Chapter 6: Control of Cash 2

Petty Cash System of Control A petty cash system is used to handle small payments that a company needs to make without issuing checks. These payments may include minor expenses like shipping fees, small repairs, or office supplies. The petty cash system ensures that small transactions are easily managed while maintaining control over cash. Operating a Petty Cash Fund: 1. Establishment: To establish a petty cash fund, the company estimates the amount of small payments it will need for a short period, such as a month. A check is drawn for that amount, cashed, and the funds are handed to a designated petty cashier or petty cash custodian. For example, if Z-Mart sets up a $75 petty cash fund, the company writes a check for $75 and hands the cash to the petty cashier. Journal Entry to Establish Petty Cash Fund: plaintext Debit: Petty Cash $75 Credit: Cash (in bank) $75 2. Payments: When small payments are made, the recipient signs a petty cash receipt or petty cash ticket, which is placed in the petty cashbox along with the remaining cash. The total of the receipts and the cash on hand should always equal the initial fund amount. For instance, if the petty cash fund was $100, and there is $80 in cash and $20 in receipts, the fund is still balanced. 3. Reimbursement: When the petty cash fund is low, the petty cashier summarizes the expenses by account type and requests reimbursement. The company issues a check to restore the fund to its original amount, ensuring all expenses are properly recorded in the appropriate accounts. For example, if $71.30 was spent and only $3.70 remains, the reimbursement check would be for $71.30. Journal Entry to Reimburse Petty Cash Fund: plaintext Debit: Various Expenses Credit: Cash (in bank) $71.30 $71.30 4. Petty Cash Over or Short: Sometimes the cash remaining plus receipts does not equal the fund amount due to errors like missing receipts or overpayment. This discrepancy is recorded in the Cash Over and Short account. If the fund is short, it’s recorded as an expense (debit). If there’s an overage, it’s recorded as revenue (credit). Example of Reimbursement with a Shortage: o Suppose the petty cashier has $15 in cash and $178 in receipts, but the fund should total $200. The $7 shortage would be recorded as follows: plaintext Debit: Miscellaneous Expenses Debit: Cash Over and Short Credit: Cash (in bank) $178 $7 $185 Increasing or Decreasing a Petty Cash Fund: • Increase the fund: To increase the petty cash fund, the company writes a check for the additional amount, debiting Petty Cash and crediting Cash (bank). For example, increasing a fund from $75 to $100 requires this entry: plaintext Debit: Petty Cash Credit: Cash • $25 $25 Decrease the fund: To reduce the fund, the company debits Cash (bank) and credits Petty Cash. For instance, reducing a fund from $75 to $55 would look like this: plaintext Debit: Cash $20 Credit: Petty Cash $20 Internal Controls in the Petty Cash System: • • • Receipts: Each payment should have a corresponding receipt, and regular reconciliations ensure accountability. Surprise Audits: Companies may conduct unannounced counts of the petty cash fund to verify that the amount of cash and receipts matches the fund total. Separation of Duties: The petty cashier, recordkeeper, and individuals approving payments should all have separate roles to minimize fraud risk. Example Scenario: Z-Mart establishes a $75 petty cash fund on November 1. By November 27, the petty cashier has made payments totaling $71.30, leaving only $3.70 in cash. The reimbursement entry for November 27 would look like: Journal Entry: plaintext Debit: Tile Cleaning Expense Debit: Office Supplies Expense Credit: Cash (in bank) $46.50 $24.80 $71.30 If the company decides to increase the petty cash fund from $75 to $100, an additional journal entry is made: Journal Entry to Increase the Petty Cash Fund: plaintext Debit: Petty Cash Credit: Cash $25 $25