Petty Cashbook – SS1 Book Keeping Lesson Note (Third Term)

A petty cash book is the subsidiary book of account used for recording low-value (petty) cash payments and occasional small cash receipts.

Behavioural objectives

By the end of the lesson, students should be able to:

1. state what a petty cash book is and what it is used for;
2. explain how the imprest system works;
3. list the features and advantages of the imprest system;
4. draw the layout of a petty cash book with analysis columns;
5. prepare a petty cash book and complete the double entry for its totals.

What is a petty cash book?

A petty cash book is a book of prime entry that records small cash payments, so they do not clutter the main Cash Book.

• Similar to the Cash Book: it records cash received and cash paid.
• Book of prime entry: transactions are first written here before they are posted elsewhere.
• Ledger account: it is part of the double entry system, so it also works as a ledger account.
• Purpose: small payments need not be entered one by one in the Cash Book or the ledger, so the number of entries falls.

What items are paid for from petty cash?

• Postage: stamps and small courier charges.
• Stationery: pens, paper and similar items.
• Cleaning: cleaning materials and small cleaning services.
• Travelling expenses: local transport fares for staff.
• Small payments to creditors: low-value amounts owed to suppliers.

Who keeps the petty cash book?

• Petty cashier: usually a junior member of staff who receives a cash float to make small payments.
• Chief (main) cashier: is free to concentrate on more important tasks.
• Training: the work trains the junior member of staff.
• Checking: the chief cashier checks the petty cashier’s work at regular intervals.

What is a petty cash voucher?

A petty cash voucher is a document, duly authorised, that a staff member presents to the petty cashier to obtain petty cash.

• Purpose: it shows why the money is required.
• Date: it shows the date of the payment.
• Signature: it carries the signature of the person receiving the cash.
• Checking: at regular intervals, the petty cashier checks the vouchers against the total cash spent.

What is the imprest system?

The imprest system is a method of running petty cash in which the petty cashier starts every period with the same fixed amount of money.

• Imprest amount (cash float): the fixed sum the petty cashier starts each period with.
• Period: it may be a week, a fortnight, a month and so on.
• Control: the main cashier knows exactly how much petty cash was spent in each period.
• Adjustment: the imprest amount can be raised or lowered if it is too little or too much.

How does the imprest system work?

1. The main cashier gives the petty cashier enough money for the period. This is the imprest amount.
2. During the period, payments are made from the float and recorded in the petty cash book.
3. At the end of the period, the petty cash book is balanced.
4. The main cashier gives the petty cashier enough cash to restore the balance to the imprest amount.
5. The petty cashier starts the next period with the same amount of cash.

What are the features of the imprest system?

1. Petty cashier: a petty cashier is selected.
2. Fixed float: the main cashier gives the petty cashier a fixed sum (the imprest amount or cash float).
3. Vouchers: the petty cashier pays out petty cash only against duly authorised petty cash vouchers.
4. Reimbursement: the main cashier refunds the total amount paid in the period, which restores the imprest to its original figure.

What are the advantages of the imprest system?

• Less work for the main cashier: the main cashier’s burden is greatly reduced.
• Training: it trains young account clerks.
• Accountability: every expense is supported by documentary evidence.
• Fraud control: it helps to eliminate or discourage fraudulent practices.
• Budget control: it reveals extravagance and items of spending that overshoot the budget.
• Cost control: the total for each expense item can be used for cost-control decisions.
• Limited liability: the petty cashier’s liability can never exceed the imprest amount.
• Fewer entries: the main Cash Book and general ledger are relieved of many small, insignificant items.
• Check at any time: cash in hand plus the amount spent according to the vouchers should always equal the cash float.
• Reduced losses: losses through the petty cashier are minimised.

What is the layout of a petty cash book?

A petty cash book looks like a ledger account with several money columns on the credit side, called analysis columns.

• Analysis columns: they divide the payments into categories of expense.
• One column per main expense: each business decides the number of columns and the expenses.
• Voucher number column: it replaces the folio column on the credit side and shows the voucher for each payment.
• Examinations: guidance is given on the columns required.

Petty cash book

What does each column show?

How is a petty cash book prepared?

What is done during the period?

Money received or balance brought down

1. Debit the total received column with money received from the main cashier, or with the balance brought down from the previous period.
2. Write “cash”, “bank” or “balance b/d” in the details column, as appropriate.
3. Debit the total received column with money received from any other source.
4. Write the name of the account to be credited in the details column.

Examples of other receipts:

• Debtor: a debtor pays an account in cash.
• Travel expenses: an employee repays the cost of private travel.
• Telephone expenses: an employee repays the cost of private telephone calls.

Money paid

1. Credit the total paid column with the money paid out.
2. Enter the same amount in the analysis column for that expense.
3. Write a brief reason for the payment in the details column.

What is done at the end of the period?

1. Add the total paid column and insert the total.
2. Add each analysis column and insert the totals.
3. Check that the analysis totals, added across, agree with the total paid column.
4. Balance the total received and total paid columns, as in any other ledger account.
5. Carry the balance down from the credit side to the debit side to start the new period.
6. When the imprest is restored, enter the amount received as described above.

How is the double entry completed?

The double entry is completed by debiting each expense account in the general (nominal) ledger with the total of its analysis column.

• Analysis column totals: debit the relevant expense account in the general ledger.
• Folio number: it is often written below the analysis total to show that the entry has been posted.
• Ledger column: it holds items that need posting outside the general ledger.

What points should students remember?

• Double-entry book: the petty cash book must be included in the Trial Balance.
• Fixed maximum: the maximum cash held in the petty cash book is fixed.
• Reimbursement: the cashier must be refunded the amount paid out.
• Source documents: receipts, cheques and petty cash vouchers, duly authorised by the designated officers.

Evaluation

1. What is a petty cash book?
2. Explain how the imprest system works.
3. State five advantages of the imprest system.
4. What is the purpose of the analysis columns in a petty cash book?
5. How is the double entry completed for the totals of the analysis columns?

Assignment

Write a short set of notes on the petty cash book that includes the following:

1. the four features of the imprest system;
2. the layout of a petty cash book with analysis columns for transport, cleaning and postage;
3. the source documents for entries in the petty cash book.