Overview
This lecture explains the purpose of petty cash funds, how they are controlled, and the correct method for recording petty cash transactions in accounting journals.
Purpose and Control of Petty Cash
- Petty cash is a small amount of cash kept on hand for minor business expenses.
- It helps control cash usage for small expenditures where access to large sums is unnecessary.
- A petty cash custodian is assigned to manage and review all petty cash receipts.
- The imprest system keeps the petty cash fund at a fixed balance by replenishing only the amount spent.
Establishing and Using Petty Cash Fund
- To create a petty cash fund, debit Petty Cash and credit Cash for the desired fund amount.
- After establishing, use petty cash for small purchases and keep receipts (vouchers) for each transaction.
- Only change the Petty Cash account when initially setting up or changing the fund's total amount.
Recording Replenishments
- When replenishing, calculate the cash needed to restore the fund to its original amount.
- Credit Cash for the replenished amount and debit each individual expense account based on receipts (e.g., Delivery, Postage, Supplies).
- No entry to Petty Cash is made during regular replenishments; only Cash and expense accounts are affected.
Handling Cash Short and Over
- If total of receipts does not match the cash missing from the fund, use the Cash Short and Over account.
- Debit Cash Short and Over when actual cash is less than receipts (shortage); acts as an expense.
- Credit Cash Short and Over when actual cash is more than receipts (overage); acts as revenue.
- A zero balance in Cash Short and Over is ideal.
Key Terms & Definitions
- Petty Cash — A small cash fund for minor, everyday expenditures.
- Custodian — Person responsible for managing the petty cash fund.
- Imprest System — A system maintaining a fixed petty cash balance; replenished for amounts spent.
- Cash Short and Over — Account used to record discrepancies between receipts and actual cash in the petty cash fund.
Action Items / Next Steps
- Practice journalizing petty cash fund establishment and replenishment transactions.
- Review how to handle discrepancies using the Cash Short and Over account.