Process Petty Cash Transactions

Process petty cash transactions

Contents

Key to resources

Introduction

Payments from the petty cash fund

The reimbursement process

This learning guide is based on the following resource:
Textbook
Duncan A (2006) Introductory Accounting, National Core Accounting Publications, Bondi
Note
A new edition of this textbook was being published at the same time as this resource.
Where possible, we have provided a second Key to resources to this new edition.

Key to resources

Resource / Textbook (2006 edition)
1 / Chapter 13 ‘Petty Cash’, p403
2 / Chapter 13 Operation of the imprest system of petty cash
3 / Chapter 13 Establishing the petty cash fund
4 / Chapter 13 Payments from the petty cash fund
5 / Chapter 13 The reimbursement process
6 / Chapter 13 Example for Mellars Clothing, p409
7 / Chapter 13 Self-testing exercises 1 and 2
8 / Chapter 13 Example for G Wizz, pp411–412
9 / Chapter 13 Self-testing exercise 3
Resource / Textbook (2007 edition)
1 / Chapter 10 ‘Petty Cash’, p 337
2 / Chapter 10 Operation of the imprest system of petty cash
3 / Chapter 10 Establishing the petty cash fund
4 / Chapter 10 Payments from the petty cash fund
5 / Chapter 10 The reimbursement process
6 / Chapter 10 Example for Mellars Clothing, p 343
7 / Chapter 10 Self-testing exercises 1 and 2
8 / Chapter 10 Example for G Wizz, pp 345 – 346
9 / Chapter 10 Self-testing exercise 3

Introduction

Most business operations will incur small expenses on a daily basis. The frequency and small amount of these expenses may make it inconvenient to pay them in the normal manner, that is, through the accounts payable system by issuing a cheque. A business can set aside an amount of cash to meet the small expenses incurred to overcome this problem.

When a business has cash on the premises, systems need to be in place to protect it against the risk of errors and irregularities.

/ Now go to Resource 1

In particular note that any payment of cash needs to be authorised. Note the comments under the heading ‘The need for a petty cash system’ and that any payments are recorded on a signed petty cash voucherwhich is also authorised.

The usual system of petty cash used is known as the imprest system.With this system an amount of petty cash is established known as the petty cashfloat. At any one time, the amount of the cash on hand together with the totals shown on the petty cash vouchers should agree with the float. The totals shown on the petty cash vouchers represent the spent amount of the float.

/ Now go to Resource 2
Note carefully the comments on the operation of the imprest system of petty cash.

When the amount for the float is decided, the general journal entry to establish the amount is:

Petty cash / xxxx
Bank / xxxx
/ Now go to Resource 3
In the textbook under the heading of ‘Establishing the petty cash fund’, the amount of the original float is $200.

If that amount is found to be too small and it is decided to increase the amount at a later date to say $500 then the general journal entry would be:

Petty cash / 300.00
Bank / 300.00

On the other hand, if the original float of $200 was found to be too much and a decision was taken to reduce the float by $50 then the $50 would be re-banked with the general journal entry:

Bank / 50.00
Petty cash / 50.00

Note the posting of the original amount of $200 to the petty cash general ledger account. This balance of $200 will remain until the amount of the float is increased or decreased as per the above entries. Petty cash is shown as a current asset in the balance sheet.

Payments from the petty cash fund

/ Now go to Resource 4

The spent vouchers would be listed in a petty cash book with headings designed to suit the particular business.

The reimbursement process

/ Now go to Resource 5

Only one voucher number is shown in this exercise. However, voucher numbers011, 012 and 013 would have been signed and authorised for the respective amounts. The total of the spent vouchers is $176, leaving $24 as cash on hand. As the business has made a decision that $24 is not enough, a cheque is drawn for the amount spent of $176. Note particularly the general journal entry for the reimbursement showing the debit to the individual expense accounts (and GST) and a credit to bank.

The petty cash account in the general ledger is notaffected by the reimbursement. When the cheque is cashed at the bank the amount of actual cash on hand will again be $200.

/ Now go to Resource 6
In the example for Mellars Clothing, note that part (b) of the requirements should read ‘General Journal entries’ (given in solution) and not ‘Cash Journal entries’.
/ Now go to Resource 7
Try the self-testing exercises indicated.
/ Now go to Resource 8
In the example for G Wizz, note again that part (b) of the requirements should read ‘General Journal entries’ (which is given in the solution).
/ Now go to Resource 9
Note in the solution that the heading for postage in the petty cash book should read ‘courier’. The general journal entry is correct.

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