Principles of Accounting I

Chapter Four
Cash Control
Definition of Cash:
Cash is a medium of transaction. Cash includes money in currency and coins, checks received,
Bank drafts, money orders, and deposits.
The criteria used to define cash are:
 That the item be media of exchange
 That it be readily available for payment and that it is free from contractual restriction for
immediate use.
 A current asset that a Bank readily accepts for deposit
Examples of non-cash items usually confused with cash are:
 Postage and revenue stamps - which cannot be used for payment and which are
prepayments
 Post dated checks and IOUs - which are receivables
 Deposits with trustee - which are out of control of management
 Deposits with suppliers - which are deposits
 Time deposits in Banks - which are contractually restricted from use for a certain time.

Characteristics of Cash:
 Cash is the most liquid of all assets, which can be converted into other assets any time.
 It is transferable without ownership questioned
 It is divisible
 It is similar to one another and cannot be identified – i.e. it is homogeneous
 It has large amount but small volume. Can be transported or kept easily
 Several transactions of a business affect cash directly or indirectly
Management of Cash:
Cash Management is required for the following reasons:
 Assuring there is sufficient cash to carry future operation
 Avoid handling of excess idle cash
 Safeguard or protect cash from loss or fraud
 Implement proper accounting for cash receipts and cash payments

Control of Cash
Need for control:
Because of the ease with which cash can be transferred, cash is an asset most likely to be diverted
and subject to misuse. Cash can be transferred from person to person without its ownership being
questioned. In addition several transactions affect receipt and/or payment of cash either directly or
indirectly.
It is therefore necessary that cash is effectively guarded and protected.
Internal Controls:
The purpose of a system of internal control is:
 To ensure that cash assets are verified physically when needed
 To ensure that these assets are protected while in custody
 To ensure that cash assets are used for authorized purposes only
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This entails both administrative controls that bring the use of Safes, cash registers, strong rooms
etc., and accounting controls that specifies the use of proper authorization, recording and bank
reconciliation systems.

Internal Control of Cash – Techniques:

 Separation of duties of record keeping and cash custody
 Control cash receipts by using cash registers and other dual record systems
 Using a checking or current account in a bank properly i.e. Deposit all collections of cash
 Do all payments by check
 Verifying the validity and amount of expenditure and authorizing it before issuing check -
i.e. using the payment voucher system.
 Establish petty cash fund for minor expenditures in cash

Bank Accounts:
One of the major devices of internal control for cash is maintaining a Bank Account where all
collections are deposited and payments are made by check. The advantages of a bank account are:
 It is much safer to put cash in a Bank account rather than in the office or at home.
 It provides additional recording of cash - one by the bank and one by the Enterprise.

The most common types of bank accounts here in Ethiopia are Checking accounts, Saving
Accounts and Time deposits:
 An account from which a depositor can order payments to others is called a Checking
account. It is sometimes called Current Account or Demand Deposit Account.
 A Savings account is an account with the bank on which the Bank pays interest to the
depositor. It is usually maintained by individuals. A savings account is opened by a
business in rare cases where they have excess idle cash. Deposits and withdrawals are
made at the counter of the Bank by vouchers prepared for the purpose. Payments to third
parties cannot be directly made.
 Time Deposits are type of deposit where the depositor and the bank agree as to the time of
withdrawal. Time deposits usually pay higher interest than saving accounts. Time Deposit
account is opened by a business cases when they have excess idle cash. Since there is
restriction on use of the amount time deposits are not considered cash.

Forms used in connection to Bank Accounts:

1. Signature card: At the time an account is opened, account number is assigned and
signature card must be signed by each person authorized to sign checks. The card is used as
sample signature card to verify authenticity of checks at a latter date.
2. Deposit ticket: A form used to list all deposits of the account holder is called the deposit
slip or ticket. In Ethiopia it is usually of two types: one for cash deposits, and the other for
check deposits. It is prepared in two copies and one copy is stamped by the Bank teller
(cashier) and given to the depositor as evidence of the date and amount of the deposit. The
ticket copies serve as source documents for both the Bank and the Enterprise to
simultaneously record the deposit.
Checks received are recorded and deposited as cash as soon as they are received on the
assumption that the drawer has enough money in his account.
E.g. Deposit of Br 1,000.00 to Bank account:
Cash in Bank 1000.00
Cash on hand 1000.00

