Petty cash fund is a relatively small amount of cash that businesses keep on hand for the purpose of small transactions such as providing change to customers, postage expenses, highway tolls etc. In such transactions, the use of checks is time consuming, costly or illogical.
Usually a custodian is appointed to administer the petty cash and it is his/her duty to account for the expenses incurred out of petty cash fund. Whenever the custodian makes any payment from the fund to an employee or a customer etc., he or she must record the amount being disbursed, the name of the person to whom the payment is being made and the reason for the disbursement.
Following are the typical transactions connected to petty cash fund.
- Creation: Petty cash fund may be created by drawing a check on the company's checking account and handing it over to the custodian of the fund. The journal entry is to debit petty cash and credit cash at bank.
- Disbursements: Individual disbursements from petty cash are not recorded via a journal entry. Instead journal entry is passed at the time of each replenishment and at the end of the period for the total amount disbursed.
- Replenishment: When the balance in petty cash becomes low, a journal entry is passed debiting various expense accounts and crediting petty cash for the sum of disbursements made. Then petty cash is replenished usually via a check.
- Raising Fund Level: When the volume of transactions to be handled by the petty cash grows, the fund level is raised. The journal entry is to debit the petty cash and credit cash at bank.
Company A created a petty cash fund of $900 on Jan 1, 2012. The journal entry is:
|Cash at Bank||900|
During January 2012, following disbursements were made from the fund:
The journal entry to record the about disbursements from petty cash is:
The company replenished the fund via a check of $730. The journal entry is:
|Cash at Bank||730|