Identifying the differences is called a
BANK RECONCILIATION and is a function that should be
performed every month
The bank reconciliation process uses two accounts:
1. The bank statement which is a report provided by a bank listing all deposits, withdrawals and the bank
balance
2. The business cash account in the general ledger with all the amounts that were paid, deposited and the
balance
Payments and deposits that appear on the ledger will likely appear on the bank statement at some future
date requiring no entries at this time. Essentially, this process has just accounted for the difference.
Entries that appear on the bank statement and not on the ledger, however, will never appear on the
ledger unless those transactions are journalized.
A petty cash fund is set up to pay small (petty) expenses.
Postage
Coffee & Donut
The fund is reserved for small amounts and should not be used for many types of items such as:
Giving loans
Buying inventory
Paying wages
Paying for expenditures exceeding a predetermined amount
The petty cash fund is physical cash that is drawn from the bank account and kept in a petty cash box. It
is recorded as an asset account. Think of it as a separate cash account for small expenses.
A cheque is cashed and deposited into a petty cash box, which is still an asset of the business since it
has not yet been spent.
When setting up a petty cash fund, the following need to be considered.
Who will be responsible for the day-to-day maintenance of the fund? The responsible person is called
the Custodian.
How much cash should be kept in the petty cash fund?
How often should it be replenished? E.g. weekly or monthly
What controls (rules) are necessary to ensure that the cash is being looked after responsibly? Where
should the fund be kept?
Each of these topics will be addressed in this section.
Petty cash is usually operated on an imprest system.
The petty cash fund is set at a fixed amount called the float amount
Spending is limited to the amount available in the petty cash fund
No change is ever made in the amount of the petty cash ledger account except for when the fund is
established or when the fund is increased or decreased
When replenishing the petty cash fund
A reimbursement cheque is issued
The reimbursed cash is physically placed in the petty cash box
The various expense accounts are debited and the cash account is credited.
There is no change to the petty cash ledger account
It is common for a petty cash fund to have more, or less cash than accounted for.
These amounts are called “cash over and short”.
They can be caused through incorrect counting or even theft.
Careful controls are necessary to ensure that the cash is accounted for.
The custodian presents the summary slip along with any supporting vouchers to the controller who
provides the cash to reimburses the petty cash fund.
