Petty Cash

Petty cash is a small amount of physical cash that a business keeps on its premises to pay for minor expenses, such as postage, office supplies, taxi fares, small repairs and staff refreshments. These payments are too small or too urgent to justify a check, a bank transfer or a purchase order. The fund is usually held in a locked box or drawer and managed by one designated person, the petty cash custodian.

Most businesses run petty cash on an imprest basis: the fund is set at a fixed amount, known as the imprest amount, and is topped up to that level periodically by an amount equal to the payments made. At any time, cash in the box plus receipts for payments made should equal the fixed amount. Petty cash is reported as part of cash and cash equivalents on the balance sheet.

• Establishing the fund: the business writes a check or withdraws cash for the imprest amount, for example $300. The entry debits petty cash and credits cash in bank.
• Making payments: each payment is supported by a receipt and a petty cash voucher showing the date, amount, purpose and the signatures of the recipient and the custodian. No journal entry is made at this stage.
• Replenishing the fund: when cash runs low, or at month end, the custodian totals the vouchers by expense type. The business writes a check for the total, debiting the relevant expense accounts and crediting cash in bank. The petty cash account itself is not changed.
• Changing the fund size: only when the imprest amount is increased or reduced is the petty cash account debited or credited.

A small office sets up a $300 petty cash fund. During the month, the custodian pays $62 for postage, $85 for office supplies, $40 for a courier and $48 for staff refreshments, a total of $235. At month end the box contains $61. The cash over or short is:

Here $\text{Cash on hand}$ is the counted cash in the box, $\text{Vouchers}$ is the total of receipts for payments made, and $\text{Imprest amount}$ is the fixed size of the fund. The result is $61 plus $235 minus $300, or a $4 shortage. To replenish the fund to $300, the office writes a check for $239. The journal entry debits postage expense $62, office supplies expense $85, delivery expense $40, staff welfare expense $48 and cash over and short $4, and credits cash in bank $239. A small, occasional shortage is normal; frequent or large ones point to errors or theft.

Because cash is easy to steal and hard to trace, petty cash needs simple but firm controls:

• Assign a single custodian, so responsibility for shortages is clear.
• Keep the fund small, enough for perhaps two to four weeks of payments.
• Set a maximum amount per payment and a list of allowed uses, with larger items paid through normal purchasing.
• Require a receipt and an approved voucher for every payment, and cancel vouchers once reimbursed so they cannot be reused.
• Have someone other than the custodian carry out surprise counts and review vouchers before replenishment.
• Record replenishments promptly and always at period end, so that expenses are recorded in the right period.

Many businesses have reduced or eliminated petty cash by issuing company debit cards or prepaid cards, which record each transaction electronically and integrate with expense software. Petty cash remains common in retail outlets, construction sites, restaurants and in countries where cash is still widely used. For the financial statements, petty cash is usually immaterial, but auditors still test it in businesses with weak controls, because abuse of petty cash can be an early sign of wider problems. It is counted alongside cash in the register and included when the general ledger is matched against the bank reconciliation and the overall cash reconciliation.