Establishing Petty Cash System
1. Purchase a lock box. When you are starting a petty cash fund, you need to buy a lock box that will hold the cash available for use and the receipts for what has been spent. You need a small, metal box that can easily fit within a desk drawer. This box can either have combination lock or have a key lock, depending on what is best for your particular office. Either way, it needs to be extremely secure to deter people from tampering with the box.
You need to have a box big enough to keep all the money and receipts in, but small enough to be inconspicuous and easily hid. Make sure you get one with a money tray so the bills and change can be easily organized. These are available in most stationery or office supply stores.
2. Assign responsibility for the petty cash fund. Once you have a place to store the money, you need to assign an individual in charge of the petty cash box and account. The person you assign should be generally available to any person/employee who might have need of petty cash, such as an accounting clerk or an administrative assistant.
The custodian or cashier of the petty cash box is responsible for disbursing petty cash funds in return for original receipts, replenishing cash in the fund when needed, and recording items purchased or paid for with petty cash funds.
3. Store the petty cash box. Petty cash boxes should be kept out of sight in a closed drawer. The drawer needs to be in the custodian's desk or another drawer that is easy for the custodian to get to. The combination or key to open the box should be kept in a different drawer, possibly on the key chain of the custodian. It depends on who else needs access to the box and if you have more than one custodian.
To add an extra layer of protection, the drawer you keep the box in can also have a lock. This would provide additional security for the money that is kept there. If you have more than one person who needs access to the cash box, think about having multiple keys made or finding a box that comes with additional keys.
4. Determine the withdrawal limit. Petty cash is not intended to replace or avoid accounting control of expenses. It is set up as a convenience for small purchases that do not warrant writing checks. You need to establish the maximum transaction amount to be handled through the petty cash system. This way, any transaction above that amount can be handled through the normal purchasing process.
For example, a church might restrict petty cash transactions to $50 or less. Any transaction above $50 would then be processed as a normal account payable.
5. Deposit cash into the petty cash fund. Once you have the basics covered, you need to put money into petty cash. You should write a check to the custodian to initially establish the fund. The check amount should be sufficient to handle most cash purchases for the time period you choose, but not so large as to encourage theft. Once the check is cashed, the money should be placed into the petty cash box.
A typical beginning amount is between $100-$500. Make sure you keep all denominations of bills in the petty cash drawer. You should have a few $20, a few $10, a good number of $5. You should also have coins as well. This will make it easy to reimburse petty cash payments.
6. Create a petty cash transaction log. (Form attached) With the first initial payment to petty cash, the custodian should start a log of the transactions that go through the petty cash box. This can be a simple hand written accounting log or an online spread sheet kept up with by the custodian. The petty cash custodian should keep up with each transaction by placing it in the log. There should be a line for the description of the transaction, such as office supplies or shipping charge and the amount spent.
The first payment to petty cash should be placed in the log as a petty cash deposit. Then all the transactions can be deducted from this amount.
7. Establish the petty cash fund on the accounting records of the company. Cash and petty cash accounts are both asset accounts. When initially opening the petty cash fund, cash is simply transferred from one asset account to another with no effect on the balance of the organization’s assets.
The transactions that are made to the company's account for opening the petty cash fund should be a credit from the bank account for the amount of the check given to petty cash. You can then transcribe the transaction to the petty cash fund as a debit of cash to the account, which will establish its initial balance from $0 to the amount you deposit into the fund.
Petty Cash Dr. $100
Bank Account Cr. $100
In this stage, there has been no actual expense because the money has simply been transferred from one account of the company to another, so the total assets of the company are unchanged.
8. Start using the money. Once there is enough cash in the petty cash box, the church can start using it for small transactions. The custodian should require a receipt for each petty cash purchase. When presented with the receipt of purchase, the custodian should note the date and name of the purchaser on the receipt and deposit the receipt in the petty cash box.
The custodian should also reimburse the purchaser with exact change for the purchase.
The custodian can also give an advance on petty cash in order to buy something. The company can come up with a system where the person who is going to buy something comes to the custodian for a cash advance. The custodian can mark the purchase in a log to explain what the purchaser intends to buy with the cash advance and how much is needed. Once the purchaser buys the products he set out for, he should return to the custodian with the receipt and change.
Managing Petty Cash Expenditures
1. Replenish the cash. The accounting clerk needs to replenish the amount of cash in the petty cash fund as often as needed. The custodian should start another log each time the fund is replenished. The custodian should give the completed list and accompanying receipts to the designated accounting clerk. They will audit the receipts, check the addition of the petty cash receipts, and write a check to the custodian for the total amount spent in order to replenish the fund.
The custodian then cashes the check and deposits the funds in the petty cash box, restoring the beginning balance of the petty cash fund.
If the petty cash is not used all that often or if there is a larger amount in the box, you may never use all of the petty cash. In these cases, the clerk can replenish what has been taken out once a month in order to keep track of the expenditures and help with the accounting of the petty cash.
If you find that you need more money in your petty cash, you can increase the balance of the fund at any time. All the accounting clerk has to do is write a check to the custodian for the additional amount. For example, if the $100 initial balance is insufficient to pay the expenses the majority of time, increase the fund to $200 by writing a check to the custodian for a second $100. The custodian should then follow the normal procedure for replenishment.
2. Account for the petty cash transactions. Once the list of transactions from the petty cash custodian is complete, the accounting clerk will confirm that a receipt is present for each transaction, and that expenditures are properly added to calculate the sum. They should then sort each receipt into the appropriate expense category and total the expenditure for each category. Common expense categories that are affected by petty cash include postage, office supplies, and transportation.
There is no need to make an entry for each transaction since an individual small expense is insignificant in the operation of the church. Log them as complete sums under each category.
It is important to ensure that the total amount of receipts equals the amount initially in the petty cash account. Any variation may mean a purchase was not accounted for. For example, if you had $100 in the petty cash account, once it is drained, you should have receipts + remaining cash that equal $100.
Entry to write petty cash replenishment cheque:
Various Expense accounts – Dr. $$$ (total from Petty Cash form)
Bank account – Cr. $$$
***Please Note: Once the first cheque is written to establish the petty cash funds, no further entries are made to the Petty Cash account. The balance of the Petty Cash account should always remain the same amount as the first cheque written. All entries to reimburse the petty cash are charged to expense accounts.