What is Petty Cash Fund?


Petty Cash Fund

Payments of relatively small sums by cheque may be cumbersome resulting in delay and inconvenience. For such transactions a petty cash fund system is a cost effective and flexible approach of making payments.

Based on experience of past payments and future expense projections, management decides on an amount that shall be a petty cash fund.  The significance of this step is that the petty cash at any one time should not exceed the set amount, also known as a ceiling.  Special management consent would be required for increase of the fund.
Management will also select an employee who will be a custodian of the fund.  The custodian maintains record of every payment made to enable categorization and summarization of the payments. Petty cash payments are made on the basis of a petty cash voucher that normally is approved by a designated officer before a payment is made.

A Petty Cash Voucher contains the following details:

·        date of the transaction,
·        a serial number,
·        name of person paid
·        amount paid in number and words,
·        expense category,
·        approval signature, and
·        acknowledgement of receipt by payee, usually by signature.


Accounting entries for petty cash transactions
There are four events that require attention for recording purposes in maintaining a petty cash fund. These are:

i)          The establishment of the petty cash fund,
ii)         Payments through the petty cash fund,
iii)        Replenishment of the fund, and
iv)        Recording of expenses in the general ledger.

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