Adjusting a Petty Cash Account
Companies use petty cash accounts to reduce paperwork and simplify the process for paying small dollar transactions and transactions requiring immediate cash payments. The company appoints a petty cash custodian, who manages the funds in the petty cash by keeping the money locked up and disbursing the funds to employees with valid documentation. Sometimes companies find it necessary to adjust the amount of funds maintained in a petty cash account.
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Activity Review
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Periodically, company management reviews the activity occurring in the petty cash account. When the petty cash fund reaches a predetermined level, the petty cash custodian brings the documentation to accounting and requests that additional funds be provided to replenish the fund. Accounting maintains this documentation, records an entry in the accounting records and provides the petty cash custodian with the necessary cash funds. Management uses the accounting documentation to review the number of disbursements that occur throughout the month and the number of times the petty cash lockbox requires replenishment.
Management Decision
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If the petty cash fund requires frequent replenishment, management needs to consider whether the total amount of cash maintained in the lockbox needs to be adjusted. If management decides that the amount of petty cash needs to be increased, it also needs to determine how much to increase the petty cash fund. Management considers the number of times it considers reasonable for petty cash replenishment and how much to increase the petty cash fund to reach this level.
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Accounting Transaction
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After management decides what the adjusted petty cash level should be, accounting needs to record the adjustment. Management documents the revised petty cash amount and forwards this information to the accounting staff. The accounting staff compares the adjusted petty cash amount to the previous petty cash amount to determine the difference. The accountant then records an increase to the company's petty cash account and a decrease to the company's cash account.
Petty Cash Adjustment
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After the accounting department records the entry in the company's financial records, the accountant requests the accounts payable department to print a check. Accounts payable prints a check payable to petty cash for the difference recorded by the accounting department. Accounts payable presents this check to the petty cash custodian. The petty cash custodian cashes the check and adds the funds to the petty cash lockbox.
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