An organization may require little amounts of cash to pay for petty (little) expenses, for example, parking a car, postage stamps and courier expenses. Rather than issuing a check every time, the organization will set up a petty cash fund to pay for these little sums in cash.
Petty Cash is generally worked on what is known as an imprest system. The opening balance in the petty cash fund less the amount of cash disbursed for petty expenses should be equal to what is left in the petty cash fund. At the end of the day the petty cash fund will be replenished with the amount of cash spent to pay for petty expenses.
How to Set Up a Petty Cash Fund
- The Petty Cash Custodian: One individual should be designated as the petty cash custodian. Choosing one individual as custodian safeguards the petty cash fund, also increases transparency and accountability. The petty cash custodian is responsible for ensuring the legitimacy of the expenses disbursed through the petty cash fund.
- Establishment of the Amount for the Petty Cash Fund: The custodian will determine the amount of cash require for the petty cash fund and when the petty cash fund will be replenished.
- Initial Journal Entry to establish the petty cash fund.
- Receipts Requirment: The custodian will require the receipt of the supplier from the employee for the expenses made by the employee. That receipt will show the amount spent and the information about the supplier and the expense. Then the employee will sign a voucher to reimburse the amount spent.
- Petty Cash Summary: The custodian will provide the petty cash summary at the end of the period which is a week in this example. Summary of petty cash fund is shown below.
- Cash Over and Short: The custodian needs to make subtraction or addition of small amounts where required. As in the example above $2 cash short was add to make $83 to $85 (a complete figure).
- Presentation to the Supervisor: The custodian presents this petty cash summary sheet to the supervisor will all original receipts. Then the supervisor after reviewing these documents and petty cash summary sheet gives the check to the custodian to reimburse the petty cash fund to its intial amount (i.e. $100). The custodian then cashes the check ($85) to replenish the petty cash fund back to initial amount (i.e. $100).