3 Stages of Operating Petty Cash Fund

As per principle of cash payment all payments are to be made by cheque. In case of payment of petty cash this basic principle of payment by cheque is not followed.

Every business organization is to pay cash for various day-to-day petty expenses such as pencil, rubber, paper, ink, pin, conveyance, telephone, postal stamp, revenue stamp etc.

Payment of these expenses by cheque is not practicable. Moreover it creates complexities. If these payments are made by cheques, a huge number of cheques are to be issued every day for petty payment which are time-consuming and expensive.

In some cases the amount of expenditure is so small that issuing cheque for it is quite inconvenient and unnecessary. So for making payment of petty expenses a petty cash fund is created as an alternative to issue of cheques from where cash payment is made.

Operating petty cash fund is very often termed as imprest system.

Operating petty cash fund contains there stages – (1) Fund creation (2) Making payments from funds & (3) Replenishing the fund.

1. Establishing Fund

Two necessary steps for establishing petty cash fund are (a) an appointment of a petty cashier who will work as a custodian of this fund & (b) determining the necessary amount of fund. Normally a fund is created to meet daily petty expenses for maximum four weeks.

For this purpose a cheque is given to the petty cashier for a definite sum of money by the company.

Assuming ACI Company decides to establish a petty cash fund for $500 on 1st July. On the same date a cheque is handed over to petty cashier.

The General Journal entry for this is;

Petty cashier encashes the cheque and keeps this money in a box under lock and key termed as petty cash box.

Petty cash fund is created for a definite amount of money. If any alteration of established petty cash fund is not required, new journal entry is not needed.

For example ACI company decided to increase the petty cash fund from Tk.500 to 700. For this change the general new journal entry is the same as above.

2. Making payments from funds

The petty cashier is empowered by the management to spend money from this fund as per specified rules of the company.

Generally management fixes up the maximum limit of expenditure by the petty cashier at a time for a particular head of expenditure.

Similarly payment is restricted out of this fund for some heads of expenditure such as payment of short-term loan to employees.

Petty cashier is to use printed payment receipt containing serial number for cash head of expenditure.

Every petty cash voucher/receipt is to be signed by the petty cashier and the recipient. Petty cash record is maintained with these receipts/vouchers. These receipts are preserved in the petty cash box.

Specimen form of a petty cash receipt;

Petty Cash fund reduces for every petty cash receipt kept in the petty cash box.

When petty cash fund is almost exhausted due to the increase in number of petty cash receipts, the fund is replenished with equal amount of money spent.

A neutral person is engaged to check whether the petty cashier uses the petty cash properly.

That person must be an internal auditor. Journal entry is not required for cash payment of transaction from petty cash fund.

If any entry is passed for this, it would be treated as unnecessary work. Instead, at the time of replenishing the fund every expenditure is taken into consideration.

3. Replenishing the fund

When petty cash fund comes down to a minimum limit, it is replenished for the spent money. In such cases petty cashier is to furnish a requisition for new fund.

The petty cashier prepares a statement of petty cash expenditure and sends it along with all petty cash receipts to cash department.

The general cashier, after proper checking and verifications of the petty expenditures, sends a cheque for spent amount for meeting petty expenditures for the next period.

The general cashier puts rubber stamp – ‘payment made’ on the deposited petty cash payment receipt to stop their reuse.