Chapter -6

CASH
Introduction:-
Internal control is especially needed to prevent fraud and theft relating to cash transaction.
Cash is high in value, but light in weight and small in bulk - hence a fortune can be transported
in a briefcase. The risk of fraud and related theft of cash are increased by the fact that currency
bears as identifying data which can prove legal ownership.
Accountants define cash as money on deposit in banks and any items that a book will accept
for immediate deposit. These items includes not only coins and paper money. but also checks,
money orders, traveler's checks, and the charge slips signed by customers using bank credit
cards, such as VISA and master card.
Reporting cash in Balance sheet
The balance sheet indicates the amount of cash owned by the business at a particular date. Cash
is listed first in the balance sheet, because it represents resources that can be used immediately to
pay any type of obligation. The term liquid asset is used to describe assets that can convert
quickly into cash. In the current asset section of the balance sheet, assets are listed in the order of
their relative liquidity. Thus, cash being the ultimate in liquidity is listed first.
* Cash equivalents are short term investment and they are liquid.
Example- money market fund, Treasury bills and commercial paper
- These items are considered so similar to cash and many business call the first asset is cash &
cash equivalents. Not all short - term investments are viewed as cash equivalents. Investments in
stocks and bonds, for example, are not considered cash equivalents. Such investments appear in
the balance sheet as "Marketable securities," which usually is listed second among the current
assets.
* Evaluating Solvency
- Bankers, credit managers, and other creditors who study a balance sheet always are interested
in the amount of cash and cash equivalents as compared to other balance sheet items, such as
account payable. These users of a company's financial statements are interested in evaluating the
company solvency that is, its ability to pay its debts as they come due. They need to know the
amount of liquid resources on hand.
However, these users do not need such details as the number of separate bank accounts, or a
break down of the amount of cash on hand as compared to cash in bank, and amounts
temporarily invested in cash equivalents.
* Restricted cash
- Some bank accounts are restricted as their use, so they are not available to meet normal
operating needs of the business.
For example: - a bank account may contain cash specially remarked for the acquisition of
plant Assets.
Restricted bank accounts are not regarded as current assets if their balances are not available
for use in paying current liabilities. Therefore, "restricted cash balances" may be listed just below
the current asset section of the balance sheet in the section entitled long - term investments.
* The statement of cash flows
- This is a separate financial statement that summarizes all of the cash activities (receipts
disbursements) during the accounting period. Interpreting the statement of cash flows requires an
understanding of many types of business transactions, including the operating, investing, and
financing activities of large corporation.

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* Management Responsibilities relating to cash
Among the measures essential to the efficient management of cash are:
1. A cash budget (or forecast) of planned cash receipts, cash payments, and cash balances
scheduled month by month for year in advance.
2. An accounting system that assures prompt and accurate recording of cash receipts, cash
payments, and cash balances.
3. Internal control that will prevent or minimize losses from fraud or theft.
4. Policies that anticipate the need for borrowing & assure the available of a sufficient amount of
cash at all times to make necessary payment plus a reasonable balance of emergencies.
5. Policies that prevent unnecessarily large amounts of cash from being held idle in bank
accounts w/c produce title or no revenue.
- Internal control over cash is sometimes regarded of as a means of preventing fraud and theft. A
good system of internal control, will aid in achieving management's other objectives of
anticipating the need for borrowing, accurate accounting for cash transaction, and the
maintenance of adequate but not excessive cash balances.
6.1. Control over cash
- It is necessary to safeguard cash effectively because of the ease with which it can be
transferred. One of the major devices for maintaining control over cash is the bank account. To
obtain the most benefit from a bank account, all cash received must be deposited in the bank and
all payments must be made by checks drawn on the bank or from special cash funds. When such
a system is strictly followed, there is a double record of cash, one by the business and the other
by the bank.
- A bank may require a business to maintain in a bank account a minimum cash balance, called a
compensating balance. This requirement is generally imposed by the bank as a part of a loan
agreement or line of credit (an amount the bank is willing to lend.
- The forms used by a business in connection with a bank account are a signature card, deposit
ticket, check, and record of checks draw.
- Check issued to a creditor on account is usually accompanied by a notification of the specific
invoice that is being paid. The purpose of such notification, some times called a remittance
advice, is to make sure that proper credit is recorded in the accounts of the creditor.
* Need for cash controls
- Control over cash is important because:
1. Cash is the one asset that is readily convertible in to any other type of assets.
2. It is easily conceded and transported
3. It is highly desired
4. It affect large volume of transaction, because of these characteristics, cash is the asset most
susceptible to improper diversion and use. Therefore, to safeguard cash & assure the accuracy of
the accounting records for cash, effective internal control over cash is imperative.
- The major steps in establishing internal control over cash include the following
1. Separate the function of handing cash from the maintenance of accounting records. Employees
who handle cash should not have access to the accounting records, and accounting personnel
should not have access to cash.
2. Prepare a control listing of cash receipts at the time and place the money is received. For cash
sales, this listing may be a cash register tape, created by ringing up each sale on a cash register.
For checks received through the mail, a control listing of including checks should be prepared by
the employee assigned to open the mail.

