Welcome to the World of Small Change!
Hi there! In this chapter, we are going to look at one of the simplest yet most important parts of an accounting system: Petty Cash. While large businesses deal with thousands of dollars in bank transfers and checks, they still need a way to pay for the small things—like a bottle of milk for the office tea, a pack of stamps, or a quick taxi fare.
Don’t worry if accounting feels like a lot of big numbers right now. Petty cash is all about those small, everyday amounts, and once you understand the Imprest System, everything else will click into place!
What is Petty Cash?
Petty Cash is a small amount of physical cash kept on the business premises to pay for minor, low-value items. It’s much more efficient than writing a check or processing a bank transfer for a \$2 item!
\n\nWhy do we need it?
\nImagine if the CEO had to sign a formal check every time the office ran out of biscuits. It would be a waste of time and resources! Petty cash allows the business to handle these "petty" (small) expenses quickly and easily.
\n\nQuick Review: Petty cash is for minor expenses. Large expenses (like buying a new computer) should always go through the main bank account.
\n\nThe Imprest System: The Golden Rule of Petty Cash
\nMost businesses use something called the Imprest System to manage their petty cash. It sounds fancy, but it's actually a very clever way to keep track of money.
\n\nHow it works: The Analogy
\nThink of it like this: Your parents give you \$50 for a week’s worth of lunches (this is your float). At the end of the week, you show them your receipts. You spent \$42. To get you back to exactly \$50 for the next week, your parents give you exactly \$42. You are back at your original starting point.
\n\nKey Terms to Remember:
\n1. The Float (or Imprest Amount): This is the fixed amount of cash the petty cash tin should hold at the start of a period.
\n2. Petty Cash Vouchers: Every time someone takes money out, they must leave a "note" or voucher explaining what it was for, along with a receipt.
\n3. Reimbursement (or "Topping Up"): This is the act of putting money back into the tin to reach the original float amount again.
The Magic Formula:
\nAt any given time, the following should be true:
\n\( \text{Cash remaining in the tin} + \text{Total of the vouchers} = \text{The Float amount} \)
Key Takeaway: The Imprest System ensures that the total value of cash and receipts always equals the pre-set float. If it doesn't, someone might have made a mistake (or stolen some change!).
\n\nThe Step-by-Step Process
\nLet's look at how this works in a real business environment. Don't worry if this seems detailed; just follow the steps!
\n\nStep 1: Setting the Float
\nThe business decides they need \$100 for small monthly expenses. They withdraw \$100 from the main bank account and give it to the Petty Cashier.
Step 2: Making Payments
\nAn employee needs \$5 for a notebook. They take the \$5 from the tin and give the Petty Cashier a receipt. The cashier fills out a Petty Cash Voucher.
Step 3: Calculating the Top-up
\nAt the end of the month, the cashier counts the money left. There is \$20 in the tin. This means \$80 has been spent.
\n\( \$100 (\text{Float}) - \$20 (\text{Cash Left}) = \$80 (\text{Reimbursement needed}) \)
Step 4: Reinstating the Float
A check is drawn from the main bank account for \$80. This is cashed, and the money is put back into the tin. The balance is now back to \$100.
Recording the Transactions (The Bookkeeping)
Even though it's "small change," we still have to record it in our accounts! In Section B of your curriculum, recording transactions is vital.
1. When you first set up the fund:
Debit Petty Cash Account (Increasing an asset)
Credit Cash at Bank Account (Decreasing an asset)
2. When you top up (reimburse) the fund:
When we top up, we aren't just recording the money going back in; we are recording the expenses that were paid for.
Debit The specific expense accounts (e.g., Postage, Stationery, Cleaning)
Credit Cash at Bank Account
Wait! Why don't we credit the Petty Cash account every time we buy a stamp?
Actually, some businesses use a Petty Cash Book. This acts as a "book of original entry." The total of each column in this book is then transferred to the general ledger at the end of the period. This keeps the main ledger clean and uncluttered.
Internal Controls: Keeping the Money Safe
Because petty cash is "real" money sitting in a tin, it is very easy to lose or steal. Businesses use Internal Controls to prevent this.
- Physical Security: The cash should be kept in a locked box, inside a locked drawer.
- Limited Access: Only one person (the Petty Cashier) should have the key.
- Authorization: Every single cent spent must have a voucher signed by a manager and the person receiving the money.
- Spot Checks: A senior accountant should occasionally show up unannounced to count the cash and vouchers to make sure they equal the float.
Did you know? Many modern businesses are moving away from physical petty cash tins and using "pre-paid corporate debit cards" instead. However, for your BA3 exam, you must understand the traditional paper-and-tin system!
Common Mistakes to Avoid
1. Mixing Funds: Never use petty cash to give "IOUs" to staff or to cash personal checks for the boss.
2. Missing Receipts: If there is no receipt, there should be no payment. If the cashier gives out money without a voucher, the tin will be "short" at the end of the month.
3. Forgetting the Top-Up: If you don't reimburse the fund, eventually you'll run out of cash to pay for things!
Summary Quick Review
- Petty Cash: Small cash fund for minor items.
- The Float: The fixed starting balance.
- Imprest System: A system where the fund is topped up by the exact amount spent to return it to the float level.
- Vouchers: The evidence required for every payment.
- Double Entry: Topping up involves Debiting the expense accounts and Crediting the Bank account.
Don't worry if this feels like a lot of steps. Just remember: Money out = Voucher in. At the end of the month, replace the vouchers with enough cash to get back to the start!