Learning Outcomes
After completing this article, you will be able to describe the petty cash imprest system, explain how petty cash controls work, document and authorise petty cash claims, and perform petty cash reconciliations. You will understand key terms and be able to record petty cash in the accounting system for the ACCA FA1 syllabus.
ACCA Recording Financial Transactions (FA1) Syllabus
For ACCA Recording Financial Transactions (FA1), you are required to understand how petty cash is managed and controlled within a business. This article covers:
- The function and operation of the petty cash imprest system.
- The preparation and authorisation of petty cash vouchers.
- Controls over petty cash, including reconciliation procedures.
- Recording and analysing petty cash receipts and payments in the accounting system.
- Identifying and resolving petty cash discrepancies.
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- What is the main control feature of the imprest petty cash system?
- Name two types of documentation required to support a petty cash reimbursement.
- Briefly outline how to reconcile the petty cash balance at any point.
- If vouchers plus the cash on hand do not match the imprest amount, what might this indicate?
Introduction
Petty cash is used to pay for small business expenses, such as office refreshments, travel fares, or postage. The imprest petty cash system sets a fixed float for these minor costs, with strict control and regular reconciliation to prevent misuse or errors. ACCA candidates must understand the process of recording, authorising, and controlling petty cash transactions, as well as the correct way to reconcile and account for petty cash in line with exam requirements.
Key Term: petty cash
Petty cash is a small amount of cash kept on hand for minor business expenses that do not justify payment by cheque or bank transfer.Key Term: imprest system
The imprest system is a method where petty cash is maintained at a fixed amount, with any expenses periodically reimbursed to restore this original float.
The Petty Cash Imprest System
Purpose and Operation
The petty cash imprest system is designed to control, record, and limit cash payments for minor business expenses. A set amount—known as the imprest amount or float—is provided to the petty cashier. Only payments with valid documentation and authorisation are permitted. Regular checks help detect errors or fraud.
Key Term: petty cash float
The petty cash float is the fixed amount of cash allocated for petty cash expenses in a given period.
Authorisation and Documentation
All petty cash payments must be supported by an authorised petty cash voucher and, where possible, an original receipt. This ensures each payment is valid and approved.
Key Term: petty cash voucher
A petty cash voucher is a form completed to document and authorise each payment from petty cash, including the amount, reason, supporting receipt, and necessary signatures.
Controls Over Petty Cash
Strong control over petty cash is needed to reduce the risk of theft or errors. Effective controls include:
- Keeping vouchers and cash locked and accessible only to the designated petty cashier.
- Sequentially numbering all vouchers for tracking.
- Always matching every claim to supporting receipts or tickets.
- Enforcing clear authorisation limits for individual claims.
- Restricting petty cash use to appropriate expense types (e.g. not for large or personal expenses).
Worked Example 1.1
A business has a petty cash imprest float of $100. Over the week, the following approved and documented expenses were paid:
- Taxi fare: $12.50
- Office tea and coffee: $4.80
- Stamps: $7.20
At week’s end, what should the petty cash reconciliation show?
Answer:
Total payments = $24.50. Expected cash remaining = $100.00 - $24.50 = $75.50. The sum of vouchers ($24.50) plus remaining cash ($75.50) should equal the original float of $100.
Petty Cash Reconciliation Procedures
At any time, the total of unspent petty cash plus the value of reimbursed vouchers must equal the original imprest float. Regular reconciliation is a key control. The process involves:
- Counting the actual cash in the box.
- Summing all petty cash vouchers held since the last reimbursement.
- Verifying that (cash + vouchers) equals the imprest amount.
- Investigating and resolving any discrepancies immediately.
Key Term: petty cash reconciliation
Petty cash reconciliation is the process of confirming that the cash on hand plus vouchers equals the established petty cash float.
Worked Example 1.2
At the end of a period, the petty cash float is set at $200. The cashier counts $42.40 in cash and has vouchers totalling $157.60. How much will be reimbursed by the business, and is the float balanced?
Answer:
Cash + vouchers = $42.40 + $157.60 = $200.00. The reimbursement should be $157.60 to restore the float to $200.
Exam Warning
Discrepancies between the sum of cash and vouchers and the imprest float indicate errors, missing vouchers, unrecorded expenses, or possible theft. Always follow up any differences promptly and do not ignore small variances.
Recording Petty Cash in the Accounting System
Petty cash transactions must be accurately recorded. When topping up the float, a business records a payment to petty cash from the bank account. At period end, totals of vouchers for each expense type are identified for posting to the relevant expense and tax accounts in the general ledger.
Worked Example 1.3
A business reimburses the petty cash float by $85. Petty cash vouchers show: postage $20, refreshments $15, taxi fare $40, all with valid receipts. How should these items be posted?
Answer:
The reimbursement is recorded as:
- Debit: Postage Expense $20
- Debit: Refreshments Expense $15
- Debit: Taxi Expense $40
- Credit: Bank $85 (to reflect the outflow of funds)
Reconciling and Investigating Discrepancies
If the cash plus vouchers does not match the imprest amount, possible reasons include:
- Missing vouchers or unrecorded expenses.
- Mistakes in cash counting or voucher amounts.
- Fraud or theft. Prompt investigation is essential to maintain integrity.
Worked Example 1.4
A business’s petty cash float is $75. On review, vouchers total $60, but cash on hand is only $13. What does this reveal, and what should be done?
Answer:
$60 (vouchers) + $13 (cash) = $73, which is $2 less than the float. The shortfall suggests an error or a possible loss. The discrepancy should be investigated, and action taken to record/adjust for the difference.
Summary
The petty cash imprest system allows small, regular expenses to be managed and controlled. Strong documentation, authorisation, and regular reconciliation ensure accuracy and security. Maintaining correct records and promptly addressing discrepancies protects the business against loss.
Key Point Checklist
This article has covered the following key knowledge points:
- Explain the operation and purpose of the petty cash imprest system.
- Identify key controls and authorisation requirements over petty cash.
- Recognise the importance of sequentially numbered petty cash vouchers and supporting receipts.
- Carry out petty cash reconciliations to maintain control.
- Record petty cash transactions in the accounting system and analyse reimbursements.
- Know how to investigate discrepancies in petty cash.
Key Terms and Concepts
- petty cash
- imprest system
- petty cash float
- petty cash voucher
- petty cash reconciliation