PETTY CASH BOOK – SS1 Financial Accounting Lesson Note (Second Term)

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

• Examples of petty payments: postage, stationery, cleaning, travelling expenses and small cash payments to creditors.

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. describe the layout of a petty cash book and its analysis columns;
5. describe how entries are made in the petty cash book during and at the end of a period.

How does a petty cash book work?

The petty cash book works like the Cash Book, but it records only small cash payments.

• Book of prime entry: payments are first recorded here.
• Ledger account: it is part of the double entry system, so it is also a ledger account.
• Fewer entries: small payments need not be recorded one by one in the Cash Book or the ledger.

Who keeps the petty cash book?

A junior member of staff, called the petty cashier, usually keeps the petty cash book.

• Cash float: the petty cashier is given an amount of cash from which to make small payments.
• Benefit to the chief cashier: the chief (main) cashier can concentrate on more important tasks.
• Benefit to the junior: the work gives useful training.
• Checking: the chief cashier must check the petty cashier’s work at regular intervals.

How is petty cash obtained?

A member of staff obtains petty cash by presenting a completed and duly authorised petty cash voucher to the petty cashier.

• Purpose: the voucher shows why the money is required.
• Date: the voucher shows the date of the request.
• Signature: the person receiving the cash signs the voucher.
• 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 keeping petty cash in which the petty cashier starts every period with the same fixed amount.

• Imprest amount (cash float): the fixed sum given to the petty cashier at the start of each period.
• Period: it may be a week, a fortnight, a month and so on.
• Common use: most organisations keep their petty cash book on the imprest system.

How does the imprest system operate?

1. The main cashier gives the petty cashier enough money to cover petty expenses for the period.
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 therefore starts each period with the same amount of cash.

What is an example of restoring the imprest?

• Imprest amount: ₦10,000 at the start of the week.
• Total paid out: ₦7,500 by the end of the week.
• Cash left: ₦10,000 − ₦7,500 = ₦2,500.
• Reimbursement: the main cashier gives ₦7,500, so the float returns to ₦10,000.

What does the imprest system tell the main cashier?

• Amount spent: the main cashier knows exactly how much petty cash was spent in each period.
• Adjustment: the imprest amount can be changed if it is too much or not enough.

What are the features of the imprest system?

The imprest system has four main features.

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 petty cash disbursements against duly authorised petty cash vouchers.
4. Reimbursement: the main cashier refunds the total paid for the period, restoring the imprest to its original figure.

What are the advantages of the imprest system?

The imprest system gives better control of small payments and reduces the work of the main cashier.

1. Less burden: the burden of the main cashier is greatly reduced.
2. Training: it trains young account clerks.
3. Accountability: every expense is supported by documentary evidence.
4. Fraud: it helps to eliminate or discourage fraudulent practices.
5. Extravagance: it reveals wasteful spending and items that overshoot the budgeted amounts.
6. Cost control: the total of each item of expenditure can be used as a basis for cost-control decisions.
7. Limited liability: the liability of the petty cashier can never exceed the imprest amount.
8. Fewer entries: the main Cash Book and the general ledger are relieved of entries for many small (insignificant) items.
9. Easy checking: the system can be checked at any time, because cash in hand plus the amount spent per the vouchers should always equal the cash float.
10. Fewer losses: losses through the petty cashier can be 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, with one column for each main type of expense.
• Voucher number column: it replaces the folio column on the credit side and shows the voucher for each payment.
• Number of columns: each business decides its columns and main types of expense.
• In examinations: guidance is given on the columns required.

What does a petty cash book look like?

The left side (Date to Total received) is the debit side. The right side (Date to Ledger) is the credit side.

How is the petty cash book prepared?

The petty cash book is prepared in two stages: entries made during the period and entries made at the end of the period.

What entries are made during the period?

Money received or balance brought down

1. Debit the total received column with money received from the main cashier, or 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.

• Debtor: a debtor pays an account in cash.
• Travel expenses: an employee repays petty cash for private travel.
• Telephone expenses: an employee repays petty cash for 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 entries are made 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. Added across, they should agree with the total paid column.
3. Balance the total received and total paid columns as in any other ledger account.
4. Carry down the balance from the credit side to the debit side to start the new period.
5. Enter the money received when the imprest is restored, as described above.
6. Complete the double entry for the totals of the analysis columns.
7. Debit the total of each analysis column to the relevant expense account in the general (nominal) ledger.
8. Write the folio number of that expense account below the analysis total to show the double entry is complete.

What is the ledger column used for?

The ledger column records items paid out of petty cash that must be posted to a ledger other than the general ledger.

• Creditor paid: a purchases ledger account was settled out of petty cash. Debit the creditor’s account.
• Customer refunded: a customer who overpaid was refunded from petty cash. Debit the customer’s sales ledger account.

What must students remember about the petty cash book?

• Double entry: the petty cash book is a double-entry book and must be included in the Trial Balance.
• Maximum cash: the maximum level of cash held in the petty cash book is fixed.
• Reimbursement: the cashier must be reimbursed for the amount he or she has paid out.
• Source documents: receipts, cheques and petty cash vouchers duly authorised by the designated officers.

Evaluation

1. What is a petty cash book used for?
2. What is the imprest amount (cash float)?
3. What should a petty cash voucher show?
4. What are analysis columns in a petty cash book?
5. How are the totals of the analysis columns posted to complete the double entry?

Assignment

State the features of the imprest system and give seven advantages of keeping the petty cash book on the imprest system.