Petty Cash Fund

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This is the transcript that was read over the top of the slides:

The petty cash fund, by Sophie Hilton.

What does a company do if they only need to spend a minor amount of cash? If the process of writing up a cheque is unjustifiable? Or cheque is not accepted in the first place? Maybe they just want to buy some new pens or post a letter?

They use petty cash!

A business may establish a petty cash fund using a small amount of cash on hand to pay for minor expenditures. Despite the size of the business and of the fund, the three steps in operation involve:

Establishing the fund
Making payment from the fund
Replenishing the fund

To establish the fund, a cheque in the amount of the desire fund is written and cashed, then the cash is placed under the card of a designated employee known as the custodian. A journal entry is then made to record the establishment of the fund.

The following journal entry records the establishment of a 100$ petty cash fund.

Petty cash is debited and cash is credited. Cash has not inflowed or outflowed from the business yet, it has merely moved funds.

Hence total assets have not changed.

Step two in operating the petty cash fund is replenishing the fund. Now the cash can be used to make qualifying payments. The two ways to generally do this are by:

Physically taking the cash from the fund to make a payment

Or by an employee using their personal money to make a transaction and later being reimbursed by the company.

Regardless, the custodians should keep the receipts and authorisations that entitled them to access the petty cash fund. It is important to remember that journal entries are only recorded when fund is replenished.

Step three is replenishing the fund.

The fund must be replenished as the cash fund decreases. This is done by calculating the difference between the remaining balance of the fund and the original balance.

The receipts from petty cash transactions are used as documentation and then the company will replenish the fund with the amount needed. This is illustrated in the following pretty cash replenishment report showing that the fund needs $85 to be fully replenished.

As a result, a cheque would be issued for $85 and recorded as follows.
The entry increases the three expense accounts related to the expenditures and decreases the Cash account for the amount of the cheque.

What happens if the total cash needed to replenish the fund does not equal the total receipts?

Sometimes, the custodian forgets to collect receipts is not issued with a receipt or given the incorrect change, resulting in discrepancy between the cash needed for replenishment and the amount recorded on the receipts.
In cases such as these, the discrepancy is charged to an account called cash over and short.

This is a temporary account and can have either a debit or credit balance, depending on whether the company is short of cash or over in cash.

In some cases employees are issued with a business credit card and are required to justify and receive authorisation for any purchases after they are made. Business credit cards cannot prevent unauthorised expenditure, but it can easily be detected and the employee held to account.

Thanks for watching and I hope you now have a good understanding of the petty cash account.

Fund