Petty cash
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Businesses often need small amounts discretionary funds in the form of cash known as petty cash for expenditures where it is not practical to make the disbursement by check.
The most common way of accounting for these expenditures is to use the imprest system. The initial fund would be created by issuing a check for the desired amount. Usually $100 would be sufficient for most small business needs, however larger businesses may have several thousand dollars in discretionary funds available as petty cash. The entry for this initial fund would be to debit Petty Cash and credit cash.
As expenditures are made, the custodian of the fund will reimburse employees and secure a petty cash voucher in return. At any given time the total of cash on hand plus reimbursed vouchers must equal the original fund.
When the fund gets low the custodian submits the vouchers for reimbursement. Assuming the vouchers add up to $80 and that the majority of expenditures were for office supplies, an $80 check is issued and an $80 debit towards office expenses is marked. Once the check is cashed, the custodian has cash at the original amount.
Oversight of petty cash is important because of the potential for abuse. Examples of petty cash controls include a limit (such as 10% of the total fund) on disbursements and monthly audits by someone other than the custodian. Use of petty cash is sufficiently widespread that vouchers for use in reimbursement are available at any office supply store.
