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The Petty Cash Fund

Companies normally use checks to pay their obligations because


checks provide a record of each payment. Companies also maintain
a petty cash fund to pay for small, miscellaneous expenditures such
as stamps, small delivery charges, or emergency supplies. The size of
a petty cash fund varies depending on the needs of the business. A
petty cash fund should be small enough so that it does not
unnecessarily tie up company assets or become a target for theft, but
it should be large enough to lessen the inconvenience associated with
frequently replenishing the fund. For this reason, companies typically
establish a petty cash fund that needs to be replenished every two to
four weeks.
Companies assign responsibility for the petty cash fund to a person
called the petty cash custodian or petty cashier. To establish a petty
cash fund, someone must write a check to the petty cash custodian,
who cashes the check and keeps the money in a locked file or cash
box. The journal entry to record the creation of a petty cash fund
appears below.

Most companies would record this entryor any other entry that
credits cashin the cash disbursements special journal, but the
illustrations use the general journal to eliminate journal columns that
are not relevant to this discussion and to conform with this subject's
presentation in most textbooks.
Whenever someone in the company requests petty cash, the petty
cash custodian prepares a voucher that identifies the date, amount,
recipient, and reason for the cash disbursement. For control purposes,
vouchers are sequentially prenumbered and signed by both the person
requesting the cash and the custodian. After the cash is spent, receipts
or other relevant documents should be returned to the petty cash
custodian, who attaches them to the voucher. All vouchers are kept
with the petty cash fund until the fund is replenished, so the total
amount of the vouchers and the remaining cash in the fund should
always equal the amount assigned to the fund.

When the fund requires more cash or at the end of an accounting


period, the petty cash custodian requests a check for the difference
between the cash on hand and the total assigned to the fund. At this
time, the person who provides cash to the custodian should examine
the vouchers to verify their legitimacy. The transaction that replenishes
the petty cash fund is recorded with a compound entry that debits all
relevant asset or expense accounts and credits cash. Consider the
journal entry below, which is made after the custodian requests $130
to replenish the petty cash fund and submits vouchers that fall into one
of three categories.

Notice that the petty cash account is debited or credited only when the
fund is established or when the size of the fund is increased or
decreased, not when the fund is replenished.
If the voucher amounts do not equal the cash needed to replenish the
fund, the difference is recorded in an account named cash over and
short. This account is debited when there is a cash shortage and
credited when there is a cash overage. Cash over and short appears on
the income statement as a miscellaneous expense if the account has a
debit balance or as a miscellaneous revenue if the account has a credit
balance. In the journal entry below, the vouchers total $130 but the
fund needs $135, so the entry includes a $5 debit to the cash over and
short account.

If the vouchers total $130 but the fund needs only $125, the journal
entry includes a $5 credit to the cash over and short account.

How do I start a petty cash fund?

To start a petty cash fund you need to open a general ledger account
entitled Petty Cash. This will be an additional cash account that you
could report either separately or have its balance included with other
cash accounts when preparing a balance sheet.
Next you need to write a check for the amount that you believe is the
amount needed for making small payments in your office. Lets
assume that the amount will be $100. When processing the check you
would indicate the account code for Petty Cash, so that the new
account will be debited for $100.
You also need to designate one person to be the petty cash custodian.
This persons name will be the payee of the $100 check. This person
will then be accountable for the $100. At all times the custodian must
have a combination of cash and petty cash receipts which add up to
$100.
Just prior to issuing financial statements, the petty cash custodian
should request cash for the petty cash receipts. This is known as
replenishing the petty cash fund. This allows for the expenses to be
included in the income statement and will result in the custodian

having the $100 of cash that will be reported in the balance sheet. The
custodian can also replenish the petty cash fund when there is little
cash on hand due to a large amount of petty cash payments.

Ledger
General ledger.
A ledger[1] is the principal book or computer file for recording and
totaling monetary transactions by account, with debits and credits in
separate columns and a beginning balance and ending balance for
each account.
[edit]Overview
The ledger is a permanent summary of all amounts entered in
supporting journals which list individual transactions by date. Every
transaction flows from a journal to one or more ledgers. A
company's financial statements are generated from summary totals in
the ledgers.[2]
Ledgers include:

Sales ledger, records accounts receivable. This ledger consists of


the financial transactions made by customers to the company.

Purchase ledger records money spent for purchasing by the


company.

General ledger representing the 5 main account


types: assets, liabilities, income, expenses, and equity.

For every debit recorded in a ledger, there must be a


corresponding credit so that the debits equal the credits in the grand
totals.

What is a general ledger account?

