Cambrige Notes: Principles of Accounting: The petty Cash Book

• As a business grows it is customary to have a Petty Cash Book and a Cash Book
• In large businesses if all small transactions were to be recorded in the in the Cash Book it would become unwieldy
• Imagine the example of a retail giant such as OK Supermarkets
• The chain likely experiences thousands of small cash transactions per day across each branch
• If all these were to be recorded in the Cash Book they would only serve to obscure the really important (material) transactions which would become hidden in a mass of small transactions
• Another thing to consider is the fact that most if not all cash receipts by these large businesses are banked daily
• The proper way to treat a cash received that is banked on the same day is to omit the cash nature of the transaction and record it as a bank deposit instead
• Thus for such businesses all the small receipts are collated and recorded as one large deposit
• The little individual entries that generated the cash receipts may be recorded in a book called the bank cash book
• The bank cash book simply lists the origin of the cash and amount that was banked
• There remains however the problem of how to deal with small cash payments
• Most large businesses make use of a Petty Cash Book
• A petty cash book is used to record all small(petty) cash payments that take place within the business
• It is entirely up to each business to decide exactily what constitutes a petty cash payment
• For a small retail trader all transactions of $10 and below might be seen as petty cash transactions while for a large bank such as J P Morgan all transactions below $10 000 might be seen as petty cash transactions
• The distinction is decided by the business in question
• The Petty Cash Book is a book original entry and a ledger account just like the Cash Book
• In a normal organisation there is a Cashier (Clerk) in Charge of Cash and the Cash Book
• Under the Cashier there may be Petty Cashiers who are responsible for Petty Cash and each Petty Cash Book
• For example there might be a Petty Cashier in each organisation’s departments and a Cashier in the main Finance Department
• A Petty Cash Book records petty payments made in each department by the petty cashiers
• There are three main advantages of using a Petty Cash Book:
  1. Division of Labour frees up the main Cashier
  2. Less transactions are entered in the main Cash Book making it less cluttered with only monthly totals transferred to the General Ledger
  3. Easier to verify and authenticate even the smallest transactions to prevent fraud and misappropriation of funds:
     1. When a petty cashier makes a payment to someone, then that person will have to fill in a
        voucher showing exactly what the payment was for.
     2. They usually have to attach bills, e.g. for petrol, to the petty cash voucher
     3. They would sign the voucher to certify that their expenses had
        been received from the petty cashier
     4. This is easier if the cashier is familiar with the department and person making the payment request
• Cash is to make these payments is disbursed to the Petty Cashiers using the imprest system
• To learn more about the imprest system click here
• Most Petty Cash Book are also analytical
• To learn more about the Analytical Cash Book click here

To access more topics go to the Cambridge IGCSE Accounting(0452)/O Level Principles of Accounts(7110) Notes.