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 3. Check: A check is a written instrument signed by a depositor ordering the bank to pay
certain sum of money to the order of a designated person. There are three parties on a
check:
 The Drawer: The one who signs the check
 The Drawee: The bank to whom the order to pay is given
 The Payee: The one to whom the payment is to be made.
Cash is credited as soon as a check is issued even though it takes some time until it is presented
and cashed at the Bank.
E.g. Payment of Electric bill by check Br 300.00
Electricity Expense 300.00
Cash in Bank 300.00
Check form has name and address of the depositor, the account number and pre numbered
consecutive check number to facilitate depositors' internal control.

Records Supporting Checks Issued:

A pre-numbered printed document, which contains the details of the checks to be issued, is called a
Check Payment Voucher. The Check Payment Voucher needs to be completed before a check is
prepared and issued. It is usually made out in one original and pad copy.
 The original is attached with supporting documents for future reference and audit.
 The copy is retained in the pad for quick reference
 The voucher is used to authorize the payment before the check is written
 Its pre-numbers facilitate the control function.

Supporting documents are written evidences that provide further details authenticating the
payment shown on the check. After check is prepared and paid all supporting documents attached
to the Check Payment Voucher (CPV) are stamped or marked "paid" in order to avoid duplicate
payment later on.
Examples of Supporting documents are letters authorizing payment, agreement or contract copies,
invoices, purchase orders, goods receiving vouchers, approved application for payments e.t.c.

The Check Payment Voucher (CPV) looks as follows:

No: 025687
Date ____________

Paid to: ____________________________________________________

Amount:(in words)_____________________________________________
_____________________________In figures: ______________________
Reason for Payment:__________________________________________
___________________________________________________________
Check No:________________Account No:________________________

Prepared by: Certified By: Authorized By: Received By:

___________ ____________ _______________ _____________

For Accounts use only:

Code Amount
Gen. Ledger Sub Ledger Debit Credit
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 Writing a Check

Steps for preparing a check

1. Before writing a check the accounting clerk in charge of preparing a check should ensure
that:
 The Check Payment Voucher is properly completed and authorized (signed)
and all documents evidencing the authenticity of the payment are attached to it.
 The payment is in settlement of an approved contract, service, and purchase
etc.
 All the necessary documents are approved and the payment authorized by
authorized managers
 All the payment documents are Arithmetically accurate.

2. Prepare the check stub:

 Write the date of the check
 Write the payee – the person or business to whom the check is payable
 Write the purpose of the payment
 Ensure the Balance Brought forward (BBF) and deposits since then are written and
summed
 Write the amount of the check
 Calculate and write the balance carried forward (BCF)
 On the next check stub copy the balance as BBF.

3. Prepare the Check:

 Write the date (the current date). Banks will not pay post-dated checks
 Write name of the payee
 Write the amount both in figures and words
 Have the check signed by authorized signatories

4. Point of Caution:
 Write a check in ink with a pen. Do not write a check with a pencil
 Write checks carefully. Banks do not pay a check for reason of slight errors

Illustration: Assume AT Co paid electric bill of Br 1230.45 to Ethiopian Electric Power Co.
(EEPCO). Prepare a check for the payment from Abyssinia Bank. Balance before the payment was
Br 7,235.75 and there was a deposit of Br 2,000.00 after the BBF amount. The current check no is
E382138 and the CPV no is 1472.

Date________ ABYSSINIA BANK AT co., POB 7053,AA

Pay To:_________ A/c No 314
____________ Date:_________________
For:_____________

Pay To: ___________________________ ____________________________

BBF ______ Birr: ____________________(in words) ____________________________

Deposit_____
Total ______ ________________________________________________________

This Ck______
BCF ______ 4

Ck No: E 382138 Ck No: E 382138 Signature:______________________

Voiding a Check
Banks usually refuse to cash a check that has errors in writing it. If an error is made in writing a
check, it should be cancelled, and a new check is made. The erroneous check is crossed across the
face with two lines and the word “VOID” is legibly written on it as follows. A VOID check is
pinned and retained in the check pad for easy reference.

