11.1 Petty Cash & Cash Controls
Key Takeaways
- Under the imprest petty cash system, the Petty Cash ledger balance stays at the fixed fund amount; expenses are journalized only when the fund is replenished.
- Establish or change the fund size with Debit/Credit Petty Cash against Cash in Bank; never expense the fund when it is first set up.
- Cash Over/Short captures the difference when remaining cash plus vouchers do not equal the imprest total at replenishment.
- Philippine SME cash control requires segregation of custody, recording, and authorization—and those rules belong in the internal control manual (HCS412305).
11.1 Petty Cash & Cash Controls
Quick Answer: Use an imprest petty cash fund at a fixed peso amount. Debit Petty Cash and credit Cash in Bank only when you establish, increase, or decrease the fund. When you replenish, debit the expense (or asset) accounts supported by vouchers (and Cash Over/Short if needed) and credit Cash in Bank—do not change the Petty Cash ledger balance on routine replenishment.
Chapter 10 covered internal control principles and the IC manual. This chapter applies those principles to the two cash procedures most heavily tested in Bookkeeping NC III practice banks and work-related projects: petty cash and bank reconciliation. For Philippine SMEs, cash is the asset most exposed to theft, error, and informal shortcuts. Assessors look for a fund that is fixed, voucher-documented, replenished correctly, and separated from the person who records the books.
Why Petty Cash Exists
Not every peso outflow deserves a check or electronic transfer. Delivery tips, photocopies, small office supplies, messenger fees, and emergency jeepney or Grab fares for errands are common. Paying those from undeposited sales collections destroys the audit trail and violates strong cash-disbursement policy. The control solution is an established petty cash fund: a locked box or drawer with a known imprest total, a custodian, pre-numbered or sequentially logged vouchers, and periodic replenishment from Cash in Bank.
Practice-bank wording mirrors the IC policy: make all disbursements by pre-numbered check except small amounts paid from an established petty cash fund. That exception is allowed only because the fund itself is controlled.
The Imprest System — Fixed Fund Balance
Imprest means the fund is restored to a constant authorized amount after each replenishment. If management authorizes ₱5,000, the Petty Cash general-ledger account should show ₱5,000 after establishment and after every change in fund size. Day-to-day payouts reduce physical cash and create vouchers, but they do not generate general-journal entries until replenishment. A logbook or voucher register supports custody; the ledger waits for the replenishment check.
| Event | Physical cash in box | Petty Cash G/L balance | Journal entry? |
|---|---|---|---|
| Establish ₱5,000 | ₱5,000 | ₱5,000 | Yes — Dr Petty Cash / Cr Cash in Bank |
| Pay ₱250 supplies with voucher | ₱4,750 + ₱250 voucher | Still ₱5,000 | No G/L entry yet |
| Replenish ₱4,600 (example) | Back to ₱5,000 | Still ₱5,000 | Yes — Dr expenses (± Over/Short) / Cr Cash in Bank |
| Increase fund to ₱8,000 | Add ₱3,000 | ₱8,000 | Yes — Dr Petty Cash ₱3,000 / Cr Cash in Bank |
Establishing the Fund
Management (or the owner in a sole proprietorship) sets the fund size based on expected weekly or monthly small disbursements. The cashier or bookkeeper draws a check payable to the petty cash custodian (or to “Petty Cash”), cashes it, and places the notes and coins in the box.
Journal entry — establish ₱5,000 fund:
| Account | Debit | Credit |
|---|---|---|
| Petty Cash | ₱5,000 | |
| Cash in Bank | ₱5,000 |
This is an asset exchange, not an expense. Debiting Miscellaneous Expense at establishment is a common written-exam trap.
Voucher Documentation
Every payout should leave a petty cash voucher (or equivalent slip) showing: date, payee or purpose, amount in words and figures, account to charge (supplies, delivery, transportation, representation within policy), signature of recipient, and approval by the custodian or a designated supervisor. Attach ORs or sales invoices when available. Vouchers stay in the box until replenishment; then they support the replenishment check and are filed with the voucher package.
