Question

Why do we keep a petty cash fund. What do we debit and credit when we replenish it?

How does a bank reconciliation help us control cash?

Answer 1

Petty Cash Fund, Why?

Petty cash fund, as the name suggests, is created to meet the petty cash expenses such as postage stamps, travelling expenses, delivery charges, stationary etc. As you can see, these expenses are generally very small and hence the name “petty”. Petty cash funds are maintained to be able to make immediate payments for the small expenses. By entrusting a cashier or a petty cash custodian to look over the fund, things are made much easier for the business. The company is able to keep the petty cash fund separate from the main cash account which has higher amounts of money, thereby significantly reducing the risk of cash mismanagement by entrusting qualified professionals to look after high profile cash transactions.

Petty Cash Replenishment:

When the petty cash custodian applies for replenishment, he will request for an amount which will replenish the petty cash fund to the original amount at which it was established. The petty cash account will be debited and the cash account will be credited. Suppose a petty cash fund was established for $200 and after meeting all the petty expenses, there is a balance of $20 in the petty cash fund. The following journal entry will be passed for replenishment:

	Debit ($)	Credit ($)
Petty cash (200-20)	180
Cash		180

How does a bank reconciliation help us control cash?

Bank reconciliation statement are very essential in controlling cash. They can be used as internal control tools to help detect and restrict fraud. The bank provides us with an independent record of cash transactions from the view point of the bank. By reconciling the bank balance as per bank records with the bank balance as per the records of the company helps us to record all transactions and if the amounts do not coincide, it indicates either an error and or a fraud. A person who prepares a bank reconciliation statement must not have access to the book keeping activity of the company to ensure that there is no tampering of the accounting records. Any unexplainable differences arising in the bank balance from the bank records and the same in the books of accounts will be thoroughly investigated. This way, the bank reconciliation statement helps us detect and restrict fraud and errors and thereby help control cash.