Abyssinia Bank AT Co A/c No 314

D
Pay To: ___________________________ I_____________________
Birr: ____________________O____________________________
V
Ck No: E 382136 Signature:________________

A memorandum entry is made in the cash Journal for each voided check to keep record of all
checks.

Transferring Checks - Endorsements

Once a check is written and issued the payee is the owner of the check. Ownership of checks and
the right to cash it at the Drawee Bank can be transferred by signing on the back of the check. This
is called Endorsing the Check – Endorsement.

There are different types of endorsements:

1. Blank Endorsement – Only the Endorser’s (Payee’s) signature is put on the back of the
check. This means pay to anyone who presents the check to the bank – i.e. the bearer.
e.g. Girma Tafa, the payee, is endorsing the check:

2. Special Endorsement – states to whom the check is to be paid followed by signature of the
endorser. The endorsement permits the check to be cashed or transferred by the order of the
endorsee, Abebech Tufa.
Pay to the order of Abebech Tufa

3. Restrictive Endorsement – restricts further transfer of the check. They are usually used for
checks intended to be deposited to the account of the payee.

For deposit to account No 0452 of Girma Tufa

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 4. Qualified Endorsement – this is an endorsement in which the endorser does not accept any
responsibility for payment of the check. If the Bank refuses to cash the check with
Qualified Endorsement, the holder may not claim from the endorser. However, he can
claim from the original Drawer of the check.

Without Recourse

Restricting Check Endorsements - Crossed checks

For safety reasons Enterprises restrict endorsement of checks. This is done by stamping the check
leaves at the upper left corner. Alternative ways of restricting are:

1. Cross check – A parallel diagonal line may be drawn on the upper left corner of the face of
the check. A crossed check is not transferable by endorsement.

Abyssinia Bank AT Co A/c No 314

Pay To: ___________________________ _____________________

Birr: ____________________ ____________________________

Ck No: E 382138 Signature:________________

1. Payee only – The words “PAYEE ONLY” are stamped in the upper left corner of the face
of the check. This crossing restricts:
 The cashing of the check unless the payee presents it
 The check cannot be transferred by endorsement.

Abyssinia Bank AT Co A/c No 314

Pay To: ___________________________ _____________________

Birr: ____________________ ____________________________

Ck No: E 382138 Signature:________________

2. Account Payee Only – The words “ACCOUNT PAYEE ONLY” are stamped in the upper
left corner of the face of the check. This kind of check cannot be cashed at all. It can only
be deposited to the account of the Payee.

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 Abyssinia Bank AT Co A/c No 314

Pay To: ___________________________ _____________________

Birr: ____________________ ____________________________

Ck No: E 382138 Signature:________________

Dishonoured check
A check that a Bank refuses to pay is called dishonoured check. A check may be dishonoured
because of:
1. The amount of the check may be erroneously written. The amount in figures and in words
may differ.
2. Signature on the check may appear different from that of samples on signature card.
3. Check may be post-dated
4. Depositors account may have insufficient balance to pay the check – NSF = Not sufficient
fund
5. The name of the payee may be written erroneously

Debit and Credit advices

Debit and Credit advices are documents originated by the bank to tell depositor that his/her
account has been affected by transactions other than neither deposits nor checks. The entries that
the bank originates are passed by debit or credit ticket, and the debit or credit advices are copies of
those tickets. Debit advice shows amount deducted from the depositor’s balance, and credit advice
shows amount added to depositor’s account. The depositor may collect the advices as and when he
checks his bank or at the end of the month along with the bank statement.

The Bank Statement

A Bank statement is essentially a copy of the depositor’s ledger account. The statement is sent to
the depositor at the end of every month. The statement shows:
 Beginning balance at the start of the period
 Deposits during the month
 Withdrawals during the month, and
 Ending balance at the end of the month, known as the bank balance.

