A petty cash fund is used to make small expenditures that cannot wait for the formal check- writing process. The fund is operated on an imprest basis. This means that when the fund gets low on cash it is replenished. The person responsible for keeping the petty cash is called the petty cash custodian.
How to Establish a Petty Cash Fund
To establish a petty cash fund you debit the petty cash account and credit the cash account.
Establishing a petty cash fund transfers money from a bank to a safe box. The transaction is an asset exchange transaction.
Example: Exercise 6-13A
The following steps are taken when disbursing funds from a petty cash fund:
1) When money is disbursed from the petty cash fund, the custodian should complete a petty cash voucher
2) Any receipts should be attached to the voucher
3) The voucher should be signed as evidence that cash was received
4) At any time the total amount of receipts and cash must equal the petty cash fund balance
5) No journal entry is made when petty cash fund is disbursed.
6) A journal entry is made when the petty cash fund is replenished. This is done when the petty cash fund is relatively low.
Replenishing the petty cash fund
When the petty cash fund is low, the fund has to be replenished. The following steps are taken to replenish the funds:
1) Total all vouchers in the petty cash fund
2) Any shortage in cash is determined. Any shortage in cash is written off to the “cash short and over” account.
3) A check is written for the amount that brings the petty cash fund back to the imprest balance