Petty Cash Book

The Problem with Small Payments

In any business, a huge number of small, repetitive payments are made every day — auto fare, postage, cartage, refreshments, stationery, and so on. If the main cashier had to record every single one of these in the main cash book, the book would become extremely bulky and the cashier would be overburdened. To solve this, large organisations appoint a separate person — the petty cashier — and maintain a separate book called the petty cash book.

The Imprest System

The petty cashier operates on the Imprest system. Here is how it works:

• At the start of a period (say, a month), the head cashier gives the petty cashier a fixed sum of money. This fixed sum is called the imprest amount — for example, ₹2,000.
• The petty cashier makes all small payments out of this imprest amount throughout the period.
• When most of the imprest amount has been spent (say, ₹1,780 out of ₹2,000), the petty cashier gets reimbursed for the exact amount spent from the head cashier. This brings the petty cashier back to the full imprest amount at the start of the next period.
• Reimbursement may happen weekly, fortnightly, or monthly, depending on how often small payments are made.

Format of the Petty Cash Book

The petty cash book has a receipt (debit) side with only one amount column — for the cash received from the head cashier. The payment (credit) side has multiple columns:

• A first column for the total amount paid (called the "Amount Paid" column)
• Several analysis columns, each allotted to a specific type of common expense (e.g., Postage, Conveyance, Stationery)
• A Miscellaneous column for payments that do not have a separate column
• A Remarks column to note the nature of the payment

Columns for Date, Voucher Number, and Particulars are common to both sides.

Advantages of Maintaining a Petty Cash Book

1. Saving of time and effort of the chief cashier — The chief cashier is freed from petty disbursements and can focus on large cash transactions. This saves time and labour and helps the chief cashier work more effectively.

2. Effective control over cash disbursements — Cash control becomes easier because work is divided. The head cashier controls big payments directly and keeps a check on the petty cashier for small payments. This makes fraud and embezzlement very difficult.

3. Convenient recording — Recording petty disbursements in the main cash book would make it bulky and unmanageable. The materiality principle says that insignificant details need not appear in the main cash book — only material and useful information should be there. Recording small payments in a separate book is easy, and at the end of the period, the totals of different expense types are posted to the ledger in one go, saving time and effort.

Worked Example: M/s Samaira Traders

Mr. Mohit, the petty cashier of M/s Samaira Traders, received ₹2,000 from the head cashier on May 1, 2017. The following petty expenses were made during May:

Petty Cash Book of Samaira Traders

Posting from the Petty Cash Book

The petty cash book is balanced periodically. The difference between total receipts and total payments is the balance with the petty cashier. This balance is carried to the next period, and the petty cashier is paid the amount actually spent (the reimbursement).

A Petty Cash Account is opened in the ledger. Here is the accounting treatment:

1. When cash is given to the petty cashier initially:

   • Debit Petty Cash A/c
   • Credit Cash A/c

2. At the end of the period, when expenses are posted:

   • Each expense account (Postage, Telephone & Telegram, Conveyance, Stationery, Miscellaneous Expenses) is debited with its periodic total from the respective column.
   • Petty Cash A/c is credited with the total expenditure (₹1,487) by writing "Sundries as per petty cash book".

3. When reimbursement is made:

   • Debit Petty Cash A/c (with the amount reimbursed)
   • Credit Cash A/c

Journal Entries in the Books of Samaira Traders

Petty Cash Account