Record The Reimbursement Of The Petty Cash Fund

Reimbursing a petty cash fund is a crucial internal control process that ensures the fund's integrity and accuracy. It involves replenishing the fund with an amount equal to the documented disbursements, bringing the cash balance back to its original, established level. This process not only restores the fund but also provides a mechanism to review the expenses incurred, ensuring they are valid, properly authorized, and accurately recorded in the company’s accounting system.

Understanding the Petty Cash Fund

A petty cash fund is a small amount of cash kept on hand to pay for minor expenses where writing a check or using a credit card is impractical. These expenses often include items like office supplies, postage, or small reimbursements to employees. The fund is typically managed by a designated custodian who is responsible for safeguarding the cash, approving disbursements, and maintaining proper records.

Key characteristics of a petty cash fund:

• Small Denomination: It is designed for small, incidental expenses.
• Imprest System: It operates on an imprest system, meaning the fund is always replenished to its original amount.
• Custodial Responsibility: A specific employee is responsible for managing the fund.
• Documentation: Every disbursement must be supported by a receipt or a petty cash voucher.

Why Reimburse Petty Cash?

Reimbursing the petty cash fund is essential for several reasons:

• Maintaining the Imprest Balance: Reimbursement ensures the fund always has the correct amount of cash available. Without regular reimbursement, the fund would eventually be depleted.
• Accurate Financial Records: The reimbursement process provides an opportunity to record the expenses incurred from the petty cash fund in the company's general ledger. This is crucial for accurate financial reporting.
• Internal Control: Reimbursement offers a control mechanism to review expenses, ensuring they are legitimate and properly authorized. This helps prevent fraud and misuse of funds.
• Budget Monitoring: By recording petty cash expenses, companies can track spending patterns and identify areas where costs can be reduced.
• Audit Trail: The documentation created during the reimbursement process provides a clear audit trail for auditors to verify the legitimacy of the expenses.

Step-by-Step Guide to Recording Petty Cash Reimbursement

Here's a detailed guide on how to properly record the reimbursement of a petty cash fund:

1. Gather all Petty Cash Vouchers and Receipts

The first step is to collect all the petty cash vouchers and supporting receipts for expenses paid out of the fund. Each voucher should include the following information:

• Date: The date the expense was incurred.
• Amount: The amount of the expense.
• Description: A brief description of the expense (e.g., "Office Supplies," "Postage").
• Account: The general ledger account to which the expense should be charged (e.g., "Office Supplies Expense," "Postage Expense").
• Authorization: The signature of the custodian and, if required, the signature of the person who authorized the expense.
• Recipient: The signature of the person receiving the cash.

Ensuring completeness and accuracy:

• Verify that each voucher has a corresponding receipt, if applicable.
• Ensure that the amounts on the vouchers match the amounts on the receipts.
• Check that each voucher is properly authorized.
• Confirm that the correct general ledger account is indicated on each voucher.

2. Summarize the Petty Cash Disbursements

Once you have gathered all the vouchers and receipts, the next step is to summarize the disbursements by general ledger account. This involves creating a summary sheet or using a spreadsheet to categorize each expense.

Example:

Let's say your petty cash vouchers include the following expenses:

• Office Supplies: $50
• Postage: $30
• Employee Reimbursement (Lunch): $20

Your summary sheet would look like this:

3. Calculate the Reimbursement Amount

The reimbursement amount is the total of all the documented disbursements. This amount will bring the petty cash fund back to its original balance.

Formula:

Reimbursement Amount = Original Fund Balance - Remaining Cash in Fund

Example:

If your original petty cash fund balance was $200, and you currently have $100 in the fund, the reimbursement amount would be:

Reimbursement Amount = $200 - $100 = $100

This $100 represents the total documented expenses and should match the total from your summary sheet.

4. Prepare the Journal Entry

A journal entry is required to record the reimbursement of the petty cash fund in the company's general ledger. This entry will debit the various expense accounts and credit cash.

