Accounting – 2.3 Books of prime entry | e-Consult

A business maintains a petty cash fund with an initial balance of £50.00. During the month of June, the following transactions occurred:

• Office supplies: £15.00
• Postage: £8.00
• Client gift: £12.00
• Minor repairs: £25.00
• The bank receipt for the month shows a total of £40.00.

Prepare a petty cash voucher and show how the petty cash book would be affected.

Explain the advantages and disadvantages of using a petty cash system compared to using cheques for all small payments.

Advantages of Petty Cash System:

• Convenience: Provides a quick and easy method for making small payments without the delays associated with cheque processing.
• Cost-Effective: Reduces the number of cheques required, saving on stationery, bank charges, and administrative time.
• Improved Efficiency: Allows staff to handle immediate expenses without needing to seek authorisation for each individual payment.
• Control: The fixed amount of cash provides a degree of control over spending.

Disadvantages of Petty Cash System:

• Risk of Theft: The cash is held on the premises, making it vulnerable to theft.
• Potential for Errors: Requires careful record-keeping to avoid errors in recording transactions.
• Limited Accountability: It can be difficult to track exactly how the cash is being spent.
• Requires Regular Reconciliation: Needs to be reconciled regularly to ensure accuracy and prevent discrepancies.
• Not Suitable for Large Payments: Only suitable for small, infrequent payments. Larger expenses require cheques or electronic transfers.
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