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Petty Cash Funds

A petty cash fund is used for small items that the company pays for with cash. The use of petty cash should be very limited; checks or credit cards should be used when feasible.

A petty cash fund is created and maintained as follows:

• Select a dollar amount to be kept in the petty cash fund. For this example, you will create a petty cash fund with a starting balance of $100.
• Choose a custodian of the petty cash fund. The custodian will be responsible for dispersing cash from the fund and maintaining supporting documentation for all cash purchases.
• Use pre-numbered petty cash tickets to track petty cash disbursements.
• Prepare a journal entry to set up the petty cash fund.
• Periodically reconcile and replenish the petty cash fund and account for any overages or deficiencies in the account.

Example of a Petty Cash Fund

On January 1, you establish a petty cash fund with a beginning balance of $100. The following journal entry is recorded to establish the fund:

You will write a check for “cash” or otherwise withdraw $100 cash from the proper bank account. The $100 will be placed in a lock box, where the records for the petty cash fund will be maintained.

During January, you had two petty cash tickets, one for the purchase of $25 in travel expenses and the other for $11 in postage.

At the end of January, you counted the cash remaining in the petty cash fund: $63. You have receipts that total $36; therefore, you should have $64 remaining in the account ( $\$100-\text{ \$}25-\; \$11$). You are $1 short.

You would reconcile the account as follows:

At the end of January, you replenished the petty cash fund by preparing the following journal entry:

You would take the cash and place it in the petty cash lock box, bringing the balance back up to $100.