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3. Require that all cash receipts be deposited daily in the bank.
4. Make all payments by check. The only exception should be for small payments to be made in
cash from a petty cash fund. Payments should never be made out of cash receipts. Checks
should never be drawn payable to cash. A check drawn to a named payee requires endorsement
by the payee on the back of the check before it can be cashed or deposited. This endorsement
provides permanent evidence identifying the person who received the funds. On the other hand, a
check payable to cash can be deposited or cashed by anyone.
5. Require that the validity and amount of every expenditure be verified before a check is issued
in payment.
6. Separate that the function of approving expenditures from the function of signing checks.
6.2. Internal control of cash receipts
- The bank reconciliation is an important part of the system of internal control over cash.
Other controls of cash receipts include the separation of responsibilities for recording cash
transactions from the handling of cash.
- The cash receipts may result from a variety of sources such as cash sales, collection on account
receivable, the receipt of interest, rents, and dividends, investment by owners, bank loans, and
proceeds from the sale of non current assets.
- The application of internal control principles to cash receipt transaction is as follows:-
Principle: - Application to cash receipts.
1. Establishment of responsibility -only designate personnel such as cashier
Should be authorized to handle or have access to
Cash receipt
2. Segregation of Duties - The duties of receiving cash, recording cash
receipt transaction, & having custody
of cash should be assigned to different individual.
3. Documentation procedures - Documents should include
A. Remittance advice for mall receipts
B. Cash receipt vouchers for over the counter
receipts.
C. Deposit slips for bank deposits
4. Physical control - company safes and bank vaults should be for the storage
areas should be limited to authorized personnel, cash
register should be used in executing over the
counter receipts
5. Independent internal - Daily cash counts of register receipts should be
verification made by internal auditor or any other authorized
personnel, daily comparison of total receipts
in the bank should be made by person other than
cashier.
6. Other controls - All personnel who handle cash receipts should be
bonded and be required to take valuation, cash
should be deposited in the bank in total daily.
* Cash change Fund
- Retail stores of other business that receive cash directly from customers must keep some
currency & coins on hand in order to make change. This cash is recorded in a cash change fund
account.

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- Accounting procedures in relation to change fund:
A- Check is drawn for the required amount
B. Journal entry is made to record the change fund establishment
DR. Cash on hand ----------------------xxx
CR. cash in Bank-----------------------xxx
- Note that no additional changes or credits to the cash on hand account are necessary unless the
amount of fund is increased or decreased. The total amount of cash received during the day is
deposited, and the original amount of the change fund is retained.