Example:

Using the expenses from the previous example, the journal entry would be:

Explanation:

• Debit: The debit entries increase the balance of the expense accounts (Office Supplies Expense, Postage Expense, and Employee Meals Expense).
• Credit: The credit entry decreases the cash account balance, reflecting the cash used to replenish the fund.
• Description: A brief description of the journal entry is included for clarity.

5. Obtain Approval

Before processing the reimbursement, it's essential to obtain approval from a designated authority, such as a supervisor or manager. This step ensures that the expenses are reviewed and authorized.

Approval process:

• Present the summary sheet, petty cash vouchers, and receipts to the approver.
• The approver should review the documentation to ensure that the expenses are legitimate and properly authorized.
• Once approved, the approver should sign the summary sheet.

6. Replenish the Petty Cash Fund

After obtaining approval, the next step is to replenish the petty cash fund. This involves writing a check or withdrawing cash from the company's bank account for the reimbursement amount.

Process:

• Write a check payable to "Petty Cash" or the name of the custodian.
• Cash the check and place the cash in the petty cash box.
• The custodian should verify that the cash in the fund now matches the original balance.

7. File the Documentation

Finally, all the documentation related to the reimbursement should be filed and stored securely. This documentation includes the petty cash vouchers, receipts, summary sheet, and approved reimbursement request.

Filing guidelines:

• File the documentation in a logical and organized manner (e.g., by date or voucher number).
• Store the documentation in a secure location to prevent loss or theft.
• Retain the documentation for the required retention period (as per company policy or legal requirements).

Internal Controls for Petty Cash

Implementing strong internal controls over the petty cash fund is crucial to prevent fraud and misuse of funds. Here are some key internal controls:

• Establish a Fixed Fund Balance: Determine an appropriate amount for the petty cash fund based on the company's needs.
• Designate a Custodian: Assign a specific employee to be responsible for managing the fund.
• Require Vouchers for All Disbursements: Ensure that every disbursement is supported by a properly completed petty cash voucher.
• Obtain Receipts: Whenever possible, obtain receipts for all expenses.
• Limit the Size of Disbursements: Set a maximum amount for individual petty cash disbursements.
• Segregation of Duties: The custodian should not have the authority to approve their own reimbursements.
• Regular Reconciliation: Conduct regular reconciliations of the petty cash fund to ensure that the cash balance matches the documented disbursements.
• Surprise Audits: Perform surprise audits of the petty cash fund to deter fraud and ensure compliance with policies.
• Secure Storage: Store the petty cash fund in a secure location, such as a locked cash box or drawer.
• Proper Authorization: Require proper authorization for all disbursements and reimbursements.

Best Practices for Petty Cash Management

Here are some best practices for managing a petty cash fund effectively:

• Establish a Clear Petty Cash Policy: Develop a written policy that outlines the purpose of the fund, the procedures for disbursements and reimbursements, and the responsibilities of the custodian.
• Train the Custodian: Provide thorough training to the custodian on how to manage the fund, complete vouchers, and maintain records.
• Use Pre-numbered Vouchers: Using pre-numbered vouchers can help track and account for all disbursements.
• Require Detailed Descriptions: Ensure that vouchers include detailed descriptions of the expenses.
• Avoid Using Petty Cash for Large or Recurring Expenses: Petty cash should only be used for small, incidental expenses. Larger or recurring expenses should be paid through other channels, such as checks or electronic payments.
• Regularly Review the Fund Balance: Periodically review the fund balance to ensure that it is still appropriate for the company's needs.
• Implement a Petty Cash Software: Consider implementing a petty cash management software to automate the tracking and reconciliation of the fund.
• Monitor Spending Patterns: Analyze petty cash spending patterns to identify any unusual or suspicious activity.
• Secure Blank Checks: Do not store blank checks in the petty cash box.
• Limit Access to the Fund: Restrict access to the petty cash fund to authorized personnel only.