A general ledger account is an account or record used to sort and store


balance sheet and income statement transactions. Examples of
general ledger accounts include the asset accounts such as Cash,
Accounts Receivable, Inventory, Investments, Land, and Equipment.
Examples of the general ledger liability accounts include Notes
Payable, Accounts Payable, Accrued Expenses Payable, and Customer
Deposits. Examples of income statement accounts found in the general
ledger include Sales, Service Fee Revenues, Salaries Expense, Rent
Expense, Advertising Expense, Interest Expense, and Loss on Disposal
of Assets.
Some general ledger accounts are summary records which are referred
to as control accounts. The detail that supports each of the control
accounts will be found outside of the general ledger in what is known
as a subsidiary ledger. For example, Accounts Receivable could be a
control account in the general ledger, and there will be a subsidiary
ledger which contains each customers credit activity. The general
ledger accounts Inventory, Equipment, and Accounts Payable could
also be control accounts and for each there will be a subsidiary ledger
containing the supporting detail.
A listing of a companys general ledger accounts is found in its Chart of
Accounts.

Example of Ledger and Preparing Ledger Accounts:


Learning Objectives:
1. How are ledger accounts prepared?
Journalise the following transactions and post them to the ledger
accounts concerned:
1991

Jan. 1 Purchased goods forcash

2,000

Jan. 3 Sold goods to Karim

500

Jan. 10Received from Karim

500

Jan. 15Purchased machinery for cash

1,000

Jan. 20Cashsales

300

Jan. 25Sold goods to Rahim & Sons

600

Jan. 28Received from Rahim & Sons

590

Discount allowed

10

Jan. 30Paid Rent

50

Jan. 31PaidSalaries

100

Solution:
Date

Particulars

Jan. 1 Purchases Account


To CashAccount

L.F.

Debit

12

2,000

13

Credit

2,000

(Goods purchased for cash)

Jan. 3 Karim
To Sales Account

14

500

15

500

(Goods sold on credit)

Jan. 10 CashAccount
To Karim Account

13

500

14

500

(Cashreceived)

Jan. 15 Machinery Account


To CashAccount
(Machinery purchased)

16
13

1,000
1,000

Jan. 20 CashAccount

13

To Sales Account

300

15

300

(Goods sold for cash)

Jan. 25 Rahim & Sons

17

To Sales Account

600

15

600

(Goods sold on credit)

Jan. 28 CashAccount
Discount Allowed
To Rahim & Sons

13

590

18

10

17

600

(Cashreceived, discount
allowed)

Jan. 30Rent Account


To CashAccount

19

50

13

50

(Rent paid)

Jan. 31SalariesAccount
To CashAccount

20

100

13

100

(salariespaid)

Total

5,650
LEDGER ACCOUNT

5,650

Purchases Account
Date

Particulars

1991
.
To Casha/c
Jan.1

J.F. Amoun Date


t

Particulars

J.F. Amount

30 2,000

Cash Account
Date Particulars J.F. Amoun Date
t
1991.
Jan.1 To Karim
0
To Sales a/c
Jan.2 To Rahim &
0
Sons
Jan.2
8

30
30
30

500
300
590

Particulars

J.F Amoun
.
t

1991.
Jan.1 By Purchases a/c 30
By Machinery
30
a/c
30
By Rent a/c
30
By Salaries a/c

2,000
1,000
50
100

Karim Account
Date

Particulars

1991
.
To Sales a/c
Jan.1

J.F. Amoun Date


t
30

500

Particulars

1991.
Jan.1 By Casha/c
0

J.F. Amount

30

500

Sales Account
Date

Particulars

J.F. Amoun Date


t

Particulars

J.F. Amount

1991.
Jan.3 By Karim
30
By Casha/c
30
By Rahim & Sons 30

500
300
600

Machinery Account
Date

Particulars

J.F. Amoun Date

Particulars

J.F. Amount

t
1991
.
To CashAccoun 30
Jan.1 t
5

1,000

Rahim & Sons Account


Date

Particulars

1991
.
To Sales a/c
Jan.2
5

J.F. Amoun Date


t
30

600

Particulars

1991.
Jan.2 By Casha/c
8
By Discount a/c

J.F. Amount

590
10

Discount Account
Date

Particulars

1991
.
To Rahim &
Jan.2 Sons
8

J.F. Amoun Date


t
30

Particulars

J.F. Amount

Particulars

J.F. Amount

10

Rent Account
Date

Particulars

1991
.
To Casha/c
Jan.3
0

J.F. Amoun Date


t
30

50

Salaries Account
Date
1991

Particulars

J.F. Amoun Date


t

Particulars

J.F. Amount

.
To Casha/c
Jan.3
1

30

2,000