* Cash short and over

The amount of cash actually received during a day often does not agree with the record of cash
receipts. Whenever there is difference b/n the record and the actual cash and no error can be
found in the record, it must be assumed that the mistake occurred in making change. The cash
shortage or overage is recorded in an account entitled cash short & over.- The common method
for handling such mistake such as,
A. In the cash receipt journal a cash short & over column in to which all cash shortages are
entered, which means there is a debit balance at the end of fiscal period, so it is an expense and it
is miscellaneous administrative expense in the income statement.
Example - Assume that the total cash sales for the day amount to Birr 2,500 as recorded by the
cash registered, but the cash drawer then counted amounts of only Birr 2,480 for ABC Company
- This shows there is cash shortage of Birr 20 determined as follow:-
* Cash collections as per records birr--------------------2,500
* Actual cash available on hand birr---------------------2,480
Cash shortage --------------------------------------------- 20
Entry: DR cash ----------------------- 2,480
Cash short & over--------- 20
CR sales --------------------------- 2, 500
B. In the cash receipt journal as cash short & over column in to which all cash overage are
entered which means there is a credit balance at the end of the fiscal period, so it is revenue and
it is treated as other income sections of income statement.
Example - during January 2 through January 20 total cash sales amount to 5,600 birr as per the
cash register, but that the cash on hand was counted to be birr 5,700 & the overage of birr 100 is
computed as follow:-
Cash on hand ------------------------- birr 5,700
Cash as per records -----------------------5,600
Cash average --------------------------------100
Entry DR. Cash --------------------------- 5,700
CR. sales ----------------------------------- 5,600
Cash short & over--------------------- 100
6.3 Internal control of cash payment
- Payments may be made for a variety of reasons such as to pay expenses, liabilities and
dividends, or to purchase assets. It is generally recognized that the more effective internal control
over cash disbursements results when that payment are made by check, except for incidental
amounts that are paid out of petty cash (the operation of a petty cash fund is explained in the
following sections of this chapter)

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- Payments by check generally occur by only after specified control procedures have been
followed. In addition, the "paid" checks provide documentary proof of payments. The application
of the principles of internal control to cash disbursements is as follows:-
Principles Application to cash disbursement
1. Establishment of Responsibility - Only specified individual should
be authorized to sing checks
2. Segregation of duties - The duties of approving an item should be performed
by different individuals, check signors should not
record cash disbursement transaction
3. Documentation procedures- Pre-numbered checked should be used
and all checks in a series should be accounted for.
In recording each checks should be supported by an
approved invoice or other documentation.
- Any spoiled check should be marked "Void" and field
in sequence so that all numbers in the series
can be accounted.
- When a check is presented to a company official for
signature, it should be accompanied by approved
invoices and voucher showing that transactions
have been fully verified and that payment is verified
- When the check is signed, the supporting invoices &
vouchers should be perforated or stamped "paid" to
eliminate any possibility of their being presented
latter in support of another check.
4. Physical control - Blank checks should be stored in a safe with access
restricted to authorized personnel, check writer
should be used to imprint the amount of the check in
indelible ink
5. Independent internal - Each check should be compared with the approved
verification internal verification invoice before it is issued, bank
& book balance should be reconciled monthly.
6.4. Bank Reconciliation statement
- Each month, the depositor receives a bank statement from a bank. The statement shows:
1. Checks paid & other debits that reduced the balance in the depositor account.
2. Depositors & other creditors that increase the balance in the depositor's account
balance in the depositor account, and
3. The account balance after each day's transaction
- The bank includes with the bank statement memoranda explaining other debits (payments) and
credits (deposits or additions) made by the bank to depositor's account.
- A bank reconciliation is a schedule explaining any difference between the balance shown in
bank statement and the balance shown in the depositor's account. At the end of each month, the
depositor should prepare bank reconciliation to verity that these independent sets of records are
in agreement. For strong internal control, the employee who reconciles the bank statement
should not have any other responsibilities for cash.
- The balance shown in monthly bank seldom equals the balance appearing in the depositor's
accounting records. Certain transactions recorded by the bank. The most common examples are:

