Principle of the Double Record.—A fundamental principle in the handling of cash is to secure a double—not a duplicate—record of its receipt and disbursement. The practice of depositing in a bank all cash receipts and making disbursements only by check should be followed invariably, because it secures this double record—the bank’s record and the cashier’s record. Any discrepancy is detected whenever comparison of the two records is made. When the bank’s record is compared with the cash book record, the balances shown by each are seldom in agreement, chiefly because of the outstanding checks which have not yet been presented to the bank for payment. This requires a reconciliation of the two balances before proof of correctness is secured, which is usually accomplished by subtracting from the bank balance the amount of the outstanding checks. Other adjustments are sometimes necessary. These are explained and a form of reconciliation statement is shown on [page 475].
Most concerns object, however, to issuing checks for small amounts, and set therefore a minimum below which they do not issue them. For the purpose of paying smaller amounts, a petty cash fund is provided from which disbursements are made in cash. This fund is established, in the first instance, by a check on the general cash and is from time to time replenished in the same way. In this manner the double record is maintained.
Handling the Petty Cash.—There are two general methods of handling the petty cash. Under the one, entry of the check creating the fund is made as an immediate charge to some expense account and no further accounting is required. This method is based on the theory that the cash is to be used for petty expenses anyway, and might as well be so charged now as later. Subsequent amounts for replenishment of the petty cash are treated in the same way. The objection to this method, from the accounting viewpoint, is that it results in an inaccurate record of expense distribution and a misstatement of the facts in that it charges to expense an item which at the time of the charge is still a part of the general cash fund. The second and chief objection is that it encourages in the petty cashier loose methods in handling and accounting for the fund, as usually no strict reckoning is required.
The second method, known as the “imprest method,” is in more general favor. This charges the original check creating the fund to an account called “Petty Cash.” The petty cashier is required to secure a receipted bill, sales ticket, or other voucher for every petty cash item of expenditure, so that at all times the amount of cash in his possession added to the receipted bills and vouchers must equal the original amount in the fund. Usually the fund is a fixed amount, its size depending upon the needs of the business for these small expenditures. When the cash in the fund becomes low, the petty cashier turns over his receipted bills to the general cashier, who issues a check for their exact total to replenish the petty cash by the amount of its depletion, thus restoring it to its original fixed amount.
The expenditures as shown by the receipted bills and vouchers are classified and entered by either of the following two methods: (1) as a charge to the several accounts through the general cash book, offsetting the petty cash replenishing check; in this case no charge appears in the “Petty Cash” account except the item covering the original check; or (2) by an entry through the journal debiting the various expenses and other items and crediting Petty Cash. This latter method necessitates charging in the general cash book the replenishing check to Petty Cash as an offset to the journal credit of the same amount. Most accountants consider the postings to the Petty Cash unnecessary—except the original—and so check both in cash book and journal. If, however, posting to the Petty Cash account in the general ledger is made whenever the fund is replenished, this will serve to indicate the activity of the fund on the face of the ledger account—information which could just as easily be obtained from the petty cash book. The imprest method thus effects a careful accounting of the petty expenditures.
The Petty Cash Book.—The petty cash book is usually a columnar record with the amount columns to the right of the explanation space. The first column is the receipts column, the second the disbursements column, and the others show under appropriate titles the distribution of disbursements. One form of the book is shown in [Form 39], with typical entries and balancing.
Form 39. Petty Cash Book
Sometimes the classified summary which is made the basis of the general cash book or journal entry referred to above, is shown in the petty cash book, the account titles being written in the explanation column, with the amounts opposite in the credit column underneath the $100 total. The items of this summary are then posted to the ledger, and the debit of the replenishing check to Petty Cash on the general cash book is “checked” in the ledger folio column. Or if the distributive column titles give sufficiently analyzed account titles, their totals may be posted without formal summarization, posting being shown by the small-figure ledger page in each column, [as in the illustration]. Where the petty cash book is used as a posting medium, of course no summarization of it is made either in the journal or the general cash book.
Keeping the Bank Account.—Several different methods of keeping the bank account are in use. Sometimes the check stub is the only record kept; in [Chapter XXIII] reference was made to the two methods of keeping the account for the entry of deposits—either on the face or the back of the stub. When the entry is made on the face, each check is usually subtracted from the previous balance and the new balance is shown. When deposits are recorded on the back of the stub—or on a special deposit interleaf—check totals and deposit totals may be carried forward from leaf to leaf without showing any balance.