The bank statement should be checked as soon as it is received, and any errors advised to the bank
for correction. The statement is checked against the records of the depositor – the cash book or
check stub where all deposits and checks/withdrawals are recorded. Usually, the balance of the
depositor’s books and that of the statement shall not agree because of the following:
 Errors may be made by the bank or by the depositor when recording
 Differences caused by time factor i.e. outstanding deposits and outstanding checks.

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  Outstanding deposits or sometimes known as deposits in transit are deposits made to the
bank but not shown in the bank statement. What normally happens is the deposit is
recorded in the depositor’s records and balance of the current month, while the bank
records it in the following month.
 Outstanding checks are those checks issued and recorded in the Depositor’s account in the
current month, but not presented to the bank for cashing or deposit. In Ethiopia, a check
remains valid for 6 months and can be presented within that period for encashment.
 Transactions not recorded by either side – e.g. service charges, cost of check books, or
remittances received.

The process of checking the statement and bringing the bank balance and the balance of the
Depositor’ record (cash book or check stub) into an agreement is called Reconciling the Bank
Statement.

Reconciling the Bank Statement

As soon as the statement is received the Depositor should reconcile its records (cash book or
Check stub) with the records of the bank. Any errors or omissions discovered on the bank
statement need to be advised to the bank for immediate correction. And any errors or omissions on
the records of the depositor should be adjusted and entries passed.

Steps in reconciling the bank statement are:

1. Start with the Cashbook or check stub and ensure that each deposit is credited by the bank
and seen on the Bank statement. Put a tick mark or some other code in front of amounts
correctly reconciled and seen on both records. Separately list the exceptions as outstanding
deposits or Deposits in transit.
2. Start with the Cashbook or check stub and ensure that each Check is debited by the bank
and seen on the Bank statement. Put a tick mark or some other code in front of amounts
correctly reconciled and seen on both records. Separately list the exceptions as outstanding
checks.
3. Look for any other unchecked amount on the Cashbook or check stub and try to trace it on
the statement. If found put the tick mark, if not list them as errors or other outstanding
items of the depositors record. E.g. Bank charges
4. Now look for unchecked amounts on the Statement and try to trace it on the statement. If
not found then list them as errors or other outstanding items on the Bank’s side.

Having identified all outstanding items then the next step is to prepare the Statement of Bank
Reconciliation. The statement has a heading and two parts:
1. Start with the beginning balance of the Bank Statement
Plus or minus adjustments for outstanding items
Equals Adjusted Statement Balance
2. Start with the beginning balance of the Cashbook or Check stub
Plus or minus adjustments for outstanding items
Equals Adjusted Book Balance
3. Ensure adjusted Book balance and Adjusted Book Balance are equal.

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 Illustration:
Assume the cashbook of ABC Co. for the month of April 2004 is as follows:

Cash Book – Abyssinia Bank A/c No 314 a/c # 12

D Description ost debit Credit Balance
ate R
ef
2
004 Balance B. F 3200.00
A
pril 1
2 Rent Exp Ck 1253 1000.00 √ 2200.00
5 Deposit 2500.00 √ 4700.00
8 Insurance Exp Ck 1254 200.00 √ 4500.00
1 Miscellaneous Exp Ck 1255 4495.00
2 5.00
1 Deposit 1200.00 √ 5695.00
4
1 Utility Exp Ck 1256 400.00 √ 5295.00
7
2 Equipment Cost Ck 1257 2000.00 √ 3295.00
0
2 Deposit of Ck 985 900.00 √ 5195.00
2
2 Fuel Exp Ck 1258 30 4895.00
7 0.00
3 Salary Exp Ck 1259 30 1895.00
0 00.00
3 Deposit 1 3595.00
0 700.00

Bank statement received at the end of the month was as follows:

D Description Checks & Credits & Balance

Date Other Other credits
debits
2
004 Balance B. F 3200.00
A
pril 1
5 Ck 1253 1000.00 √ 2200.00
5 Deposit 2500.00 √ 4700.00
1 Deposit 1200.00 √ 5900.00
4
1 Ck 1255 50.00 5850.00
4
1 Ck 1254 200.00 √ 5650.00
9
 7
1 Ck 1256 400.00 √ 5250.00
9
2 Deposit Ck 985 of CBE 900.00 √ 6150.00
2
2 Bank Charges 10.00 6140.00
3
2 Ck 1257 2000.00 √ 4140.00
5
2 Returned Ck 985 of CBE 900.00 3240.00
6
2 Charges 20.00 3220.00
7
0 Remittance received from 1100.00 4320.00
Harar
3 Balance 4320.00
0