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 1. Outstanding check: - check issued & recorded by the company, but not yet presented to the
bank for payment.
2. Deposits in transit: - cash receipts by the depositors but which reached the bank too late to be
included in the bank statement for the current month.
- In addition, certain transaction appearing in the bank statement may not have been recorded by
the depositor. For example-
1. Service charge
2. Charge for depositing NSF check:- Not sufficient fund (NSF)-
- When checks are deposited, the bank increases (credits) the deposit's account. On occasion, one
of these checks may prove to be uncollectible, b/c the marker of the checks does not have
sufficient funds in his or her account. In such cases, the bank will reduce the deposit's account by
a debit memorandum (DM) for the amount of this uncollectible item & return the checks to the
depositor marked "NSF”.
3. Miscellaneous Bank charges & Credits.
Example - printing checks, handing collection of notes receivable, and processing NSF checks.
Note-. When all cash receipts are deposited in the bank and all payments are made by check, the
cash account is often called cash in bank. This account in the depositor's ledger is the reciprocal
of the account with the depositor in the bank's ledger. Cash in bank in the depositor's ledger is an
asset with a debit balance, and the account with the depositor in the bank's ledger is a liability
with a credit balance.
= The following procedures are used in finding the reconciling items& determining the adjusted
balance of cash in bank:
1. Individual deposits listed on the bank statement are compared with unrecorded deposits
appearing in the preceding reconciliation & with deposits receipts or other records of deposits.
Deposits not recorded by the bank are added to the balance according to the bank statement.
2. Paid checks are comparing with outstanding checks appearing on the preceding reconciliation
and with checks listed in the cash payments journal. Checks issued that have not been paid by the
bank are outstanding & are deducted from the balance according to the bank statement
3. Bank credit memorandums are traced to the cash receipts journal. Credit memorandums not
recorded in the cash receipts journal are added to the balance according to the depositor's
records.
4. Bank debit memorandums are traced to the cash payments journal. Debit memorandum not
recorded in cash payment journal are deducted from the balance according to the depositor's
records.
5. Make appropriate additions or deductions to correct any errors in the balance per bank
statement or the balance per depositor's records.
6. Determine the adjusted balance of the bank statement is equal to the adjusted balance in the
depositor's records.
7. Prepare journal entries to record any items in the bank reconciliation listed as adjustment to
the balance per the depositor's records.

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 * Form of bank Reconciliation
Cash balance according to bank statement ----------------------------------- $ xxx
Add: Additions by depositor not on bank statement ------ xxx
Bank errors -----------------------------------------------xxx ---------------xxx
Deduct: Deductions by depositor not on bank statement ---xxx
Bank error ----------------------------------------------xxx ----------- (xxx)
Adjusted balance -------------------------------------------------------------------$xxx
Cash balance according to depositor's record ----------------------------------$xxx
Add: Additions by bank not recorded by depositors ------- xxx
Depositor error --------------------------------------------xxx -------------xxx
Deduct: Deductions by bank not recorded by depositor ---xxx
Depositor errors ---------------------------------------xxx ------------ (xxx)
Adjusted balance -------------------------------------------------------------------$xxx
Example: Printer Corporation employs the voucher system in controlling expenditures and
disbursements. All cash receipts are deposited each Wednesday and Friday in a night depository
after banking hours. The data required to reconcile the bank statement as of April 30 have been
abstracted from various documents and records and are reproduced as follows. To facilitate
identification, the sources of the data are printed in capital letters.
CASH IN BANK ACCOUNT:
Balance as of April 1--------------------------------------------------------------birr 7,817.40
CASH RECEIPTS JOURNAL:
Total of cash in bank debit column for month of April ------------------------- 7,829.58
DUPLICATE DEPOSIT TICKETS:
Date and amount of each deposit in April:
Date Amount Date Amount Date Amount
April 1 848.63 April 10 971.71 April 22 897.34
3 914.04 15 957.85 24 942.71
8 840.50 17 946.74 29 510.06
CHECK REGISTER:
Number and amount of each check issued in April:
Check No. Amount Check No Amount Check No. Amount
740 287.50 747 Void 754 249.75
741 555.15 748 490.90 755 172.75
742 501.90 749 640.13 756 113.95
743 671.30 750 376.77 757 907.95
744 506.88 751 299.37 758 359.60
745 117.25 752 537.01 759 601.50
746 298.66 753 380.95 760 486.39
Total amount of checks issued in April -------------------------------------------- 8,555.66
APRIL BANK STATEMENT:
Balance as of April -------------------------------------------------------------------7,947.20
Deposits and other credits ---------------------------------------------------------- 10,652.77
Checks and other debits ------------------------------------------------------------ (8,232.21)
Balance as of April 30-------------------------------------------------------------- 10,367.76

