Petty cash uses a controlled small fund to pay minor business expenses. The reimbursement is usually the amount spent, rather than the full fund amount. That distinction makes the calculation much easier.
Petty cash: set the fund level
Suppose a business establishes a petty-cash fund of PKR 10,000. This is its imprest. The custodian uses the fund for permitted small payments and keeps a voucher or receipt for each one.
The policy should define what can be paid, who authorises a payment and how evidence is retained. A neat cash book cannot replace a missing approval or receipt. In practice, cash safeguarding matters as much as the arithmetic.
Record the spending
| Payment | PKR |
|---|---|
| Local delivery charge | 1,200 |
| Office refreshments | 800 |
| Small stationery purchase | 1,500 |
| Total authorised spending | 3,500 |
If nothing else has happened, physical cash should be PKR 6,500. Cash of 6,500 plus vouchers of 3,500 equals the PKR 10,000 fund. A reimbursement of PKR 3,500 restores the physical cash to PKR 10,000.
Do not request another PKR 10,000 simply because that is the imprest. Adding that amount to the remaining PKR 6,500 would leave too much cash in the fund.
Distinguish expenses from transfers
The delivery, refreshments and stationery are classified according to their nature. The transfer from bank to replenish petty cash is a movement between cash holdings. Avoid recognising the same expenses once when the vouchers are recorded and again when the fund is reimbursed.
The precise entries depend on how the bookkeeping system records petty-cash spending and reimbursement. In an exam, follow the stated method. In either method, the final records should reflect the expenses once and the actual cash movements correctly.
What if the fund changes?
If management increases the fund from PKR 10,000 to PKR 12,000, restoring it after the same PKR 3,500 spending requires PKR 5,500: PKR 3,500 to replace spending plus PKR 2,000 to raise the fund level.
Explain both parts. Calling the whole PKR 5,500 “expenses” would be wrong: the extra PKR 2,000 is additional cash retained in the fund.
A short control check
Now suppose physical cash is PKR 6,200 but authorised vouchers still total PKR 3,500. There is a PKR 300 unexplained difference. Recount cash, check voucher totals and review transactions before deciding how to resolve it. A balancing figure is not an investigation.
For more bookkeeping practice, explore the FA1 course. Check the current FA1 syllabus when deciding how much detail to cover in your revision.
Use a full reimbursement calculation
Consider a fund with an agreed level of PKR 8,000. During the period, delivery costs are PKR 950, stationery is PKR 1,250, travel is PKR 600 and refreshments are PKR 400. Authorised payments total PKR 3,200. With no other cash movement or shortage, the closing cash is PKR 4,800. Reimbursement of PKR 3,200 restores the fund to PKR 8,000.
Now suppose the authorised fund level is reduced to PKR 7,000 at the same reimbursement date. Only PKR 2,200 needs to be added to the PKR 4,800 remaining cash. The expense total is still PKR 3,200. The change in fund size explains why the bank transfer differs from the spending. Keep three amounts separate: expenditure, remaining cash and the new approved fund level.
Journal entries when spending is recorded immediately
Under a system that records each payment when it occurs, establishing a PKR 8,000 fund is debit petty cash and credit bank for PKR 8,000. A PKR 950 delivery payment is debit delivery expense and credit petty cash. The other payments follow the same principle with the correct expense account. After total spending of PKR 3,200, petty cash has a debit balance of PKR 4,800.
Replenishing the unchanged fund is debit petty cash and credit bank for PKR 3,200. No new expense arises from this transfer because the payments were already recognised. If the fund is reduced to PKR 7,000, the replenishment in this example is PKR 2,200. The final petty-cash asset then agrees with the newly authorised amount.
Journal entries when vouchers are recorded at replenishment
Some systems keep the imprest account at its authorised level and recognise the expenditure when the vouchers are reimbursed. In that arrangement, replenishment for the same spending can debit delivery expense 950, stationery expense 1,250, travel expense 600 and refreshments expense 400, with a credit to bank of PKR 3,200. The petty-cash control account remains at the established fund amount.
These approaches should not be mixed. Recording each voucher as an expense and then debiting the expense again at reimbursement doubles expenditure. Read the method supplied in the question. At a reporting date, ensure unrecorded spending is dealt with appropriately so that the cash asset and expenses reflect the actual position rather than an outdated fund figure.
Make the voucher useful to a reviewer
A petty-cash voucher should identify the date, amount, reason, recipient and evidence supporting the payment. A reference number helps track it without relying on memory. The reviewer should be able to tell what was bought, why it was a business payment and who authorised it. A signature alone is less helpful than a clear explanation attached to a receipt.
If the receipt is missing, follow the business’s exception process rather than treating the payment as automatically valid. Document the explanation and obtain the required approval. The arithmetic may still add up while the supporting evidence is weak. Cash accountability includes both a correct total and a defensible explanation of each payment.
Segregate custody and review where possible
The person holding cash should not be the only person authorising reimbursement and reviewing the count. An independent check of cash and vouchers can reveal missing documentation, personal purchases or an incorrect total. In a small business with few staff, an owner or manager can perform the periodic review and sign off the reconciliation.
Store cash securely and restrict access to the custodian. Avoid mixing personal money with the fund, because it obscures the amount that belongs to the business. Set a limit for individual payments and define which expenses should instead be processed through the normal supplier or payroll system. Petty cash is for suitable small transactions, not a way to bypass approval procedures.
Investigate a shortage step by step
If the count is PKR 4,650 when PKR 4,800 is expected, there is a PKR 150 shortage. Recount denominations, verify voucher additions and confirm that any reimbursement or returned advance has been included. Check whether a payment was made but its voucher was misplaced. Keep the investigation separate from the decision about the eventual accounting treatment.
A shortage is not automatically theft, and it is not automatically a valid expense. The cause may be a counting error, incorrect change or omitted evidence. Report unresolved differences through the established process and retain the review trail. For exam questions, use only the facts provided and distinguish identified expenditure from an unexplained cash difference.
Test your understanding without a calculator shortcut
Write the relationship as remaining cash plus supported payments equals the original fund, assuming no changes or discrepancies. Then ask what cash must be added to reach the approved closing fund. Explain why an increase in the fund is a cash allocation and why reimbursement does not necessarily equal an expense entry. This reasoning works even when the question changes the fund size or recording method.
Frequently asked questions
Is the imprest amount the same as the reimbursement?
No. The imprest is the agreed fund level. The reimbursement normally replaces the authorised spending needed to restore that level.
What if petty cash plus vouchers does not equal the imprest?
Investigate missing vouchers, recording errors, unauthorised payments or a cash shortage. Do not invent an expense to make the totals agree.