Financial Accounting Nov/Dec 2015

Section A: Theory of Financial Accounting

Question 1

 

(a) (i) What is a Petty Cash Book?

(ii) State three source documents that are used to make entries in the books.

(b) Explain the imprest system as used in petty cash accounting.

(c) State three advantages of operating a petty cash system.

Observation

Majority of the candidates that attempted this question were able to define petty cash book but failed to explain the advantages for operating the petty cash book as a result, they recorded low marks. The expected answers include:

(a) (i) A Petty Cash Book is both a book of original or prime entry and a ledger account. This is used for recording cash transactions which are particularly small and too numerous to be conveniently entered in the main cash book.

(ii) The source documents are:

  • Receipts;
  • Petty Cash vouchers;
  • Bills;
  • Invoices;
  • Certificate of honour.

 

(b) The Imprest system is a system where the main cashier give the petty cashier a specified sum known as cash float to meet petty expenses incurred during the period.

The petty cashier after paying approved petty cash vouchers is re-imbursed with the amount spent after the main cashier has certified the payments made.

(c) The advantages of operating petty cash system are:

(i) The main cashier is relieved from paying small expenses;
(ii) It saves space in the main cash book;
(iii) Postings into the ledger becomes easier since only totals are posted to the general ledger;
(iv) Controlling the activities of the petty cashier is easier when separated from the main cashier’s duties;

(v) It ensures accountability for every expenditure since all are supported by documentary evidence;
(vi) It serves as a means of training accounts clerk;
(vii) It is easy to operate.