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Date and amount of each deposit in April:
Date Amount Date Amount Date Amount
April 1 690.25 April 9 840.50 April 18 946.74
2 848.63 11 971.71 23 897.34
4 914.04 16 975.85 25 942.71
CHECKS ACCOMPANYING APRIL BANK STATEMENT:
Number and amount of each check, rearranged in numerical sequence:
Check No Amount Check No Amount Check No Amount
731 162.15 744 506.88 751 299.37
738 251.40 745 117.25 752 537.01
739 60.55 746 298.66 753 380.95
740 287.50 748 490.90 754 249.75
741 555.15 749 640.13 756 113.95
742 501.90 750 376.77 757 907.95
743 671.30 760 486.39
BANK MEMORANDUMS ACCOMPANYING APRIL BANK STATEMENT:
Date, description, and amount of each memorandum:
Date Description Amount
April 4 Bank credit memo for note collected: Principal 2,500.00
Interest 125.00
24 Bank debit memo for check returned b/c of insufficient funds 311.80
30 Bank debit memo for service charges 24.50

BANK RECONCILATION FOR PRECEDING MONTH:

Printer Corporation
Bank reconciliation
April 30, 19-
Balance per Bank--------------------------------------------------------------------- 7,947.20
Add: - Deposit for April 30, not recorded by bank------------------------------- 690.25
Deduct: - Outstanding check- Check no731---------------------162.15
736---------------------345.95
738---------------------251.40
739--------------------- 60.55 -------------- (820.05)
Adjusted Balance-------------------------------------------------------------------------- 7,817.40

Balance per depositors ------------------------------------------------------------------7,832.50

Deduct:- Service charge ---------------------------------------------------------------- 15.10
Adjusted Balance----------------------------------------------------------------------- 7,817.40
Instructors:
1. Prepare bank reconciliation as of April 30. if errors in recording deposits or checks are
discovered, assume that the errors were made by the company. Assume that all deposits
are from cash sales. All checks are in payment of vouchers.
2. Record the necessary entries in general journal form. The accounts have not been closed.
1.

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 Printer Corporation
Bank reconciliation
April 30, 19-
Balance per Bank---------------------------------------------------------------------10,367.76
Add:- Deposit for April 30, not recorded by bank------------------------------- 510.06
Deduct:- Outstanding check- Check no731---------------------345.95
755---------------------172.75
758---------------------359.60
759---------------------601.50 ------------ (1,479.80)
Adjusted Balance-------------------------------------------------------------------------- 9,398.02

Balance per depositors (7,817.4+7,829.58-8,555.66) --------------------------------7,091.32

Add:- Proceeds of note collected by bank include interest---------------2,625.00
Depositor error--------------------------------------------------------------18.00 2,643.00
Deduct:- Bank debt memo of NSF----------------------------------311.80
Bank debt memo of service charge---------------------- 24.50 (336.30)
Adjusted Balance---------------------------------------------------------------------------9,398.02

2. The entries for printer corporation, based on its bank reconciliation are as follows:-
April 30, Dr Cash in bank-----------------------------------------2,643
Cr Note receivable-------------------------------------------2,500
Interest income----------------------------------------------125
Account payable----------------------------------------------18
April 30, Dr Account receivable-----------------------------------311.80
Miscellaneous Administrative expense--------------24.50
Cr Cash in bank-------------------------------------------------336.30