Common Mistakes to Avoid

Here are some common mistakes to avoid when managing a petty cash fund:

• Failure to Obtain Vouchers: Not requiring vouchers for all disbursements.
• Incomplete Vouchers: Missing information on vouchers (e.g., date, amount, description).
• Lack of Receipts: Not obtaining receipts for expenses when possible.
• Using Petty Cash for Inappropriate Expenses: Using the fund for personal expenses or other unauthorized purposes.
• Failure to Reconcile Regularly: Not reconciling the fund on a regular basis.
• Poor Record Keeping: Not maintaining accurate and organized records of disbursements and reimbursements.
• Lack of Internal Controls: Not implementing adequate internal controls to prevent fraud and misuse of funds.
• Storing Blank Checks in the Petty Cash Box: This can lead to unauthorized use of funds.
• Delaying Reimbursements: Allowing the fund to become significantly depleted before replenishing it.
• Not Reviewing Spending Patterns: Failing to monitor spending patterns to identify potential issues.

Petty Cash Reimbursement: An Example Scenario

To further illustrate the process, let's consider a practical example:

Scenario:

ABC Company maintains a petty cash fund with an original balance of $300. Sarah, the office administrator, is the designated custodian of the fund. During the month, Sarah made the following disbursements:

• Office Supplies: $75
• Postage: $45
• Employee Reimbursement (Parking): $30
• Coffee and Snacks for Meeting: $50

At the end of the month, Sarah has $100 remaining in the petty cash fund. She needs to reimburse the fund to bring it back to its original balance of $300.

Steps:

1. Gather Vouchers and Receipts: Sarah gathers all the petty cash vouchers and receipts for the expenses.

2. Summarize Disbursements: Sarah creates a summary sheet:

   Account	Amount
   Office Supplies Expense	$75
   Postage Expense	$45
   Employee Travel Expense	$30
   Miscellaneous Expense	$50
   Total	$200

3. Calculate Reimbursement Amount:

   Reimbursement Amount = $300 (Original Balance) - $100 (Remaining Cash) = $200

4. Prepare Journal Entry: Sarah prepares the following journal entry:

   Account	Debit	Credit
   Office Supplies Expense	$75
   Postage Expense	$45
   Employee Travel Expense	$30
   Miscellaneous Expense	$50
   Cash		$200
   To record reimbursement of petty cash fund

5. Obtain Approval: Sarah presents the summary sheet, vouchers, and receipts to her supervisor for approval.

6. Replenish the Fund: After approval, Sarah writes a check for $200 payable to "Petty Cash." She cashes the check and places the $200 in the petty cash box, bringing the fund back to its original balance of $300.

7. File Documentation: Sarah files all the documentation in a designated petty cash file.

Alternatives to Petty Cash Funds

While petty cash funds have been a traditional method for handling small expenses, there are alternative approaches that can offer greater efficiency and control:

• Company Credit Cards: Providing employees with company credit cards for small expenses can reduce the need for petty cash.
• Employee Reimbursement Programs: Employees can pay for expenses out-of-pocket and then submit expense reports for reimbursement.
• Online Payment Systems: Utilizing online payment systems like PayPal or Venmo can streamline the payment process for small expenses.
• Prepaid Cards: Giving employees prepaid cards with limited spending amounts can provide a controlled way to manage small expenses.
• Procurement Cards (P-Cards): P-Cards are credit cards specifically designed for small-dollar purchases, offering enhanced tracking and control features.

These alternatives can provide better visibility into spending, reduce the risk of fraud, and streamline the accounting process.

Conclusion

Recording the reimbursement of a petty cash fund is a critical process for maintaining accurate financial records and ensuring effective internal control. By following the steps outlined in this guide, companies can properly track and account for petty cash expenses, prevent misuse of funds, and maintain the integrity of their financial reporting. Implementing strong internal controls and adhering to best practices for petty cash management can further enhance the efficiency and effectiveness of this essential process. While traditional petty cash funds still have their place, businesses should also consider modern alternatives that offer greater control and automation for managing small expenses.