Without vouchers, the custodian cannot prove where the cash went, and the bookkeeper cannot classify expenses. Assessors fail practical projects that replenish “miscellaneous” with no supporting slips.
Replenishment — When Expenses Hit the Books
Replenish when the box is low, at month-end before statements, or on a fixed schedule stated in the IC manual. Count remaining cash, total the vouchers, and prove:
Remaining cash + voucher totals = imprest fund (or explain Over/Short).
The replenishment check equals the amount needed to restore the box to the imprest total (normally equal to the voucher total when there is no over/short).
Example. Imprest fund ₱5,000. Remaining cash ₱400. Vouchers: Office Supplies ₱3,000; Delivery Expense ₱1,500. Cash + vouchers = ₱4,900 → ₱100 cash short.
Replenishment entry (restore ₱4,600 so box returns to ₱5,000):
| Account | Debit | Credit |
|---|---|---|
| Office Supplies (or Supplies Expense) | ₱3,000 | |
| Delivery Expense | ₱1,500 | |
| Cash Over/Short | ₱100 | |
| Cash in Bank | ₱4,600 |
Petty Cash is not debited or credited. Expenses (and the shortage) are recognized; Cash in Bank decreases.
If remaining cash + vouchers exceed the imprest amount, credit Cash Over/Short for the overage and replenish a smaller amount.
Increase and Decrease of Fund Size
| Change | Entry |
|---|---|
| Increase ₱5,000 → ₱8,000 | Dr Petty Cash ₱3,000; Cr Cash in Bank ₱3,000 |
| Decrease ₱8,000 → ₱5,000 | Dr Cash in Bank ₱3,000; Cr Petty Cash ₱3,000 |
Debiting Petty Cash for the new total instead of the difference is a frequent error (₱8,000 debit on top of an existing ₱5,000 would imply ₱13,000). Always journalize only the change, preferably after a clean replenishment so vouchers are cleared first.
Segregation of Duties for Philippine SMEs
Ideal separation:
- Custody — petty cash custodian holds the box and issues vouchers.
- Recording — bookkeeper/accounting clerk journalizes replenishment and maintains Cash in Bank.
- Authorization — owner, manager, or designated officer approves fund size, large vouchers, and the replenishment check.
In a three-person SME, combine roles carefully: the person who counts sales cash should not alone approve and record the replenishment. Surprise counts by someone other than the custodian belong in the IC manual. Deposit daily receipts intact; never pay expenses from undeposited collections.
Link to the Internal Control Manual (HCS412305)
The IC manual (Chapter 10) should state: authorized fund amount; custodian name/role; voucher form; approval limits; replenishment frequency; prohibition on IOUs and personal borrowing from the box; surprise-count policy; and how Cash Over/Short is investigated. Checking policy compliance and preparing compliance reports can cite petty-cash count results, missing vouchers, or repeated shortages. On assessment day, treat petty cash as evidence that you can apply IC principles—not only define them.
Accuracy Habits for the Work-Related Project
- Prove cash + vouchers against imprest before writing the replenishment check.
- Classify each voucher to the correct expense or asset title from the chart of accounts.
- Keep Petty Cash G/L equal to the authorized fund after establish/increase/decrease only.
- Document segregation and count procedures so the practical package supports HCS412305 as well as cash accuracy.
A business establishes a Petty Cash Fund of ₱5,000. What is the correct journal entry?
Under the imprest petty cash system, when are expenses paid from the box recorded in the general ledger?
A ₱5,000 petty cash fund has ₱400 cash remaining and vouchers for Office Supplies ₱3,000 and Delivery Expense ₱1,500. What is the Cash Over/Short result at replenishment?
Management increases the petty cash fund from ₱5,000 to ₱8,000 after a full replenishment. Which entry is correct?