How to Manage Your Petty Cash Fund

But first, why would you want to establish a petty cash box? ... And what procedures should you put in place?

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The main reason is convenience ... a petty cash fund for minor expenses is convenient. There could also be some cost savings related to the administration expenses (including labor) associated with writing a cheque for small amounts.

Here is an example where it makes sense to break the internal control principle of paying all expenses by cheque.

However, with that said, I still prefer to use a low limit credit card rather than a petty cash fund.

Okay. With that covered, here is how to manage your petty cash:

• It is best if one person is in charge of the petty cash box.
• When someone takes money out of petty cash, a voucher should be filled out and placed in the petty cash box.
• Once the purchase is made, the receipt should be attached to the voucher.
• Your petty cash receipts should be stamped with a "posted" stamp when they are entered into the accounting system.
• Each time a reconcilation of petty cash is done, remove the "posted" receipts from the petty cash box and attach all the receipts to your petty cash reconciliation ... then replenish the fund.

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Petty cash disbursements should be recorded before the end of your fiscal year so that all the expenses are recorded. The fund should be replenished to its approved amount at that time. Here are the bookkeeping entries:

(1) To setup your petty cash fund, write a cheque and code it:

Debit (Increase) Petty Cash (current asset account on the balance sheet)

Credit (Decrease) Cash in Bank (current asset account on the balance sheet)

(2) To record petty cash disbursements (you should have vouchers AND receipts for EVERY disbursement and each receipt needs to be entered individually NOT as a group ie. do not enter one line for the total amount of receipts):

Pens - Debit (Increase) Office Supplies (expense account on the income statement)

Stamps - Debit (Increase) Postage & Delivery (expense account on the income statement)

Box of photocopy paper - Debit (Increase) Office Supplies (expense account on the income statement)

GST/HST Payable - Debit (current liability on the balance sheet)

Cash Short - Debit (Increase) Cash Short or Over (expense account on the income statement) OR Cash Over - Credit (Increase) Cash Short or Over (expense account on the income statement)

OPTION ONE - To record expenses AND replenish petty cash at the same time, finish with this entry (write a cheque). ***This is the "correct ... most often taught in text books" way to do petty cash.
Credit (Decrease) Cash in Bank (current asset account on the balance sheet) if you ARE replenishing (exchanging receipts for cash)

OPTION TWO - To record expenses NOW and replenish petty cash LATER, finish with this entry (do not write a cheque). ***This is not the "correct - most often taught in text books" way to do petty cash but of course ... it's the method I prefer.
Credit (Decrease) Petty Cash (current asset account on the balance sheet) - If you use QuickBooks®, make the entries using Write Cheques so that your sales tax calculates properly. If you take a peek in the petty cash register, under this method, you will always know what your balance is without having to continually recount the cash or add up your vouchers to see if you have all your vouchers and/or receipts. Remember to stamp "posted" on receipts entered into the register so you don't enter any twice.

(3) To increase your petty cash fund ... or replenish petty cash if you used the second option above, write a cheque and code it:

Debit (Increase) Petty Cash (current asset account on the balance sheet)

Credit (Decrease) Cash in Bank (current asset account on the balance sheet)

If your cash is over or short, select the appropriate line to enter in the second bookkeeping entry. If you are balanced, you will not have a cash over/short in your journal entry.

In QuickBooks®, the petty cash account would be setup as a BANK type not an other Current Asset type ... to make reconciliations easier. Click here to see how to enter your petty cash vouchers into QuickBooks.

The Practice - Links

How to Record Common Bookkeeping Entries

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