Setting up the Petty Cash Fund

To set up the fund initially, you will first have to decide where to keep it. It should either be in a cash register that is locked or in a lock box to which only one person has the key. It's critical to make only one person responsible for the petty cash fund to ensure that cash cannot go missing.

Once you have decided where it will be kept, you will write a check from your company bank account made payable to petty cash. Most businesses operate well with a $100 petty cash float. You can always increase it later if necessary.

You cash the check and put the money into the petty cash box. In your bookkeeping system, you would record the following transaction:

DR     Petty Cash                     $100

CR     Bank                                             $100

 

Using Your Petty Cash

Okay, you've set up your fund. Now how does it work? Every time you need funds for a small purchase (say, $3.14 for stamps), you would take the money out of petty cash. In this example, you might take a ten dollar bill out of petty cash when you go to the post office. When you return, you will have a receipt (remember, always get a receipt) for $3.14 and $6.86 in change. The combination of these two things is equal to the $10 you took out of the fund.

You will put the change and the receipt back into the box and record the date, amount, and type of transaction on your petty cash control sheet.

One of the important features of the petty cash control sheet is that there is room at the bottom for summarizing the categories of transactions and for segregating the tax. These features will make it easier for you to enter the information into your bookkeeping system.

Once the actual cash in the petty cash fund gets low, you need to reconcile and replenish the fund.