To start a petty cash fund you need to open a general ledger account entitled Petty Cash. This will be an additional cash account that you could report either separately or have its balance included with other cash accounts when preparing a balance sheet.
Next you need to write a check for the amount that you believe is the amount needed for making small payments in your office. Let's assume that the amount will be $100. When processing the check you would indicate the account code for Petty Cash, so that the new account will be debited for $100.
You also need to designate one person to be the petty cash custodian. This person's name will be the payee of the $100 check. This person will then be accountable for the $100. At all times the custodian must have a combination of cash and petty cash receipts which add up to $100.
Just prior to issuing financial statements, the petty cash custodian should request cash for the petty cash receipts. This is known as replenishing the petty cash fund. This allows for the expenses to be included in the income statement and will result in the custodian having the $100 of cash that will be reported in the balance sheet. The custodian can also replenish the petty cash fund when there is little cash on hand due to a large amount of petty cash payments.
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