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Petty Cash:Establishing the Fund and Using the Fund

Brian Krogol
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Alright, so every now and then the company is going to have to purchase just mice. Elaine ius stuff like supplies here and there or maybe pay some delivery expenses. Let's see how they'll handle these trivial expenses. So when they spend money on these trivial things like I said, such as delivery or supplies. Now when I say supplies here, this isn't like the monthly order of supplies where they order a bunch of supplies, maybe the printer's out of paper and they have to run to staples real quick or office depot and just grab a, you know, a pack of paper. This is gonna be what we do with petty cash. So petty cash, it's a small cash fund, a small cash fund for paying these trivial expenses. Okay, so the idea here is that we don't want to be making journal entries all the time for you know, maybe a $5 purchase here and there. So what we'll do is have this petty cash on hand. So to establish a petty cash fund. The first thing we need to do is for the company to a point. So the company's creates the petty cash fund by appointing a custodian. So there's going to be somebody in charge of the petty cash and they're gonna give them the money. They're just gonna take the money and give it to them like in our example here. So clutch prep, appoints Alvaro the office manager to be in charge of the new petty cash fund, giving him $100. So to establish the petty cash fund, we're gonna make one journal entry here and this is going to be to debit petty cash. So this is kind of like a subsection of cash. We have like this separate bit of cash in the petty cash fund. So notice it's a debit because petty cash is still an asset, right? This is still the company's money. So we're going to debit it, it's an asset and we're gonna take it out of our regular cash. So we're going to credit cash. So it's coming out of our bank account and now it's going to be in Alvaro's hands. So we're going to debit petty cash for 100 credit cash for 100. Nothing too crazy there. Right? So we just literally move this cash out of the bank account into Alvaro's basically pocket to hold for us. So notice nothing really happens here with our assets here. We have 100 increase to petty cash and our regular cash account, like our bank account goes down by 100. So what you'll notice is that Alvaro's gonna have this money and he's gonna be spending it. He's he's in charge of the office manager ups comes and charges us a delivery fee for something. Well, he's going to take money out of the petty cash to pay for that. So throughout the period we'll see that the custodian will purchase items with the petty cash. So whenever the custodian is purchasing these items. Well, there's gonna be two things they have to keep track of. First. The custodian must keep the vendor receipts and by keeping those receipts will be able to count, you know how much of the petty cash he's spent and he'll keep an internal system as well. He'll have internal pre numbered petty cash vouchers, we call them vouchers, but this is basically just a system and it's pre numbered as an internal control so that there's no missing numbers, no random use of petty cash. Maybe Albert wanted to buy some beer. Well we would notice that there's a missing receipt or something like that. Okay, so what you'll notice is as he's spending this money as he's paying these delivery fees, he's running the staples to buy paper. We're not gonna make any journal entries. There's no journal entries are made while he's making these purchases. Okay. The journal entries are gonna be made when we replenish the fund. Alright, so let's pause here and let's take care of that journal entry in the next video