Petty Cash Procedure
A petty cash procedure is a system or a set of rules that a company puts in place to manage the use, replenishment, and reconciliation of its petty cash fund. These procedures help ensure that petty cash is used appropriately and that all transactions are accurately recorded.
The procedure may vary between organizations, but typically includes the following steps:
- Setting Up the Petty Cash Fund: A fixed amount of money is designated as petty cash. This amount is based on the company’s estimated needs for small, immediate expenses. A secure location, such as a lockbox, is used to store the cash, and a petty cash custodian is designated to manage it.
- Using the Petty Cash Fund: Whenever an employee needs cash for a small expense, they request it from the petty cash custodian. The custodian disburses the money and records the transaction, including the date, the amount of cash, the purpose of the expenditure, and the name of the employee who received the cash.
- Collecting Receipts: Every time cash is disbursed, the petty cash custodian collects a receipt or fills out a petty cash voucher. The receipt or voucher is stored with the petty cash fund.
- Replenishing the Petty Cash Fund: When the petty cash fund is low or empty, it’s time to replenish it. The petty cash custodian adds up the receipt or vouchers, which should equal the amount of cash that was disbursed. The custodian then submits a request for a check to be written in that amount. Once the check is cashed, the petty cash fund is back to its original total.
- Auditing the Petty Cash Fund: Periodically, an independent person should count the petty cash and ensure that the total of the cash and receipts equals the original petty cash total. Any discrepancies should be investigated.
- Recording Petty Cash Transactions: At regular intervals, the petty cash transactions should be recorded in the company’s general ledger.
By following these procedures, companies can manage their petty cash effectively, preventing misuse and ensuring that all transactions are recorded accurately.
Example of the Petty Cash Procedure
Let’s consider an example for XYZ Company to illustrate the petty cash procedure:
- Setting Up the Petty Cash Fund: XYZ Company decides to establish a petty cash fund of $100 for small office expenses. They choose Mary, the office manager, as the petty cash custodian. Mary is given $100 in cash, which she keeps in a lockbox in her office.
- Using the Petty Cash Fund: During the week, John, an employee, needs to purchase some office supplies that cost $15. He gets the cash from Mary and buys the supplies. Mary records this transaction in a petty cash log.
- Collecting Receipts: John gives Mary the receipt for the office supplies. Mary attaches the receipt to a petty cash voucher that includes the date, the amount, the purpose of the purchase, and John’s name. She places the voucher in the lockbox.
- Replenishing the Petty Cash Fund: At the end of the week, the petty cash is down to $20. Mary adds up all the vouchers, which total $80. She requests a check for $80 from the company, cashes it, and adds the cash to the lockbox, bringing the total back to $100.
- Auditing the Petty Cash Fund: The following week, an independent auditor counts the petty cash and verifies that the total cash and the total amounts of the vouchers equal $100. They find no discrepancies.
- Recording Petty Cash Transactions: Mary records the petty cash transactions in the company’s general ledger at the end of each month. She debits the appropriate expense accounts and credits the petty cash account for the amount used.
This example illustrates how a petty cash procedure ensures that cash is handled responsibly and that all transactions are recorded correctly.
