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8.4 Define the Purpose and Use of a Petty Cash Fund, and Prepare Petty Cash Journal Entries

What is Petty Cash?​

Petty cash is a small amount of cash kept on hand for small, incidental expenses that are impractical to pay by check or electronic transfer.

Purpose:

  • Pay for small expenses quickly
  • Avoid writing checks for small amounts
  • Convenience for minor purchases
  • Emergency expenses

Typical Uses:

  • Office supplies
  • Postage
  • Small repairs
  • Coffee/refreshments
  • Taxi fares
  • Emergency expenses

Establishing a Petty Cash Fund​

Steps:

  1. Determine Amount

    • Based on typical small expenses
    • Usually €100-€500 for small businesses
    • Should last 2-4 weeks

  2. Appoint Custodian

    • One person responsible for petty cash
    • Should be trustworthy
    • Should not have access to other cash

  3. Write Check

    • Write check to "Petty Cash" or custodian
    • Cash the check
    • Place cash in secure location (locked box, drawer)

  4. Record Establishment

Journal Entry:

500000 Petty Cash (Class 5)        €200
510000 Cash (Bank Account)                     €200
To establish petty cash fund

PCN Account:

  • 500000: Petty Cash (Class 5 - Financial Accounts)

Operating the Petty Cash Fund​

Process:

  1. Custodian Pays Expenses

    • Receives request for payment
    • Verifies expense is legitimate
    • Pays from petty cash
    • Collects receipt

  2. Maintain Receipts

    • Keep all receipts
    • Record in petty cash log
    • Total receipts should equal cash disbursed

  3. Replenish Fund

    • When fund is low (usually at 20-25% of original)
    • Total receipts and remaining cash
    • Should equal original fund amount
    • Replenish to original amount

Replenishing Petty Cash​

Example: Petty cash fund of €200

Expenses Paid:

  • Office supplies: €25
  • Postage: €15
  • Coffee: €10
  • Taxi: €20
  • Total Expenses: €70

Remaining Cash: €130

Verification: €70 (expenses) + €130 (remaining) = €200 ✓

Replenishment Entry:

619000 Office Supplies Expense    €25
619000 Postage Expense             15
619000 Miscellaneous Expense       10
619000 Travel Expense              20
510000 Cash (Bank Account)                      €70
To replenish petty cash fund

Note: Petty Cash account is NOT debited or credited during replenishment. It stays at €200. Only the expense accounts and Cash (Bank) are affected.

Petty Cash Log​

Format:

Petty Cash Log
Fund Amount: €200
Custodian: [Name]

Date    Description          Amount    Receipt #    Balance
────────────────────────────────────────────────────────────
Nov 1   Beginning Balance                -          €200
Nov 5   Office Supplies      €25        R001        €175
Nov 8   Postage              €15        R002        €160
Nov 10  Coffee               €10        R003        €150
Nov 12  Taxi                 €20        R004        €130
Nov 15  Replenished          €70        -           €200

Petty Cash Shortage or Overage​

Shortage: Remaining cash + receipts < fund amount

Example: Fund €200, Expenses €70, Remaining €125

  • Shortage: €5 (€200 - €70 - €125)

Replenishment Entry:

619000 Office Supplies        €25
619000 Postage                 15
619000 Miscellaneous           10
619000 Travel                  20
650000 Cash Shortage            5
510000 Cash (Bank)                          €75
To replenish petty cash (with €5 shortage)

Overage: Remaining cash + receipts > fund amount

Example: Fund €200, Expenses €70, Remaining €135

  • Overage: €5 (€200 - €70 - €135 = -€5, so +€5 overage)

Replenishment Entry:

619000 Office Supplies        €25
619000 Postage                 15
619000 Miscellaneous           10
619000 Travel                  20
510000 Cash (Bank)                          €65
720000 Cash Overage                          €5
To replenish petty cash (with €5 overage)

PCN Accounts:

  • 650000: Cash Shortage (Class 6 - Expense)
  • 720000: Cash Overage (Class 7 - Revenue, or reduce expenses)

Petty Cash Controls​

Controls:

  1. Appoint One Custodian

    • Clear responsibility
    • Accountability

  2. Require Receipts

    • All expenses must have receipts
    • No receipt, no reimbursement

  3. Set Maximum Amount

    • Limit individual expenses
    • Larger expenses paid by check

  4. Regular Replenishment

    • Replenish on schedule
    • Review expenses regularly

  5. Surprise Counts

    • Count fund unexpectedly
    • Verify receipts match cash

  6. Secure Storage

    • Locked box or drawer
    • Limited access
    • Key control

Luxembourg Compliance Note​

For petty cash in Luxembourg:

  • Must be properly recorded
  • Must maintain receipts
  • Must be included in cash accounts (500000)
  • Must be reconciled regularly
  • Must comply with cash handling regulations
  • VAT on expenses must be properly recorded

Think It Through​

Why is it important to require receipts for all petty cash expenses? What could happen if receipts aren't required?