coffee for a meeting.

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You can deduct some petty cash purchases from your business taxes if you have the proper records to support your claims. Your petty cash records might be inaccurate due to employee theft or brand alignment definition accounting errors. Most businesses will reserve enough cash in their fund to meet their monthly needs. However, keeping too much cash could result in unused funds sitting in an account.

Increasing the Base Fund

To reimburse expenses, require a receipt from the employee and then provide them with the exact amount of cash and coins from the lockbox. Then, place the receipt in the lockbox and record the expense in the petty cash log by entering the date, payee, description, reference number, and amount. Your available cash should always match the amount recorded in your petty cash log. Once the account is reconciled, you’re ready to record your expenses into your general ledger. The petty cash log should include the date, details of the transaction, the cash you put into petty cash, the amount distributed, and a running balance.

Petty Cash vs. Cash on Hand

The journal entry for petty cash received from customers is as follows. However, it may differ from “cash in hand” that companies keep for other purposes. Nonetheless, the accounting for both items is similar since they involve spending or receiving money. Alternatively, the custodian may bring the vouchers/receipts to the company bookkeeper as part of the regular reconciliation process.

What Internal Control Features Exist in Petty Cash?

On that note, setting up petty cash funds can be a headache to manage because sustaining them, maintaining detailed records, and frequently reconciling them will necessitate additional work for employees. This may subsequently become a nuisance or burden within large organisations and small- and medium-sized enterprises (SMEs). Most large companies would possess a petty cash fund for every department. This source of capital could be spent on minor expenses such as employee expense reimbursements, purchasing a catered lunch for the entire department, and buying office supplies and/or decorations. Create a sample memo for petty cash so that people make sure to record the right information for each petty cash transactions.

Heather needs a $315 reimbursement to bring the petty cash balance back to $500. The bottom portion of the petty cash log won’t be completed until the cash in the lockbox needs to be replenished. There’s no need to make journal entries when expenses are reimbursed from cash in the lockbox. The petty cash custodian is the person accountable for the petty cash fund. They’ll be in charge of handling and disbursing petty cash and ensuring that the petty cash fund is used for its intended purpose.

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