6.5 The Voucher System:-

A Voucher system is made up of records, methods, and procedures used in proving and
recording liabilities and in making and recording cash payments. A voucher systems uses (1)
Vouchers, (2) a voucher register, (3) a file for unpaid voucher,(4) a check register, and (5) a file
for paid vouchers.
Voucher means any document that serves as proof of authority to pay cash, such as an invoice
approved for payment or as evidence that cash has been paid, such as a canceled check. A
voucher is a special form on which is recorded relevant data about a liability and the details of its
payment. The basic idea of this system is that every transaction that will result in cash
disbursement must be verified, approved in writing, and recorded before a check is issued. A
voucher is a written authorization form prepared for each expenditure. The following steps are
invoiced under the voucher system
1- preparation of a voucher
2- approval of the voucher
3- recording the voucher
4- filing the unpaid voucher
5- paying the voucher
1- Preparing the voucher: - A voucher form is used for all expenditures, except those from
petty cash. A voucher is normally prepared in the accounting department by an

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 accounting payable clerk and is based on invoice or other supporting documents. The
following comparisons and verifications have been completed and noted on the invoice:
1- Comparison of the invoice with a copy of the purchase order to verify quantities,
prices, and terms.
2- Comparison of the invoice with the receiving report to verify receipt of the items
billed.
3- Verification of the arithmetical accuracy of the invoice.
2- Approval of the voucher:- After the voucher has been prepared, the invoice or
Other supporting evidence is attached to the voucher. The voucher is then given to the
proper official for approved.
3- Recording of the voucher: - After a voucher has been approved, it recorded as credit to
account payable and a debit to the appropriate account or accounts in a voucher register.
4- Filing the unpaid voucher: - After the voucher is recorded, it is filed by date of payment
in an unpaid voucher file (sometime called a ticker file). This method of filling facilitates
the payment of bills with in due date.
5- Paying the voucher: - On the due date, the voucher is removed from the tickler file and
forwarded to cash disbursements section. The employee prepares (but does not sign) the
check, insert relevant data in the payment summary of the voucher and transfers the
unsigned check and voucher to the finance department for signature. After signing the
check signor then:
1- Mails the check to the payee
2- Stamps (or marks) the voucher and supporting documents “paid” to prevent them
from being submitted again for payment.
3- Sends the “Paid” voucher and a copy of the check to accounting division
Note:- A voucher system not only provides effective controls over cash payments but also aids
management in fulfilling its responsibilities.

6.6 Purchase Discounts:-

In earlier chapters, purchases of merchandise were recorded at the invoice price, and cash
discounts taken were credited to the purchases discounts account at the time of payment. There
are two opposing views on how discounts taken should be reported in the income statement.
1- The most widely accepted view is that purchase discount should be reported as deduction
from purchases.
2- The other view is reported as “other income”.
A major disadvantage of recording purchases at the invoice price and recognizing purchases
discounts at the time of payment is that this method does not measure the cost of failing to take
discounts. Well-managed enterprises maintain enough cash to pay within the discount period all
invoices subject to a discount, and view the failure to take discounts as inefficiency. To measure
the cost of this inefficiency, purchases invoices may be recorded at the net amount, assuming
that all discounts will be taken. Any discounts not taken are then recorded in an expense account
called Discounts loss. This method measures the cost of failure to take cash discounts and gives
management an opportunity to take remedial action.
For example:- May 5, merchandise purchased from close co. 6000, terms 2/10, n/30
Dr Purchase-------------------------6,000
Cr A/P-------------------------------------6,000

