Petty Cash Fund
Petty cash funds give businesses a way to pay for small, routine expenses without writing a check or processing a formal payment for every minor purchase. Think office supplies, postage stamps, or reimbursing an employee for a last-minute coffee run with a client. A designated petty cash custodian manages the fund, tracks every disbursement with receipts, and keeps a running log of what's been spent.
Understanding petty cash matters for this course because it ties directly into internal controls and cash management. The fund is small, but the accounting principles behind it (establishing, replenishing, reconciling) show up repeatedly in how companies safeguard cash.
Purpose of Petty Cash Funds
Companies don't want to cut a check every time someone needs a $12 box of pens. Petty cash solves that problem by keeping a small amount of cash on hand for minor transactions.
- Convenience: Covers small, routine purchases like office supplies, postage, and minor employee reimbursements
- Reduced administrative cost: Eliminates the need for formal check requests or expense reports on trivial amounts
- Emergency access: Provides quick cash for unexpected small expenses (a broken stapler, last-minute shipping)
- Accountability: The petty cash custodian maintains a log and collects receipts for every disbursement, creating a paper trail
- Defined responsibility: One person is in charge of the fund, which makes it easier to track and audit
Journal Entries for Petty Cash
There are four key transactions you need to know how to record: establishing the fund, replenishing it, increasing it, and decreasing it.
1. Establishing the Fund
When a company first creates a petty cash fund, it moves cash from the general cash account into petty cash. Say the company sets up a $200 fund:
| Account | Debit | Credit |
|---|---|---|
| Petty Cash | ||
| Cash |
The Petty Cash account stays at this balance until the company decides to increase or decrease the fund. You don't touch the Petty Cash account during normal replenishments.
2. Replenishing the Fund
As the custodian pays for things, the cash in the fund shrinks. When it gets low, the company replenishes it back to the original amount. The key here: you debit the specific expense accounts based on the receipts collected, and credit Cash. You do not debit Petty Cash.
For example, the custodian turns in receipts showing $75 in office supplies and $30 in postage:
| Account | Debit | Credit |
|---|---|---|
| Office Supplies Expense | ||
| Postage Expense | ||
| Cash |
This brings the physical cash in the fund back up to $200 and records the expenses in the correct categories.
3. Increasing the Fund
If the company decides $200 isn't enough and wants to raise it to $250:
| Account | Debit | Credit |
|---|---|---|
| Petty Cash | ||
| Cash |
4. Decreasing the Fund
If the company decides $200 is too much and wants to bring it down to $175:
| Account | Debit | Credit |
|---|---|---|
| Cash | ||
| Petty Cash |
The Petty Cash account balance only changes when you establish, increase, or decrease the fund. Regular replenishments don't affect it.
Handling Petty Cash Discrepancies
Sometimes the physical cash in the fund plus the receipts don't add up to the established balance. When that happens, the Cash Over and Short account is used to record the difference.
Shortage (actual cash is less than it should be): The custodian can't account for some of the money. Debit Cash Over and Short for the missing amount. For example, if the fund is $200, receipts total $150, but only $45 in cash remains (instead of $50), there's a $5 shortage:
| Account | Debit | Credit |
|---|---|---|
| Office Supplies Expense (etc.) | ||
| Cash Over and Short | ||
| Cash |
Overage (actual cash is more than it should be): Credit Cash Over and Short for the excess amount.
After recording the discrepancy, the custodian should investigate the cause:
- Simple errors: A receipt was lost or change was miscounted. Correct with adjusting entries if the source is found.
- Theft or misuse: Handled per company policy, which may include disciplinary action and tighter controls.
- Recurring patterns: Frequent discrepancies signal a need for more frequent audits, better training, or reassigning the custodian role.
Consider materiality when deciding how to respond. A $0.50 discrepancy once a quarter is different from a $20 shortage every month.
Petty Cash Controls
Petty cash is physically sitting in a drawer or lockbox, which makes it vulnerable. Strong internal controls are essential:
- Segregation of duties: The person who authorizes replenishments should not be the same person who manages the fund day-to-day. Ideally, a third person reconciles the records.
- Documentation: Every disbursement needs a receipt or a signed petty cash voucher. No receipt, no reimbursement.
- Surprise counts: Managers should periodically count the fund without advance notice to verify the balance matches the records.
- Locked storage: The fund should be kept in a locked box or drawer with access limited to the custodian.
- Regular review: Petty cash procedures should be reviewed periodically and updated if weaknesses are found.
These controls connect directly to the fraud prevention concepts covered earlier in this unit. Even a small fund can reveal control weaknesses that apply to larger cash management systems.