Bookkeeping – Petty Cash (Lesson 44)

Thus far with the daily activities section. I have covered payroll, sales/receivables, purchases/payables and now I’m shifting to the cash accounts. This is the first of a set of five lessons addressing how cash is managed daily for the bookkeeper.

Petty cash is cash kept in the office in a lockbox or with staff for instant and emergency purposes. It is actual cash and not checks. There is a process to keep track of purchases paid with petty cash and to refill the depleted amounts of cash. Customarily the office manager is assigned a specific amount for the following uses:

Internal Purposes – Sometimes staff is reimbursed for fronted purchases like coffee or food. In most cases, the purchase includes office supplies while out of the office.
Deliveries – Some deliveries require cash to complete such as office meals or courier fees.
Vendors/Supplies – Certain vendors/suppliers require cash paid to pick up supplies especially for those vendors that do not allow purchases on an account; petty cash is used to complete the purchase.
Refunds to Customers

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This concept extends beyond the office. Employees in the field or the project management team are advanced cash for regular and emergency purposes. This includes gas money, trip expenditures and project costs. Other uses include large advances to the owner for vendor payments like cash in construction. Here the project manager/owner is advanced money to get cash payment discounts from subcontractors or for supplies.

But the most common form of petty cash involves retail till boxes (registers). This is the cash used by clerks at the register.

There is a process to keep track of this cash and the various purchases made. This lesson explains the four basic variances of tracking petty cash. These include:

The Lockbox System
Tills
Advances
Vendor/Supplier Account

This process is used to record the advances and receipts for expenditures. Before explaining the four variations of petty cash, I’ll explain the account structure used with bookkeeping.

Petty Cash Account Structure

The account structure is built using the chart of accounts function in the accounting software. The interesting part is that petty cash is the very first account in the chart of accounts. A good reporting format in summary and detail looks like this:

NAME OF COMPANY
Balance Sheet (Limited View Summary Format)
December 31, 2015
ASSETS
Current Assets
Cash (Parent Account) $ZZ,ZZZ
Accounts Receivable ZZZ,ZZZ
Inventory ZZ,ZZZ
Prepaid Expenses ZZ,ZZZ
Sub-Total Current Assets $ZZZ,ZZZ

NAME OF COMPANY
Balance Sheet (Limited View Detailed Format)
December 31, 2015
ASSETS
Current Assets
Cash
– Petty Cash $ZZZ
– Operating (Checking) ZZ,ZZZ
– Payroll (Checking) Z,ZZZ
– Savings ZZ,ZZZ
– Deposits in Transit Z,ZZZ
Sub-Total Cash $ZZ,ZZZ
Accounts Receivable ZZZ,ZZZ
Inventory ZZ,ZZZ
Prepaid Expenses ZZ,ZZZ
Sub-Total Current Assets $ZZZ,ZZZ

Petty Cash can be furthered in detail as follows:

NAME OF COMPANY
Balance Sheet (Limited View Detailed Format)
December 31, 2015
ASSETS
Current Assets
Cash
– Petty Cash (Parent – Child Structure)
Office Lockbox $ZZ
Advances ZZZ
Register ZZ
Vendor/Supplier ZZZ
Sub-Total Petty Cash $ZZZ
– Operating (Checking) ZZ,ZZZ
– Payroll (Checking) Z,ZZZ
– Savings ZZ,ZZZ
– Deposits in Transit Z,ZZZ
Sub-Total Cash $ZZ,ZZZ
Accounts Receivable ZZZ,ZZZ
Inventory ZZ,ZZZ
Prepaid Expenses ZZ,ZZZ
Sub-Total Current Assets $ZZZ,ZZZ

It is unlikely the structure will need to get as detailed as above. The business operation would have to get pretty complex which is rare in small business. For you, the second level detailed format for cash is going to work well. This is because most businesses only use one or two of the petty cash variances as explained below.

Lockbox Petty Cash

This is by far the most common form of petty cash because every office environment uses or needs petty cash. It is called the lockbox system because just about everyone use the $15 one drawer lockbox purchased at your local office supply store. Usually the office manager keeps the box in her desk or in a lockable file cabinet.

The system is relatively simple and updated weekly. One rule of thumb to work with, whoever controls the box physically should be responsible for managing the receipts and refilling the cash box. In addition to the box, purchase a receipt book that has at least two parts, one is a carbon copy of the primary receipt. All the receipts have a sequential number preprinted on them. Most smaller businesses start out with an initial balance of $100. A check is written to the office manager (a separate vendor is set-up with her name as the legal party) and she gets the cash from the bank. The debit is to the new petty cash account and the credit is the operating checking account. The aggregate cash balance does not change; just the balances in these two sub accounts of cash.

Naturally, the office manager gets one roll of each coin except two rolls for pennies. This takes up $18 of the $100. The balance should be in ones, fives and tens. No need for any twenty-dollar bills.

Now the lockbox is ready.

As money is paid out for items, the original receipts are attached to each receipt in the book. The book receipts are logged with what was purchased and the amount. The carbon copy stays with the book. The original receipt and any attachments (bills, receipts etc.) are kept together in a pile in the lockbox. At all times receipts plus actual cash should equal the original balance of $100.

Once the lockbox cash balance is depleted to around $50, it is time to bring its balance back to $100.

Remember the lockbox has two forms of value inside; actual cash and receipts for the cash expended. The receipts are removed and tallied. There are two different methods to enter the receipts in the system. One is the gross method and the other is the net method. Both are explained below.

