Chapter 6: Petty cash Flashcards
PETTY CASH is the money (notes and coins) a business holds to pay for low-value items and deal with any other transactions requiring cash
Petty cash is usually kept in a cash tin or box and then in a safe on the business premises. It is quicker and more convenient for the business to make payments for low-value items using petty cash than a bank transfer transaction.
Examples of small value items paid using petty cash are:
- tea and coffee for its employees
- small office supplies such as paper for the printer or postage stamps
- small taxi/cab fare for employees attending business-related events
- flowers or birthday card
Petty cash procedures
These are the steps to follow to make small-value purchases using petty cash:
- When money is taken out to make purchases for small value items, an I.O.U note is put into the tin.
An IOU contains details of:
- the amount used from the petty cash tin
- the date of transaction
- the person who took out the petty cash - After purchasing the item, any change is returned to the tin.
- The IOU is replaced with a PETTY CASH VOUCHER (or petty cash receipt) with an attached purchase receipt
- If employees spend their own money for a purchase, they will be reimbursed directly from the petty cash tin. The petty cash voucher is raised during the reimbursement with the supporting receipt attached.
Petty cash voucher records details of the petty cash payments. The voucher is included in the petty cash tin with the purchase receipt.
A petty cash voucher is issued when:
- an IOU is removed
- Reimbursement to employees who used their own money for small-value purchases
Each petty cash voucher must have a SUPPORTING RECEIPT attched to it. The supporting reciept is..
evidence of the item that was purchased. The receipt is stapled together with the petty cash voucher and placed in the tin.
Petty cash vouchers - A petty cash voucher records details of the petty cash payments. The voucher is included in the petty cash tin with the purchase receipt.
A petty cash voucher is issued when:
- An I.O.U. is removed
- Reimbursement to employees who used their own money for small-value business purchases
A petty cash voucher must have a SUPPORTING RECEIPT attached to it. The supporting receipt is evidence of the item that was purchased.
The receipt is stapled together with the petty cash voucher and placed in the tin.
Elements of a Petty Cash Voucher
- Date – The date of transaction
- Voucher number – Petty cash vouchers are issued in numerical order
- Details – A brief description of the transaction purchase. The Description should be detailed enough for the accountant to analyse the petty cash transactions later.
- Net amount – The amount for purchases before sales tax
- Sales tax – The sales tax incurred on the purchase.
The sales tax paid to the supplier is a form of input tax and is refundable from the tax authorities. Therefore, it is part of a business’s current asset. - Total amount – The total amount paid for the purchase
- Signature – The signature of the employee who received cash to make the purchase
- Authorised by – The signature of the person responsible for the petty cash system
Exam advice - Most businesses buy blank petty cash voucher books that are pre-numbered to be recorded quickly. Petty cash vouchers may look different in different organisations.
Preparing a petty cash voucher
- the NET AMOUNT (amount before sales tax) is ALWAYS 100%. The gross amount is 100% + sales tax %
Imprest and Non-Imprest Systems are METHODS OF REPLENISHING the petty cash tin. A business may manage the level of cash by operating either the imprest or non-imprest system.
In an imprest system, the amount of cash in the petty cash tin is replenished up to the fixed imprest amount set by the business. The amount to replenish in an imprest system is the total amount of petty cash vouchers in the tin.
Any other form of replenishing is called a non-imprest system.
Imprest System (Cash Float)
In an imprest system, there is a fixed amount of money in the petty cash tin at the beginning of each period.
At the end of the period, the amount of cash in the tin is counted. The business then adds cash to bring the cash total to the original fixed amount. The fixed amount of money is called a “cash float”.
For example, $100 is in the petty cash tin at the start of each week. The tin is left with $75 in cash at the end of the week. $25 is added back to the tin to bring the total cash to $100 for the start of the following week.
The petty cash vouchers are removed and filed in a folder separately from the tin for record purposes.
Key point*
Imprest amount = balance in the petty cash tin + IOUs + petty cash vouchers amount total (amount spent)
Top up amount =
Top up amount = payment vouchers + IOUs – receipt vouchers
(see examples)
Non-Imprest System
is ..
any other method of replenishing than an imprest system.
An amount added into the petty cash tin, regardless of the cash taken out during the week, is a non-imprest system.
- For example, a business starts with $125 in the petty cash tin at the beginning of the period. During the week, the business uses up $38 of petty cash. $40 is added back into the petty cash tin, bringing to total petty cash amount to $127.
Another example of a non-imprest method is when a business replenishes a fixed amount of $30 regardless of the balance in the petty cash tin.
Intro to Petty Cash Accounting
At the end of each period, the business accountant will record all activities relating to petty cash into the accounting system. The accounting system (general ledger) comprises individual ledger accounts representing categories such as assets, liabilities, capital, income and expenses.
The transactions are entered into the individual ledgers using double entry. Each individual ledger is represented using T-accounts.
Petty Cash Accounting Process
- All petty cash transactions are recorded in the individual ledger accounts using journal entries at the end of the week.
- The petty cash vouchers and attached Receipts are removed from the petty cash tin and kept in a separate folder as supporting documentation.
- The physical notes and coins in the petty cash tin are counted, and the balance is known as ‘cash-in-hand’.
- The petty cash ledger accounts are closed off. (Opening balance + Petty cash income – Petty cash expense + Reimbursements)
The balance carried/down is the petty cash balance when closing the accounts. - Reconciliation is performed by comparing the ‘cash-in-hand’ balance to the balance calculated in the petty cash ledger account. If the balances do not match, the differences are investigated.
Relevant Petty Cash Ledger Accounts
A journal is used to record transactions or adjustments in the general ledger and is a part of the double-entry process. Journals are covered in Chapter 8 (Trial Balance).
Petty cash transactions are recorded using journals to relevant petty cash ledger accounts. Transactions are recorded in the ledgers as soon as they occur.
4 are:
1) petty cash account (asset)
This account shows every transaction relating to petty cash. The balance c/d of the petty cash ledger accounts is the petty cash balance at the period end.
2) Bank Account (asset)
Petty cash tins are replenished using money in the bank.
3) Expense accounts (expense)
Purchases made using petty cash is reflected in their individual expense account.
For example, the purchase of postage stamps affects the stationery expense account. The purchase of train fare tickets affects the travel expense account.
4) Sales Tax account (asset)
There may be sales tax incurred on business purchases using petty cash. This input sales tax paid is refundable from tax authorities. Therefore, it is categorised as an asset as the business expects an inflow of money.
Petty cash transactions and double entries
Journal entries are created on each petty cash transaction to be posted into the relevant ledger accounts. Below is a list of petty cash transactions and their associated journal entries.
