P1: Petty Cash Fund | ACCOUNTING ESSENTIALS

🎯 Learning Objectives

Understand the purpose and benefits of a petty cash fund
Record the establishment of a petty cash fund
Make payments from the petty cash fund
Record the replenishment of the petty cash fund
Explain why no entries are made when making payments from petty cash
Apply internal controls for petty cash management

📚 Background & Principles

A petty cash fund is a small amount of cash kept on hand to pay for minor expenses where writing a check or using electronic payment would be impractical. It provides convenience for small, frequent expenses like postage, delivery tips, office supplies, and minor repairs.

Core Principle: The key to petty cash accounting is that NO journal entries are made when payments are made from the fund. Entries are only made when the fund is ESTABLISHED (funded) or REPLENISHED (refilled to its original balance).

💡 Key Insight: Think of petty cash like mom's cookie jar—put $100 in, take cash out leaving a receipt ("cookie wrapper"), refill when empty. The "refill" is when we record the actual expenses.

🔑 Key Concepts

Establishment (Funding)

Creating the petty cash fund by transferring cash from the main bank account.

Petty Cash Receipt

A form completed when taking money from petty cash, documenting the amount, purpose, and date.

Replenishment

Refilling the petty cash fund to its original balance by submitting receipts and receiving cash.

No Payment Entry Rule

No journal entry is made when petty cash is spent—only when established or replenished.

Imprest System

A system where the fund balance remains constant, with replenishment based on documented expenses.

Documentation

Receipts or "petty cash receipts" must support every payment from the fund.

🔍 Deep Dive

Explore petty cash operations at different levels of depth:

🟢 Foundational Level

Understanding the basic petty cash cycle.

The Cookie Jar System

Setting Up and Using Petty Cash

It's annoying to write a check for every little thing (stamps, delivery tips).

Setup:

Put $100 in the jar (Debit Petty Cash, Credit Cash)

Usage:

Take cash, leave a receipt (a "cookie wrapper")

Replenish:

When the jar is empty, you should have $100 worth of "wrappers." Trade the receipts for more cash to fill the jar back to $100.

Recording:

You ONLY record expenses when you REFILL the jar.

🟡 Standard Level

Recording petty cash transactions.

The Journal Entries

Scenario: Establish a $100 petty cash fund, then later replenish with $85 in receipts.

Entry	Account	Debit	Credit
1. Establish Fund
	Petty Cash	$100
	Cash		$100
2. Make Payments (No Entry!)
	Keep receipts, but don't record in journal yet
3. Replenish ($85 spent)
	Various Expenses	$85
	Cash		$85

Key Rules to Remember

Rule 1: Journalizing

No journal entries are made when paying out cash from the fund—only when establishing or replenishing it.

Rule 2: Control

The sum of remaining cash and all receipts must equal the total fund amount.

🔴 Advanced Level

Advanced petty cash management and internal controls.

Internal Controls for Petty Cash

Control	Purpose
Custodian Assignment	One person responsible for the fund
Receipt Requirement	Every payment must have documentation
Surprise Counts	Periodic unannounced verification
Limit on Payments	Maximum amount per transaction
Regular Replenishment	Monthly or when low, not just when empty

🎨 Interactive: Petty Cash Replenisher

Calculate the replenishment amount and see the journal entry:

Fund Amount ($)

Remaining Cash ($)

Total Receipts ($)

Verification Check

$15 + $85 = $100 ✓

Journal Entry:

                                    Dr Various Expenses: $85

                                    Cr Cash: $85

🚫 Common Misconceptions & Professional Tips

❌ Misconception 1: "You should record an expense entry every time you take money from petty cash."

✅ Reality: NO! No journal entry is made when payments are made. Entries are only made when the fund is established or replenished.

❌ Misconception 2: "Petty cash is an expense account."

✅ Reality: Petty Cash is an ASSET account (like Cash), not an expense. The expenses are recorded when the fund is replenished.

❌ Misconception 3: "You must wait until petty cash is completely gone before replenishing."

✅ Reality: You can replenish at any time—typically monthly or when the fund drops to a minimum level.

💡 Professional Tip #1: Use prenumbered petty cash receipts to track all payments and prevent missing documentation.

💡 Professional Tip #2: Conduct surprise petty cash counts to verify that cash + receipts = fund balance.

💡 Professional Tip #3: Set reasonable limits (e.g., maximum $25 per transaction) to maintain control.

🧠 Memory Aids & Quick Reference

⚡ Quick Recall: Petty Cash Rules

When to Make Entries:

1. ESTABLISH: Dr Petty Cash, Cr Cash

2. REPLENISH: Dr Expenses, Cr Cash

When NOT to Make Entries:

• When making payments from the fund

💰 Establish

Dr Petty Cash (asset), Cr Cash. Fund created.

📝 Track

Keep receipts for every payment. No journal entry.

🔄 Replenish

Dr Expenses, Cr Cash. Record actual expenses.

✅ Verify

Cash + Receipts = Fund Balance. Always!

📖 Glossary

Petty Cash Fund

A small amount of cash kept on hand to pay for minor, miscellaneous expenses without writing checks.

Petty Cash Receipt

A form documenting each petty cash payment, showing the amount, purpose, date, and recipient signature.

Replenishment

The process of restoring the petty cash fund to its original balance by submitting receipts and receiving cash.

Imprest System

A cash control system where a fixed amount is maintained, with replenishment based on documented expenses.

Petty Cash Custodian

The person responsible for managing the petty cash fund, including authorizing payments and maintaining documentation.

Surprise Count

An unannounced verification of petty cash to ensure that cash and receipts equal the fund balance.

Petty Cash Fund

🎯 Learning Objectives

📚 Background & Principles

🔑 Key Concepts

🔍 Deep Dive

🟢 Foundational Level

The Cookie Jar System

🟡 Standard Level

The Journal Entries

Key Rules to Remember

Rule 1: Journalizing

Rule 2: Control

🔴 Advanced Level

Internal Controls for Petty Cash

🎨 Interactive: Petty Cash Replenisher

Verification Check

🚫 Common Misconceptions & Professional Tips

🧠 Memory Aids & Quick Reference

📖 Glossary

🎯 Knowledge Check: Petty Cash Fund