Gross Method of Petty Cash Reimbursement

The better way to describe this method is the long version of managing the receipts. Basically a general journal entry is created using a complex entry. The entry records each receipt from the pile as one line with a debit to the respective expense account and an individual credit to the petty cash. Each debit line has a description including the preprinted sequential number from the receipt. For example, look at this complex entry for a batch of receipts from petty cash:

GENERAL JOURNAL
Date ID Ledger Description DR CR
12/17/15 31724 M&E Pizza for Office 27.42
31724 Petty Cash Pizza for Office 27.42
31725 Office Supplies Printer Cartridge 17.16
31725 Petty Cash Printer Cartridge 17.16
31726 Tolls ‘A’ Parking Toll 2.00
31726 Petty Cash ‘A’ Parking Toll 2.00
31727 Office Supplies 18 Color Copies 5.41
31727 Petty Cash 18 Color Copies 5.41
$51.99 $51.99

Right now the cash balance in the petty cash lockbox is $48.01 and petty cash needs more cash to bring it back to $100. A check is written just like the first initial check for $51.99 to the office manager. Just as before, she cashes the check and refills the lockbox and now the lockbox is ready to do this all over again.

Net Method of Petty Cash Reimbursement

The net method is merely a shortcut of the gross method. With the net method a vendor is set up as ‘Petty Cash’ with the ‘Pay to’ line set to print the office manager’s name.

The check writing sub-program is brought up with the check written to petty cash, here the debit is petty cash for $51.99 and the credit is automatically the operating checking account. The second step involves recording the receipts except the credit is one line of entry to petty cash for the $51.99 as illustrated here:

GENERAL JOURNAL
Date ID Ledger Description DR CR
12/17/15 31724 M&E Pizza for Office 27.42
31725 Office Supplies Printer cartridge 17.16
31726 Tolls ‘A’ Parking Toll 2.00
31727 Office Supplies 18 Color Copies 5.41
31724-31727 Petty Cash Total Batch 51.99
$51.99 $51.99

The key to the lockbox system is that the total petty cash as identified in the trial balance equals actual cash and receipts in the lockbox. Sometimes it doesn’t match and the most common reason is the owner’s sticky fingers.

Owner’s Withdrawal of Petty Cash

The worst culprit in the entire organization is almost always the owner. I’ve seen this so many times it isn’t even funny anymore. Before going home at night owners will pull $20 from the box as extra money for the whatever items. They never fill out a receipt. It is always grab and go.

To deal with this, the office manager or bookkeeper should reconcile the lockbox every couple of days. Any missing money is a ‘Ask the owner first’ issue. Don’t forget they own the company, so they can take their own money; your job is to book the entry and document the missing funds.

Once the owner says the ‘Oh yeah, I took $20 last night’, then fill out a receipt and have him initial the document. When it comes time to record the entry, simply debit owner’s draws and distributions for the amount and in the description just state ‘Sticky Fingers’ and you’ll know what that receipt refers to. This form of entry legitimizes the action and the $20 is properly recorded and documented.

Tills

Another variance of petty cash is centered around cash register tills. The retail and food service environment varies in the amount needed in the till. For example, a grocery store till may have upwards of $300 in the initial starting amount whereas the putt-putt course register may only need $80 in the starting till.

Just like the lockbox system the petty cash amount is reset daily back to the original starting amount. The balance is a function of the deposit to operational checking that night. Most accounting retail software programs can easily manage this process of reconciling each night to ascertain the correct till balance and the physical deposit.

Employee Advances

A third variance of petty cash concerns the independence of field employees. Different industries have different needs out in production. Some employees advance money to certain employees to have in case of issues. These advances are recorded as petty cash and the employee must periodically report their receipts or confirm the existence of the advanced amount. Here are a few examples:

A) An HVAC company has seventeen vans, each driver is advanced $50 for emergency purposes. Usually once a week while the owner is in the field inspecting work he confirms the existence of the $50 bill in the driver’s wallet. If used, the driver must turn in the receipt to the front office for reimbursement.

B) Before a trip, sales reps are advanced $200 per day for lodging, meals and minor needs (tipping, tolls, etc.) while away. Upon return, the rep must account for all expenditures and reconcile with the bookkeeper. Any leftover funds are deposited back into the operational account.

C) A contractor advances $400 to his project manager for expediting any construction issues. Most often the managers use the funds to make instant cash purchases or provide incentives to employees or subs to get work done by staying late in order to keep to a schedule.

Vendor/Supplier Account for Discounts

This account is different from employee advances in that the magnitude of money involved is much greater than other petty cash accounts. This one isn’t petty per se. Usually the owner is advanced several thousands of dollars and along with a receipt book negotiates cash discounts of two to seven percent with subcontractors and suppliers. Any leftover cash is deposited back into the operational account. For a more descriptive explanation read: Cash in Construction.

Summary – Petty Cash

Petty cash is used in business to address instantaneous or emergency needs of the business. The account is traditionally the first account in the chart of accounts structure. It is set up as a child account to the parent account of cash. There are four common variances of petty cash:

Traditional Lockbox kept by the office manager
Tills for the registers in retail and food service
Advances for field employees
Vendor/Supplier account to take advantage of cash discounts

All variances of petty cash are handled in a similar manner. A check transfers cash from operational checking to the respective petty cash account. As cash is used, receipts are recorded to the books and a check is cut to replenish the used cash. Act on Knowledge.

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