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Each time the custodian distributes cash, he/she fills in the amount and reason on a voucher (i.e.: $39 for stamps) and records the voucher on the Petty Cash Log. The employee returns with a receipt that is attached to the voucher and the Custodian logs any difference (change returned, additional funds reimbursed to employee, etc.) on the Petty Cash Log. The custodian will also total the columns on the Petty Cash Log to get the balance at the end of the day.
If that is the only transaction that day, at the end of the day, the cash fund should contain $361 in cash and one voucher attached to a receipt for $39.
At the end of the month, the custodian submits all completed vouchers, a copy of the Petty Cash log for the month, the Petty Cash Balance Sheet, and requests a check (as in the case above for $39) which is cashed and added to the fund, bringing it back to the $400 predetermined balance. The replenishment check is recorded in the accounting system as:
Postage Expense 39
Cash 39
The petty cash account balance does not change unless the amount is permanently changed. Typically, the fund is replenished monthly so that only one journal entry is required.
Accounting for errors and theft
Occasionally, total cash plus vouchers will not equal $400 because of errors or theft. If, at the end of the month, the fund is $10 short, the following entry is recorded:
Postage Expense 39
Shortage Expense 10
Cash 49
The custodian will request $49: $39 postage + $10 shortage.
Typical Problems
Controls:
Generally, one custodian is responsible for petty cash and decides who can get petty cash, authorizes petty cash payments only for acceptable purposes, and observes authorized payout limits and requests reimbursements. But if the custodian is at a doctor’s appointment, no one gets cash, so consider having two or three custodians who coordinate their schedules. A different employee should process petty cash reimbursements, and still another should review distributions and amounts.
Shortages:
Petty cash funds often run out. To determine how much to keep in the fund, check last year’s replenishments. Were they weekly? monthly? quarterly? Determine the amount needed for one month and keep that amount, plus a cushion, in your petty cash.
Security:
Keep petty cash in a fireproof, locked, limited access safe, locked metal box, or vault, depending on the fund’s size. Do not leave safes and boxes unattended. Limit access to only the petty cash custodian(s).
Reimbursement:
Set dollar limits and make sure the custodian observes them. Have clear rules on what can be reimbursed. Prohibit accepting employee IOUs in exchange for cash for personal use.
Replenishment:
Replenish before funds run low. Require that all completed petty cash vouchers be in numerical order and in ink (not pencil) with receipts attached. Replenish at least monthly.
Permanent change in the petty cash amount:
Companies often overlook the need to change the amount because it is not systematically reviewed. At least yearly, review the amount as follows: Compare the replenishment each month to the monthly balance. If the amounts replenished are close to the fund balance (within 10%), increase the amount. If the replenishments (especially in peak months) are 30% less than balance, decrease the amount. Investigate whether employees with legitimate needs were denied petty cash during the year, and adjust decisions on permanent changes accordingly.
Summary
A well-run petty cash fund includes:
- Set dollar limits on petty cash disbursements;
- Reimbursement limits based on type of outlay;
- Reimbursements only for valid business expenses;
- Restriction of petty cash only to certain employees;
- Lists of reimbursable miscellaneous expenses;
- Completed, sequentially numbered vouchers to account for each disbursement;
- Requiring receipts for all vouchers when possible;
- Periodic (recommended daily) reconciliation of cash and vouchers;
- Prohibition of disbursements for personal checks;
- Distribution of petty cash policies to employees.
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