Reconciling the entries of two reciprocal accounts reveals the following outstanding items
(unchecked amounts):
1. Outstanding Deposits - i.e. Deposits debited in the depositor’s records that are not credited
on the bank statement:
Deposit debited on 30/4/04 ------------------------------------------- 1700.00

1. Outstanding Checks – i.e. Check amounts credited in the Depositor’s Book but not debited
by the Bank.
Ck no 1258 credited on 27/4/04 – Fuel expense--------------- 300.00
Ck no 1259 credited on 30/4/04 – Salaries Expense------------- 3000.00

2. Other debits in the depositor’s records that are not credited in the Bank statement:
Nothing – No such entry

3. Other debits in the depositor’s records that are not credited in the Bank statement:
a. Depositor’s error:
Ck No 1255 for miscellaneous expense - Credit of 12/4/04 for Br 5.00. Investigation shows the
check was made for Br 50.00 and the Bank has correctly debited Br 50.00 for this check on
14/4/04. But the Depositor has erroneously credited the check for 5.00, understating it by Br
45.00.

4. Bank charges debited by the Bank but not credited on Depositor books:
Debit of 23/4/04 for Bank Charges ---------------------------------- 10.00
Debit of 27/4/04 for Bank charges ----------------------------------- 20.00

5. Other debit entries debited by the bank but not credited on the depositor’s account:
a. Debit of 14/4/04 Ck No 1255 Br 50.00 – analysed and listed under 4
above
b. Dishonoured Ck returned:
Deposit of Ck no 985 of CBE on 22/4/04 for Br 900.00 was returned unpaid and the Bank debited
the Depositors account in reversal on 26/4/04, which was not reciprocally credited on the
cashbook.

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6. Credit entries by the bank but not debited on the depositor’s account:
Remittance received from Harar credited by bank on 30/4/04 ----- 1100.00

The formal Reconciliation Report appears as follows:

ABC Co
Reconciliation of Bank Statement
As at April 30, 2004

Balance per Bank Statement -------------------------------- 4,320.00

Add: Deposit of 30/4/04, not recorded by bank ---------- 1,700.00
6,020.00
Deduct outstanding checks:
Ck No 1258 --------------------------------------------- 300.00
Ck No 1259 --------------------------------------------- 3,000.00 3,300.00
Adjusted Statement Balance --------------------------------- 2,720.00

Balance per Depositors Records ---------------------------- 2,595.00

Add: Remittance received, not debited by Depositor --- 1,100.00
3,695.00
Deduct:
Bank service charges dated 23/4/04 ------------- 10.00
Bank Service Charges dated 27/4/04 ------------ 20.00 30.00
Depositor’s error recording Ck 1255 -------------- 45.00
Returned ck deposit –Ck No 985 of CBE -------- 900.00 975.00
Adjusted Book Balance --------------------------------------- 2,720.00

Entries based on Bank Reconciliation (to adjust the Book Balance):

30/4/04 Cash in Bank 1100.00

Accounts Receivable 1100.00
Remittance received from Harar customer

30/4/04 Bank Service charges Exp. 30.00

Cash in Bank 30.00
Bank charges during April 2004

30/4/04 Miscellaneous expenses 45.00

Cash in Bank 45.00
To correct error on recording Ck 1255 on 12/4/04

30/4/04 Accounts Receivable 900.00

Cash in Bank 900.00
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 To reverse deposit of 22/4/04 Ck No 985 of Customer X returned

Bank Reconciliation as Internal control tool:

Bank reconciliation is an important part of the internal control system in that it is a means of
comparing recorded cash with the cash balance reported by the bank.
To make it effective, a separate person than the one who handles records of bank accounts should
do the bank reconciliation job. This separation of duty is important to avoid embezzlement by
employees.

