Getting control of petty cash

If you handle petty cash for your employer, or help clients set up a petty cash system, you know that if anything goes wrong, you will be blamed. That's why we asked three PhDs in accounting to pool their experience and expertise to put together a fail-safe petty cash system bookkeepers can rely on.

    This ironclad petty cash system was given to our members in  The General Ledger  ( http://www.aipb.org/general_ledger.html ) — the monthly technical briefing that is free to our 30,000 members. Details on your July, 2005 briefing are at the end of this e-letter.

    Petty cash funds are not a way to get around cash disbursement controls. They enhance efficiency by providing cash quickly in the following situations:

1. When the formal system is too costly . Surprisingly, producing a check can cost as much as $2.50 or more. A $25 purchase is not worth it.
2. When the formal system is too slow . It often requires 1-5 days to process a voucher and produce a check, too long for a $25 item needed right away.
3. For special situations , such as cashing employee paychecks or providing advances for travel and conferences (some firms don't allow this).

Optimum operation

Here's how a petty cash fund works best. A petty cash custodian is put in charge of a fund, given prenumbered petty voucher forms and, say, $400 in $20s, $10s and $5s. The following entry is recorded:

Petty Cash                         400
        Cash                                  400

Each time the custodian distributes cash, she fills in the amount on a voucher (�$34 for stamps�). The employee returns with a receipt that is attached to the voucher. If that is the only transaction that day, at the end of the day, the cash fund should contain $366 in cash and one voucher attached to a receipt for $34.

When the fund runs low, the custodian asks for more cash and submits all completed vouchers and, in the case above, requests a check for $34, which is cashed and added to the fund, bringing it back to the $400 predetermined balance. This is recorded as:

Postage Expense              34
        Cash                                   34

The petty cash account balance does not change unless the amount is permanently changed. Typically, the fund is replenished after a number of receipts have accumulated so that only one journal entry is required.

Accounting for errors and theft

Often, total cash plus vouchers will not equal $400 because of errors or theft. If, at the end of the day, the fund is $10 short, the following entry is recorded:

Postage Expense              34
Shortage Expense             10
        Cash                                    44

The custodian will request $44: $34 postage + $10 shortage.

Typical Problems

Controls : Generally, one custodian is responsible for petty cash and decides who can get petty cash, requires an i.d. for each disbursement, authorizes petty cash payments only for acceptable purposes, observes authorized payout limits and requests reimbursements. But if the custodian is at a doctor's appointment, no one gets cash, so consider having two or three custodians who coordinate their schedules. A different employee should book reimbursements, and still another should review distributions, and amounts.

Shortages : Petty cash funds often run out. To determine how much to keep in the fund, check last year's replenishments. Were they weekly? monthly? quarterly? Here are some guidelines:

1. Determine the ideal number of days between replenishment dates. Every 10 days? 20 days? 30 days? The less frequently you replenish, the more cash the fund needs.
2. Know how long replenishment takes. Is it same day? 3 days? a week?
3. Decide how many funds to have, as follows:

Security: Keep petty cash in a fireproof, locked, limited access safe, locked metal box, or vault, depending on the fund's size. Do not leave safes and boxes unattended. Limit access to only the petty cash custodian(s).

Reimbursement: Set dollar limits and make sure the custodian observes them. Have clear rules on what can be reimbursed. Prohibit accepting employee IOUs in exchange for cash for personal use.

Replenishment: Replenish before funds run low. Require that all completed petty cash vouchers be in numerical order and in ink (not pencil) with receipts attached. Replenish at least monthly.

Permanent change in the petty cash amount: Firms often overlook the need to change the amount because it is not systematically reviewed. At least yearly, review the amount as follows: Compare the replenishment each month to the monthly balance. If the amounts replenished are close to the fund balance (within 10%), increase the amount. If the replenishments (especially in peak months) are 30% less than balance, decrease the amount. Investigate whether employees with legitimate needs were denied petty cash during the year, and adjust decisions on permanent changes accordingly.

Summary
A well-run petty cash fund includes:

• set dollar limits on petty cash disbursements;
• reimbursement limits based on type of outlay;
• reimbursements only for valid business expenses;
• restriction of petty cash only to certain employees;
• lists of reimbursable miscellaneous expenses;
• requiring completed, sequentially numbered vouchers to account for each disbursement;
• requiring receipts for all vouchers when possible;
• periodic reconciliation of cash and vouchers;
• prohibition of disbursements for personal checks;
• distribution of petty cash policies to employees.

Source : John P. Walker, PhD, CPA; Arundhati S. Rao, PhD; Suzanne O'Callaghan, Ph.D., CPA, CIA

BOOKKEEPING TIPS is a twice monthly newsletter published by The American Institute of Professional Bookkeepers (AIPB), Suite 500,  6001 Montrose Road, Rockville, MD 20852. Tel.: 800-622-0121, Fax: 800-541-0066, email: info@aipb.org.  

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