Petty Cash | Meaning | Template | Accounting | Example – Every organization requires cash for their day to day expenditures. Not every expense can be paid through a bank cheque or bank transfer. Tiny expenditure needs to be settled through cash only. At the same time, few receipt needs to be settled in cash such as scrap sale etc.
In almost every organization petty cash is an integral part of accounting function and mostly taken care by accounts personal only. In this article, we look at what is Petty Cash and Petty Cash Accounting in detail.
- What is Petty Cash?
- Role of Cashier
- Role of Authoriser
- Role of Receiver
- Control over Cash
- Petty Cash Accounting
- Petty Cash Accounting Example
- Replenishment of petty cash balance
- Petty cash Account Type
What is Petty Cash?
Petty cash is a small amount of cash needs to be kept in office for utilization of daily small expenditures. A person who is in possession of the cash in the organization is generally called cashier. The same person in responsible for appropriate accounting of each cash transaction done through him. All the incomes and expenses which are practically not possible to settled through bank, needs to be settled none other than cash (no barter transaction in modern economy).
Generally, the following expenditures paid in cash;
- Day to day snacks, tea for employees.
- Employee’s reimbursements – Occasional traveling, other reimbursements.
- Small bank charges – franking, Notary etc.
- For sending greetings or sweets to clients or customer on Diwali or other festivals.
Few incomes which may be taken into cash;
- Scrap sales – small amounts to unorganized vendors.
- Sale of old newspaper etc.
Usually, an organization estimated their periodical requirement of cash i.e. weekly or monthly and according to that approves a limit which can be withdrawn from the bank from time to time to settle the cash expenses. A limit of cash possession with the cashier shall not exceed at any given point of time as approved by the management of the organization. The periodicity of withdrawal from bank may differ from organization to organization as per their requirement. A small shopkeeper need more cash rather than a middle or big size organization as he needs to deal more with unorganized sector who deals in cash only.
For smooth transaction through cash, three person are part of the transaction. Preparer (Cashier), Authoriser ( Higher Management) and Receiver ( claimed by).
Also, have a look at what is Cash and Cash Equivalents
Role of Cashier
Cashier is generally most trusted person in the finance team as he possesses hard cash of the organization. His Job is right start from withdrawing the amount from the bank to settle expenses and generally includes accounting for the same. We can summarise job of cashier in the following points;
- Withdrawing amount from the bank in the permissible limit on time to time.
- Vouching the authenticity of expenditures and making the payment of the same post checking the appropriate approval is being taken.
- Creating petty cash voucher for each payment in cash and attaching supporting of the same to that. I.e. if reimbursement to employee is paid for travelling expenses than travel ticket shall be attached with the voucher.
- Passing appropriate entries in the accounting system in proper head of income or expenses and get authorized the same.
Post a primary scrutiny of voucher, Cashier placed the voucher to the higher management for their approval to settle the transaction. The responsibility to control the cash transaction is primarily of cashier but authorizer shall also be held responsible for his authorization to a transaction. Hence he should first be sure what he is authorizing. The authoriser post considering the transaction shall decide to approve or disapprove the transaction;
- Shall check the voucher and accordingly approve or disapprove the same.
- There are some legal restrictions on making payment in cash above a certain limit. Sometimes it may be technical enough so that the cashier would not have knowledge of the same. The authorizer should check the same and shall disapprove such payments.
- Sign and authorized the voucher and if he do feel shall put his remarks on the voucher itself for the future reference.
- There are certain incomes too which one could not take above a certain limit in cash. The authorizer shall possess that knowledge and shall reject such transaction.
- The authorizer is being expected to use his skills to ascertain the nature of the transaction in the general due course of business and that shall truly reflect in his authentication.
Role of Receiver
The receiver is one who claimed the amount and shall be eligible to receive the cash from the organization shall;
- Submit appropriate evidences,
- Claim the amount below or equal to maximum permissible (Employee reimbursement)
- Shall sign the voucher at the time of cash received only.
Control over Cash
As cash has most effective and speedy settlement, it is likeable but at the same time it is risky too. A bank cheque could be traced even after a couple of years and can be proved that the same payment was been made through several sources but a cash payment cannot be proved if the same is not settled after taking proper evidences into the account. Hence a petty cash voucher shall be created to put evidence in the process and shall be signed by the receiver of cash at the time of payment. A specimen of the voucher is as below;
A specimen of the petty cash template is below – |
The above petty cash voucher contains the name of voucher preparer, authorizer and receiver as all the three are important for the evidence of payment.
However, to avoid any kind of fraud in the cash, the management should place a number of controls over the cash. Some general controls are as follows:
- Petty cash should be placed at a secure place. Insurance for theft shall be taken for petty cash. The insurance shall be equal or more than from the maximum permissible amount of cash in hand approved by management.
- It must be placed at lock and key. In modern times, there is surveillance through cameras taken at every portion of the organization. Hence the petty cash shall be under surveillance to avoid theft.
- Petty cash amount should not be kept too high and shall be within the permissible limit all the time. The limit too shall be below or equal to average monthly cash expenses of the organization.