Internal Control over Cash receipts

Cash Collection Procedures:
Department stores and retail businesses usually collect cash in two ways:
 From cash sales
 From customers in settlement of accounts
 From Other Sources
Cash is collected in notes or coins or by check.
To Control & protect this asset, a procedure of accounting control is needed. The detailed
procedure used by an Enterprise to control its operation is called internal control.
It is common for businesses to use the Cash Register for recording cash receipts. At the end of the
day each cashier counts the cash in his/her cash drawer and fills out a memorandum form. The
memo shows details of cash counted and the total cash on hand - usually the total checks, and cash
notes & coins by denomination. Another person checks that the cash count on the memorandum
agrees with the record of the cash register tape, and notifies any difference. The memorandum is
then passed to the main cashier along with the cash who will signify receipt. The main cashier will
daily deposit all collections to the bank account, and passes the copy of the Deposit slip to the
accountant for recording.

Simultaneous to the cash receipts the sales invoices and other collection items are recorded in a
journal, cash receipt journal, or usually on a cash register tape which will be taken out or
summarized at end of the day.

Both the cashier's cash count memo and the daily cash receipt journal or cash register tape are sent
to the accountant for recording on a daily basis. A daily cash report is presented to the Finance or
Other Manager who daily checks that the cash count and the cash records are in balance.

Cash short and over

The cash count is not always equal to the records. Some small differences occur due to changes in
coins or other errors. Such differences are usually recorded as cash over and under. The Cash
journal will have Cash short and Over Debit and credit columns. The cash shortage is debited to
this account and the cash overage is credited to it.

Illustration 1:
On July 12, 2000 the daily cash sales record of a business was Birr 2864.65 and the actual count
of cash indicated Birr 2873.50.Find the cash short and over and pass the appropriate journal
entries.

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 Cash Count Memorandum/Report
ABC Co
Daily Cash Report/Memorandum
For the date July 12, 2000

Cash Notes & coins Amount

100 x 9 ------------------------------------------------------------------------------- 900.00
50 x 2 -------------------------------------------------------------------------------- 100.00
10 x 11-------------------------------------------------------------------------------- 110.00
5 x 12 -------------------------------------------------------------------------------- 60.00
1 x 80 -------------------------------------------------------------------------------- 80.00
0.50 x
0.25 x
0.10 x 2 ------------------------------------------------------------------------------ 0.20
0.05 x 1 ------------------------------------------------------------------------------ 0.05
0.01 x

Total Cash Notes & Coins -------------------------------------------------------- 1250.25

Checks
No Drawee Drawer
C120568 Kifle shoe shop Commercial Bank of Eth. 450.00
A09867 Arada Gebeya Co. Awash bank 1173.25

-----------------------------------
Total -------------------------------- 1623.25
Checks
Total Cash on hand 2873.50

Solution:
Recorded cash ----------- 2864.65
Counted Cash ------------ 2873.50
Cash Overage ----------- 8.85
Journal Entries:
Cash --------------------- 2873.50
Sales ---------------------------- 2864.65
Cash short & over ------------- 8.85

Illustration 2
On July 25, 2000 the daily cash sales record of a business was Birr 3426.15 and the actual count
of cash indicated Birr 3421.75.Find the cash short and over and pass the appropriate journal
entries.

Solution:
Recorded cash ----------- 3426.15
Counted Cash ------------ 3421.75
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 Cash Short ----------- 4.40

Journal Entries:
Cash --------------------- 3421.75
Cash short & over ----- 4.40
Sales ------------------- 3426.15

At the end of a period, if the Cash Short & Over account shows a credit balance, the amount is
shown as other income on the Income Statement. If it shows a Debit Balance, the amount is shown
as an Expense.

Cash change funds

This is amount of currency and coins held by Retail businesses and the like, who receive cash from
customers, for the purpose of making a change. The fund is established by drawing a sum of
money by writing check. The entry is Debit to Cash on Hand - change fund and Credit to Cash in
Bank. Once the fund is established it remains the same unless it is increased, decreased or closed.
At the end of the day total amount of cash received is deposited and the cash in change fund
remains in the cash box/register.