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On May 20, paid merchandise purchased from close co.
Dr A/P------------------------------------5,880
Discounts lost------------------------ 120
Cr cash in bank------------------------------6,000
Note:- when this method is used with the voucher system, all vouchers are prepared and
recorded at the net amount. Any discount lost is noted on the related voucher and recorded in a
special column in the check register when the voucher is paid.
 Another advantage of this treatment of purchases discounts is that all
merchandise purchased is recorded initially at the net price, and hence no later
adjustments to cost are necessary. An objection, however, is that the amount
reported as accounts payable in the balance sheet may be less than the amount
needed to discharge the liability.
6.7 Petty Cash:-
Adequate internal control over cash requires that all cash received be deposited in the bank and
all disbursements be made by check. However, it is convenient to have small amount of cash on
hand with which to make some minor expenditure. Example of such is postage due, taxi fares,
small emergency purchase of office supplies.
Using checks to pay such small amounts is both impractical and nuisance. A common way of
handling such payments, while maintaining satisfactory control, is to use petty cash fund. Petty
cash fund is a cash fund used to pay relatively small amounts. The operations of a petty cash
fund, often called an imp rest system involves:-
A- Establishing the fund
B- Making payment from the fund, and
C- Replenishing the fund
A-Establishing the fund:- At this stage
i- The size of the fund is determined
ii- A petty cash custodian is appointed who will be responsible for the fund
iii- A check payable to the petty cash custodian is issued for the stipulated amount
iv- An entry to record the withdrawal of money from a bank is recorded
B- Making payment for the fund:- as cash payments are made from the petty cash box, the
custodian of the fund is required to fill out a petty cash receipt or voucher for each expenditure.
You should note that the signature of both the custodian and the individual receiving payment
are required on the receipt. The receipts (petty cash voucher) are kept in the petty cash box until
the fund is replenished. As a result, the sum of the petty cash receipts and money in the fund
should be equal the established total at all times. No entry is made when a petty cash payment is
made. The accounting effects of each payment are recognizing when the fund is replenished.
C- Replenishing the fund:- To replenishing a petty cash fund means to replace the amount of
money that has been spent, thus restoring the cash to its original amount. Steps in replenishment
include:
1- The petty cash custodian prepares summary of the payments that have been made from
the petty cash fund.
2- The summary, supported by petty cash receipts and other supporting documents, is sent to
authorized personnel for approval
3- All supporting documentation is stamped “paid” so that it can not be submitted again for
payment.
4- A check is drawn payable to petty cash for the exact amount of the expenditure

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 5- An entry is made
Note:- the following important points
 Expense accounts are debited each time the fund is replenished. The petty cash
account is not affected by the reimbursement entry, thus, the entry does not
change the balance in the fund.
 The petty cash fund is usually replenished at the end of an accounting period,
even though the fund is not running low, so that all vouchers in the fund are
charged to expense accounts before these accounts are closed and financial
statement prepared.
 It may be necessary in replenishing a petty cash to recognize a cash shortage or
overages.
Example:- Assume on January 1, 2004 Selam bus line established a petty cash fund for birr 400.
At the end of the month count of cash on hand indicate that birr 81.60 cash remained in the fund.
Sorting of petty cash voucher disclosed that the following expenditures were made from the
fund.
Postage expenses…………………………………139.60
Office supplies…………………………………… 72.75
Miscellaneous expenses…………………………. 104.05
Total……………………………………………… 316.40
On January 31, 2004 the fund was replenished and raised to birr 500
Required:- prepare the necessary entries to record the petty cash transaction for the month
ended January 31, 2004
Solution:-
January 1, 2004 Dr petty cash………………………400
Cr cash in bank………………………400
Petty cash original…………………………………..400.00
Total petty cash payment……………………………316.40
Cash that must be on hand……………………………83.60
Cash actually on hand………………………………..81.60
Cash shortage………………………………………….2.00

January 31, 2004 Dr Postage expenses------------------------139.60

Office supplies--------------------------- 72.75
Miscellaneous expenses----------------104.05
Cash short & over-------------------------2.00
Petty cash---------------------------------100
Cr cash in bank-------------------------------------418.40

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