- Over and above petty cash must be deposited into bank immediately. If the company receives cash income, the same should be deposited into the bank in the possible shortest time if such amount is over and above of permissible amount.
- Cashier is responsible for authorization and correctness of all reimbursement made and maintaining supporting for payments made via petty cash fund to avoid misuse of the cash belongs to organisation.
- Surprise cash counts of petty cash must be done by senior official person on time to time to assures the accuracy of cash balances in petty cash register.
- Internal auditor of the organization shall be instructed to do surprise checks and voucher checking to have a better control over cash.
Note: Petty cash register shall not the form part of double entry system.
Petty Cash Accounting
Procedure relating to petty cash fund and journal entries:
Petty cash fund is created by cash withdrawing from bank and handing over to the person who maintains petty cash fund. In smaller organization the amount received from the debtor (in cash) shall also part of cash
Contra – Petty Cash A/c Dr. xxxx
To Bank A/c xxxx
Receipt – Cash A/c Dr. xxxx
To Debtor A/c xxxx
#2 – Disbursement
Each disbursement is not recorded via journal entry as there may be much small amount disbursement for tiny expenditures (i.e. buying a postage stamp). Instead of journal entry passed at the end of the day or after a particular period for the total amount disbursed.
Payment – Total Disbursement (expenditures head wise)A/c Dr. xxx
To Petty Cash A/c xxx
Narrations shall contains the total cash payment break up.
#3 – Replenishment
If petty cash balance becomes very low then petty cash is replenished via cheque.
Contra – Petty Cash A/c Dr. xxxx
To Bank A/c xxxx
Petty Cash Accounting Example
: XYZ LLP creates petty cash fund of $15,000/- on 1 Apr 2016. During the month of April 2016, following disbursement were made from petty cash fund:
Tea and snacks 1,256/-
Toll Tax 2,450/-
Printing & postage 1,550/-
Cleaning and Dusting 1,000/-
Office Supplies 2,800/-
Pass journal entries for above transaction.
1 Petty Cash A/c Dr 15,000
To Cash at Bank 15,000
(Being Petty cash fund created or being amount withdrawn from the bank for the petty cash fund)
- Tea and snacks 1,256
Toll Tax 2,450
Printing & postage 1,550
Cleaning and Dusting 1,000
Office Supplies 2,800
To Petty Cash A/c 11,356
(Being disbursement from petty cash fund)
Journal entry for Petty Cash Receipts:
Petty Cash A/c Dr. xxx
To Sale of Scrap or News Papers xxx
(Being Cash received on sale of Scrap / News Papers)
Replenishment of petty cash balance
The petty cash balance shall replenish from time to time to accommodate the further cash expenditures. However, the method of replenishment is mostly noted and depends on the cashier and his authorizer. There may be a top management instruction on it but in absence of such instructions, cashier according to his convenience, refill his cash balance.
There are few methods which may help the management or authorizer in a way or two;
The methods are;
#1 – Petty Cash Float up
When an organization practice to operate a fixed float for petty cash as organization wants the cash should not be fall below a level and should be in a range the top up amount will always remain same. The moment the cash touched the lower end of the range, the cashier shall trigger and put a request for withdrawal from bank. For example if the float level is $20,000/- and $14,000/- has been spent, the cash balance remaining is $6,000/- and $14,000/- is needed to float balance back to the level of $20,000/-. Here $6,000/- is lower end and the withdrawal amount shall always be $14,000/- only.
This practice record all the payments made since the last top up, as a basis for requesting the next top up to the authorizer. Use of this method helps signatories to know what amount was spent on before withdrawing more cash from the bank.
The range of cash in possession of accounts department at a given point of time is decided and approved by the management of the company.
#2 – Petty cash as required
Few small companies adopt a policy which results into lowest balance of cash with the company as they only withdraws when it is required. For example the company has a policy to reimburse employees on weekly basis and hence in every week company came to know how much cash is required and that amount only withdrawn by the company.
This approach reduces the risk and since there will be almost no cash balance with the company, few cost in relation to insurance and protection of money can be avoided.
#3 – Unorganised Petty Cash Management
In closely held companies, where the owners directly involved in day to day business uses this approach whereas, they dictate the method of withdrawing the amount from the bank. No formal policy is in place to withdraw the amount and no limit over the possession of the cash. Further there is no formal policy over petty cash too as the same is closely looked over by the owners of the organization.
From control and risk prospective, it is less risky as closely controlled by owner only. From policy and accounting point of view, it is informal and shall be avoided.
Best policy – From the above three petty cash policies Petty cash float up is mostly used and appreciated by accountants across the globe as it provides flexibility as well as control both over the cash transaction.
Petty cash Account Type
Petty cash is current asset and should be shown in Asset side under the head of Current Assets of the Balance sheet. Petty Cash ledger balance on any point of time cannot be negative for all the practical reasons. (Negative cash means the cash outflow is more than cash inflow which is practically not possible)
The petty cash fall under the most liquid asset organization may have.