 In this discussion we will discuss the discussion question of what is petty cash and its purpose. So petty cash is going to be the concept of us setting up a cash fund, a petty cash fund for those minor purchases that we might want to make with cash. Now remember this is going to be a departure from the normal internal controls. The normal internal controls are going to say we don't pay for things with cash. Cash doesn't give us an audit trail and we want to have an audit trail not and most people when we say that they're an audit trail they might say well I don't want an audit trail specific for the IRS to you know dig into my information but note that an audit trail is going to give us the information to go back and figure out what we have spent money on. So from a bookkeeping standpoint we typically do want an audit trail so we can be transparent to what we are doing and make our financial statements as accurate as possible and try to reduce theft and having good internal controls. So the way we do that one of the ways we do that is we don't pay for things with cash because we like the idea of the bank account having recording the information that's going in and out of the account and we could do that by electronic transfer or with a check then we have a good idea of who we paid and we can go back and see that if someone asked us whether we paid them or not we can easily go back and and find that said hey the money went out of the bank account here here it is going specifically to you written by the cancelled check or the electronic transfer here so we typically want to write a check as part of our internal controls but for those type of purchases that it's convenient to use cash and we have a small amount of transaction therefore it being in material we might want to use a petty cash fund so that's going to be the concept of it when we set up the petty cash fund our goal then is going to have it to be big enough to cover any kind of small type of transactions that would be convenient to do the petty cash funds and not too large to like incur any risk of people wanting to heighten risk of theft or people trying to rob us or an employee wanting to steal the cash because of the amount there so we want to have an even level of cash that it's enough to pay what we need to pay for not too much to incur any added risk or problem or too much added risk or problem due to having the cash on the site so once we set it up we of course want to have the petty cash in some type of lockbox we will typically set up the petty cash by just taking it out of the bank and we're going to credit the bank and debit the petty cash fund for some type of amount and then what we're going to do is spend anything on the petty cash we need to during the month or whatever time period we are covering and at the end of that time period then we'll record the transaction and of course when we do this we're going to making receipts we're going to get receipts over right down what we spent the cash on and then at the end of the time period we will make an adjustment and replenish the petty cash as we replenish the petty cash we will record the expenses related to the items that we had spent on so we're going to do this on a periodic basis like a monthly basis at the end of each month recording the expenses in accordance with all the receipts and the cash drawer to to what we have spent the petty cash on and so that's going to be the kind of flow and the process of the petty cash the petty cash can seem like an easy thing to track but it can be a little bit tricky to to track the expenditures and record that transaction within the petty cash fund so we want to make sure because if our petty cash doesn't line up to the cash receipts drawer then we're going to have to use an over and short account which will be an income statement account another kind of tricky account because it doesn't have a normal balance meaning it could flip from a debit balance to a credit balance whereas if we're talking about an expense account it typically only has a debit balance if we're talking about any account it only has and usually it's only going to have a normal balance of either a debit or a credit the cash over and short will flip from a debit to a credit depending on if the cash was over or short and it'll be an income statement account therefore that will increase or decrease that income