 Hello and welcome to the session in which we'll discuss the topic of petty cash. This topic is covered in intermediate accounting as well as the CPA exam. Whether you are an accounting student or a CPA candidate, I strongly suggest you take a look at my website, farhatlectures.com. I don't replace your CPA review course. I'm a useful addition to your CPA review course. I explain the material differently. I'll give you the theory behind the concept, which in turn will help you understand the material better. Your risk with me is one month of subscription. You give it a try. You like it. You keep it. Otherwise, you cancel. Your potential gain is adding 10 to 15 points to your CPA exam score. If not for anything, take a look at my website to find out how well or not well your university doing on the CPA exam. I do have resources for other college courses such as intermediate accounting, advanced accounting, taxation, governmental, basic accounting, so on and so forth. My supplemental CPA review courses are aligned with your Becker, Wiley, Roger, and Glean, so it's very easy to go back and forth between my material and your CPA review course. Also, you'll have access to all the AI CPA multiple choice questions over the past 10 years. Approximately 1,500 questions with detailed solution. If you haven't connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation like this recording, share it with other connect with me on Instagram, Facebook, Twitter, and Reddit. So it is petty cash. Well, petty cash is actual cash used for small expenses. Now, why do we pay with cash? Now, in general, you should never pay in cash. We should always have a check for cash disbursement. And the reason is simple. A check will keep a record of how much, when, who, and how we paid. So it gives you answers to all that you need to know for an audit. But for convenience and for expediency and for small expenditure, we might pay in a form of a check and some vendors only accept a check. For example, if you buy from your local restaurant, and if you're buying meals for your, for your employees, they're working overtime, they're in lunch, well, maybe the restaurant only takes cash, you cannot buy them, you cannot give them a check. Or if something happened, you want to buy supplies real quick and you don't want to go through the check, check procedures, you don't want to go through all the internal control to issue a check, you'll have some cash on hand. So the company establishes this petty cash fund for those type of expenses. And they will designate what we call a cash custodian, a person who's in charge of that cash. And that person will not disperse any cash without a valid receipt. And that receipt has to, has to have a business use. So the custodian will make a list of every time they issue money for an expense, expense to expense one, and they will have the dollar amount, and they will add this amount, and they'll have a receipt for that. At all time, the receipts plus the cash on hand equal to the petty cash fund. So once that petty cash fund is established, it has to be that certain amount, it does not change. This is called impressed fund. It means the, the amount is always the same. The amount equal to the receipt plus the cash. So if I don't have the cash, I must have a receipt to support my cash disbursement. Now any difference, and sometimes differences could happen where we could have more cash or less cash than the petty cash fund. I mean by cash, cash plus receipts, they could be more or less simply put, we could have made a mistake, disperse more money, or when we return the change to someone, we return the wrong change, or the other person gave us the wrong change, we might have more cash or less cash than the petty cash fund. If that's the case, we're going to put them in an account called cash over and cash short, cash over slash short, and this account is considered either a revenue or other revenue or other expenses. It should be a very small amount anyway. So once, once we run low on cash, receipts are submitted to the controller or to the AP for reimbursement and the journal entry purposes. So this is what happened once, once the, once the custodian fields were down to like $50. Okay. Now it's time to submit this list of expenses plus the receipts, ask for reimbursement so they can, they can give us the check and we move on with our life. And the petty cash fund can be increased or decreased depending on what we need to know. The best way to illustrate this petty cash is to actually work an example. Now on my forehead lectures.com, I have multiple choice exercises. You can go there, but I'm going to work an example now to show you how this all fits together. So let's work an example to illustrate this concept. So the company decided to establish a petty cash fund for $500 simply put the company wants to have on hand in one of their offices in New York City. Let's just, for example, $500. So they will send the check to that office and they will tell the cash custodian to go to the bank and cash the check. The entry will be debit, petty cash, credit cash for $500. They're both assets simply put, we took the cash from the bank account and we kept it at the office. Now we have $500 and actual cash and what I mean by actual cash is actual cash, just cash as is in this picture. Once we established this fund, we keep it at $500 until we decided to reduce it. Now, again, we assign a custodian and the custodian will only give money out with a receipt and a valid business purpose. So the custodian made the following disbursement for business purposes for a particular month. Supply $75 meal expense, $145 cleaning expense and the custodian counted the cash on hand and they had $40 on hand. Well, hold on a second. Let's count this. We have $75. We paid $75 for the supplies. We paid $145 for the meal and the employees were working overtime and we had, we had to call someone to do a quick cleanup. There was a spill at the office. Therefore, if we take $75 plus $145 plus $235, that's equal to $455 and we still have $40 in cash on hand, $220, $40, that's equal to $495. Hold on a second. We're supposed to have $500. Well, we don't. We are short $5. Why we are short? I don't know. Maybe we tipped the cleaning person that came to the cleanup or we tipped the delivery person that delivered the food. I don't know. There was some problem that we are cash short of $5. What we do is we submit this report to the controller or to the AP to reimburse us because we're only down to $40 in cash. At this point, the AP or the controller will make the following entry, supplies expense, meal expense, cleaning expense, cash over and cash short. Now this is an expense because it's $5. Then they will give us a check for $460. We're going to go ahead, cash the check, bring $460 back to the office and we have $40 already. Guess what? We're back to $500, what we started with. Now the management decided that the Pity Cash Fund is excessive for this company and management decided to reduce it to $350. So rather than having $500 as a Pity Cash Fund, we're going to bring it down to $350. What does that mean? It means we need to reduce it by $150. Simply put, we ask the cash historian to go to the bank, deposit $150 in our business bank account and we'll make the following entry. We debit cash $150, credit Pity Cash $150. Now the Pity Cash Fund is at $350. We started with $500. We decided to reduce it by $150. The Pity Cash is $350. The best way to learn this concept is to go to my website, work exercises, work multiple choice questions. At the end of this recording, I'm going to remind you whether you are an accounting student or a CPA candidate to take a look at my website marhatlectures.com. I don't replace your CPA review course. I can help you do better by explaining the material, by giving you additional resources. The CPA exam is worth it. Your accounting career is worth it. Invest in yourself, invest in your career. Good luck, study hard and of course, stay safe.