IGCSE Accounting 0452 - 2.3 Books of Prime Entry - Petty Cash

Objective: Explain and apply the imprest system of petty cash

What is Petty Cash?

Petty cash is a small amount of cash kept at the office for paying small, immediate expenses. These are expenses that are infrequent and not worth going through the main accounting procedures for.

Examples of petty cash expenses include:

• Stationery
• Office supplies
• Small deliveries
• Travel expenses for staff

The Imprest System

The imprest system is a method of controlling petty cash. It involves providing a fixed sum of money (the 'imprest amount') to the petty cash custodian. The custodian is responsible for making payments from this fund. When the fund becomes low, it is replenished back to the original imprest amount.

The key principle is that the same amount of money is paid into the petty cash fund as is taken out. This ensures that the petty cash fund remains constant.

Setting Up the Petty Cash Fund

1. Determine the Imprest Amount: This is the total amount of money initially placed in the petty cash box. It should be a reasonable amount to cover expected small expenses.
2. Prepare a Petty Cash Voucher: A petty cash voucher is a document used to record all transactions. It includes details of the date, payee, and amount of each payment.
3. Initial Cash Entry: The imprest amount is physically placed in the petty cash box. A petty cash voucher is prepared showing this initial cash entry. This voucher is then recorded in the petty cash book.

Recording Transactions in the Petty Cash Book

The petty cash book is a special book of prime entry used to record all transactions made from the petty cash fund. It's a simple book with columns for date, description of payment, and amount paid.

Each time a payment is made, a petty cash voucher is prepared. The voucher is attached to the corresponding entry in the petty cash book.

Reconciling the Petty Cash Fund

Regularly (usually monthly), the petty cash fund needs to be reconciled. This involves:

1. Counting the Cash: The custodian counts the cash in the petty cash box.
2. Calculating the Expected Balance: The custodian adds up all the petty cash vouchers for the period to calculate the expected balance.
3. Comparing the Cash and the Expected Balance: The counted cash is compared to the expected balance.
4. Adjusting the Books: If the cash and the expected balance match, no adjustment is needed. If they don't match, the books are adjusted to bring them into agreement. This might involve adding or deducting from the petty cash balance.
5. Replenishing the Fund: The petty cash fund is replenished to the original imprest amount. This is done by preparing a receipt and attaching it to the petty cash voucher.

Example Calculation

Suppose the imprest amount for a petty cash fund is $50. During the month, the following transactions occur:

• Stationery: $10
• Office Supplies: $5
• Delivery: $15
• Travel Expenses: $20

Total Payments: $10 + $5 + $15 + $20 = $50

Expected Balance: $50 (imprest amount)

Since the total payments equal the imprest amount, the petty cash fund is reconciled successfully. A receipt for $50 is prepared and attached to the petty cash voucher.

Advantages of the Imprest System

• Simple to understand and administer.
• Easy to control.
• Reduces the risk of theft.
• Provides a clear audit trail.

Disadvantages of the Imprest System

• May not be suitable for businesses with large petty cash requirements.
• Requires regular reconciliation.
• Can be inflexible if unexpected expenses arise.

Conclusion

The imprest system is a practical and effective way to manage petty cash. By maintaining a fixed amount of money and carefully recording all transactions, businesses can ensure that their petty cash fund is properly controlled and accounted for.