Cash Payments
The Voucher system - Procedures
One means of control for cash payment is using the checking account. Every payment of cash is
made by check. Furthermore many businesses use additional controls. The procedure is that
approval of cash payment by an authorized official is required before a check is written. The
system, which requires the approval of cash payment, is called the Voucher system. The basic idea
of this system is that every transaction that requires cash payment must be verified, approved and
recorded before a check is issued.
Basic features of the voucher system are:
1. A voucher payable is recorded for all expenditures
 To record liability
 To settle liability and record cash payments
2. A Voucher system uses the following
 Vouchers
 A voucher register
 File for unpaid Vouchers
 A check Register
 File for paid vouchers
3. To prepare a voucher the following documents must be available
 The Invoice
 The purchase order
 Receiving Report
4. Procedures
 The documents are compared and verified for accuracy. The voucher is prepared and
approved.
 After approval the voucher must be recorded in a Journal called Voucher Register. The
Voucher register replaces the purchase Journal and all types of expenditures can be
recorded on it.
 After recording the voucher it is kept in unpaid vouchers file until date of payment, or it is
paid immediately by authorizing check preparation.
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After payment the vouchers are filed numerically in paid Vouchers file
 The checks issued for payment of vouchers are recorded in a check register.
 Before posting the voucher register and check register column totals are footed and proved.
Illustration - The voucher system

Petty Cash
For a business that deposits all its cash collections in a bank and make payments by means of
checks, a system must be implemented for minor expenditures for which a check cannot be issued.
The problem can be solved by establishing a petty cash fund.
The petty cash fund sometimes known as Imprest. Cash fund is a small amount of cash segregated
from the main cash for payment of minor expenditures –e.g. Postage stamps, small supplies, small
refund to cash customers, taxi expenses...
The term imprest or petty cash fund is used to describe a fund, entrusted to a cashier, of fixed
amount of cash that is used to meet small expenditures conveniently paid in cash. The size of the
fund should be sufficient to cover expenses of a monthly or other short period.

Establishment, Disbursement and Replenishment of Petty Cash Fund:

Establishment
The management of the business must decide on the amount of petty cash fund required for small
expenditures for a certain short period of time. Then a check is issued in the name of the petty
cashier. The petty cashier draws the cash from the bank and keeps it in a safe box.

Disbursement
The petty cashier makes payment from the petty cash as when an approved expenditure is
received. Usually Businesses have a form called the Petty Cash Payment voucher on which each
payment is approved, and which is sometimes used to acknowledge receipt as well.

PETTY CASH VOUCHER

Voucher No: ______________________ Date: ________________

Paid To: ___________________________________________________________

For: _______________________________________________________________

Amount: __________________ (in words)________________________________

__________________________________________________________________

Charge to: _________________

Approved by:____________________ Received by: ______________________

A sample is shown above:

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The paid out petty cash vouchers are attached with supporting documents and kept in the petty
cash box. Just before the whole petty cash is consumed it must be replenished.

Replenishment:
The effect of replenishment is to restore the fund to its original level at frequent intervals by
drawing check in the amount of the expenses made. Replenishment of a petty cash fund is made
when its cash is nearly exhausted or at the end of the accounting period.

Illustration:
To illustrate the accounting of petty cash transactions, assume On December 1, 2003ABC Co.
established a petty cash fund of $250- to be held by W/o Bire. On December 21, 2003, the
custodian requested replenishment for items paid to date. The following itemized list is presented
on Dec 21 for replenishment:

ABC Co
Composition of Petty Cash Fund
December 21 and 31, Year 6

Dec 21 Dec 31
Cash in fund 9 150
Office supplies expense 171 77
Miscellaneous selling expense 65 25
Cash shortage (overage) 5 (2)
Totals 250 250

The journal entries for the month of December are as follows:

2003
Dec 1 Petty Cash Fund - ( W/o Bire 250
Cash 250
To record establishment of petty cash fund

21 Office supplies Expense 171

Miscellaneous Selling Expenses 65
Cash Short & over 5
Cash 241
To record expenses incurred since Dec 1, and
to record replenishment of petty cash fund.

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