Petty cash management

Petty cash management is referred to as the system of keeping records in order to track issuance and use of petty cash funds.

In order to smoothly run day to day operations of a business, it is sometimes required to assign limited amount of funds (petty cash) to a designated employee(s) who would utilize those funds to carry out small scale expenses on behalf of company under the authority given to him. This is done to avoid wastage of time of accounts payable department in verifying and write cheques for those small expenses.

However, the amount of petty cash and maximum limit upto which an expense can be incurred from petty cash is governed by company’s internal control policies. Moreover, local tax laws also specify limits on transaction amount that can be carried out through petty cash.

Petty cash imprest system and petty cash float:

Petty cash imprest is a popular system of managing petty cash in which a fixed amount called petty cash float is maintained in the hands of petty cash custodian. For example, if the float is decided to be $ 10,000 then initially $ 10,000 will be disbursed to the custodian. Afterwards, if custodian spends $ 6,000 during a week, $ 6,000 will be disbursed to him to maintain his petty cash float at $ 10,000.

System of petty cash:

The following diagram explains the system followed for petty cash management:

Accounting for petty cash

Following accounting entries are required to record petty cash movement.

1:Entry for disbursement of petty cash (whether initial or replenishment)

Description

Debit

Credit

Petty cash Account

****

 

Cash / Bank Account

 

****

Alternatively, if more than one custodian are maintaining petty cash at various location, specific petty cash accounts including the name of custodian (e.g. Petty Cash Account – Mr. ABC) can also be used to differentiate between them.

2: Entry for recording consumption of petty cash:

Description

Debit

Credit

Expense type 1

****

 

Expense type 2

****

 

Expense type 3

****

 

Petty Cash Account

 

****

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