Published by: Dikshya
Published date: 21 Jul 2023
Petty cash refers to a small amount of cash that a business keeps on hand to cover minor expenses and day-to-day miscellaneous expenditures. These expenses are usually of small value and occur frequently, such as buying office supplies, reimbursing small travel expenses, or paying for minor repairs. The purpose of petty cash is to facilitate the quick and convenient payment of such expenses without the need for formal requisitions and approvals for each transaction.
Establishment of Petty Cash Fund: To establish a petty cash fund, a company typically follows these steps:
Designate a custodian: A responsible employee is appointed as the custodian of the petty cash fund. The custodian is entrusted with the safekeeping and disbursement of the petty cash.
Funding the petty cash: The company sets an initial amount of cash, known as the "imprest amount," which is determined based on the expected frequency and amount of petty cash expenditures. The imprest amount is periodically replenished to maintain the original fund balance.
Recording transactions: The custodian records each petty cash disbursement in a petty cash log, providing details of the date, description of the expense, and amount.
Reconciliation and replenishment: Periodically, the petty cash custodian reconciles the remaining cash balance in the fund and requests reimbursement for the total of the documented expenses. The replenishment is made by reimbursing the custodian for the documented expenses, restoring the petty cash fund to its original imprest amount.
Cash and cash equivalents are important items in a company's financial statements, particularly in the balance sheet. The balance sheet provides a snapshot of a company's financial position at a specific point in time and is divided into two main sections: assets and liabilities. Within the assets section, cash and cash equivalents are categorized under current assets due to their high liquidity and short-term nature.
Here's a complete note on the balance sheet presentation of cash and cash equivalents:
1. Current Assets: Under the current assets section of the balance sheet, cash and cash equivalents are typically the first items listed. They are presented in order of liquidity, meaning the most liquid assets come first.
2. Cash: The first component presented under cash and cash equivalents is "Cash." This refers to the physical currency the company holds in its possession. It includes coins, notes, and other forms of currency that the company uses for day-to-day transactions.
3. Cash in Bank Accounts: Following "Cash," the balance sheet includes the amount of cash held in various bank accounts. These accounts include checking accounts, savings accounts, and money market accounts. Cash in bank accounts is also highly liquid and readily available for use by the company.
4. Petty Cash: "Petty Cash" is a separate line item representing a small amount of cash that the company keeps on hand to cover minor expenses and day-to-day miscellaneous expenditures.
5. Cash Equivalents: The next line item is "Cash Equivalents." Cash equivalents are short-term, highly liquid investments that are easily convertible into known amounts of cash and have original maturities of three months or less from the date of acquisition. Examples of cash equivalents include Treasury bills, money market funds, and short-term government or corporate bonds.
6. Bank Overdrafts (if applicable): If the company has bank overdrafts with credit balances, these are presented as a negative cash balance under "Bank Overdrafts." In this case, the net cash position is adjusted to account for the negative balance.
7. Total Cash and Cash Equivalents: At the end of the "Cash and Cash Equivalents" section, a subtotal for "Total Cash and Cash Equivalents" is presented. This represents the sum of all the components listed above and provides the total amount of cash and cash equivalents the company holds at the reporting date.
Proper presentation of cash and cash equivalents in the balance sheet is essential as it allows investors, creditors, and other stakeholders to assess the company's liquidity position. The availability of sufficient cash and cash equivalents ensures that the company can meet its short-term financial obligations and maintain its operations smoothly. Additionally, it signals financial strength and stability, which are crucial considerations for potential investors and lenders.
An internal control system is a set of policies, procedures, and practices implemented within an organization to safeguard its assets, ensure the accuracy and reliability of financial reporting, promote operational efficiency, and comply with applicable laws and regulations. It is designed to provide reasonable assurance that the organization's objectives will be achieved effectively and efficiently. The internal control system helps to minimize risks, prevent fraud, and maintain the integrity of the organization's operations. Here are the key components of an internal control system:
Control Environment: The control environment sets the tone for the organization's internal control system. It includes the overall attitude, awareness, and actions of management and employees towards internal controls. A strong control environment fosters integrity, ethics, and accountability throughout the organization.
Risk Assessment: A proper risk assessment identifies and analyzes potential risks that may hinder the achievement of the organization's objectives. This process involves understanding internal and external factors, evaluating vulnerabilities, and developing strategies to mitigate risks effectively.
Control Activities: Control activities are the specific policies, procedures, and practices that are put in place to address the identified risks. These may include segregation of duties, authorization procedures, physical safeguards, IT controls, and performance reviews, among others.
Information and Communication: An effective internal control system relies on timely and accurate information. This component ensures that relevant information is identified, captured, and communicated to the right people at the right time to support decision-making and control processes.
Monitoring: Monitoring is an ongoing process that assesses the effectiveness of the internal control system. It involves regular evaluation, testing, and reporting on the controls to ensure they are operating as intended. Any weaknesses or deficiencies discovered during monitoring are addressed promptly.
Segregation of Duties: This principle involves dividing responsibilities among different individuals to reduce the risk of errors or fraud. For example, the person who authorizes a transaction should not be the same person who processes or records it.
Authorization and Approval: All significant transactions should be authorized and approved by appropriate personnel, following established procedures and limits.
Physical Controls: Physical controls protect tangible assets from theft, damage, or misuse. Examples include locked storage areas, access controls, and security measures.
IT Controls: Information technology controls safeguard data and ensure the reliability of information systems. These controls include password protections, firewalls, data backups, and access controls.
Documentation and Recordkeeping: Proper documentation and recordkeeping ensure that transactions are adequately recorded and can be traced and verified.
The internal control system is not a one-time process; it requires continuous monitoring and improvement to adapt to changing circumstances, risks, and business needs. Internal control assessments may be performed by internal auditors or external auditors to provide independent evaluations of the system's effectiveness.
Overall, a well-designed and properly implemented internal control system contributes to the efficiency of operations, reliability of financial reporting, and compliance with laws and regulations, providing stakeholders with confidence in the organization's governance and management processes.