In a business setting, managing small, incidental expenses efficiently is crucial. These expenses, often referred to as trivial or miscellaneous, can include items like office supplies or delivery fees. To streamline the process of handling these minor costs, companies utilize a petty cash fund, which is a small cash reserve set aside for such purposes.
Establishing a petty cash fund begins with the appointment of a custodian, an individual responsible for managing the fund. For instance, a company might designate an office manager, such as Alvaro, to oversee the petty cash, providing him with an initial amount, say $100. The establishment of this fund requires a single journal entry: the company debits the petty cash account (an asset) and credits the cash account (reflecting a decrease in the bank account). This transaction can be represented as:
$$\text{Debit: Petty Cash} \quad 100$$
$$\text{Credit: Cash} \quad 100$$
This entry indicates that while the petty cash account increases by $100, the regular cash account decreases by the same amount, maintaining the overall asset balance.
Once the petty cash fund is established, the custodian can use it to pay for various small expenses without needing to make frequent journal entries for each transaction. Instead, the custodian must keep track of all expenditures by retaining vendor receipts and using pre-numbered petty cash vouchers. This internal control system helps prevent misuse of the funds and ensures accountability. For example, if Alvaro uses petty cash to pay for a delivery fee, he will document the transaction with a receipt and a voucher.
Importantly, no journal entries are recorded for each petty cash purchase. Instead, journal entries are only made when the fund needs to be replenished. This approach simplifies record-keeping and allows for efficient management of minor expenses, ensuring that the petty cash fund remains organized and accountable.