Accounting: Checks and Petty Cash

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There are special accounting practices for dealing with checks. A check is a numbered document instructing the bank to pay a specific amount to a specific party. When a business receives a check in the mail, this is considered to be a cash receipt.


The three parties to a check are the maker, the payee, and the bank. The maker is the party making payment with a check. The payee is the party receiving payment from a check. Canceled checks are those that have been paid by the bank.


Some checks include a remittance advice, which is an attachment explaining the reason for the payment. On a standard check, the routing number identifies the name of the bank from which the payment is made. On a standard check, the account number identifies the account from which payment is made.


Collusion is when multiple people conspire to evade internal controls and steal from a business. There are common protections that businesses can use to prevent collusion and employee theft. In a lock-box system, cash and checks are sent to a bank's post office box rather than to the business itself. When goods are purchased by a business, the employee who writes the purchase order should neither approve the payment nor accept the goods when they arrive.


Businesses often keep petty cash, a small amount of money that is used to pay for small items like snacks, paper clips, or stamps. Most petty cash boxes use an imprest system, in which the box must always contain a combination of cash and petty cash tickets equal to a certain amount. Petty cash is more liquid than cash in the bank because it is not protected by any of the bank's controls.


You should be familiar with the common journal entries associated with petty cash. The journal entry for setting up a petty cash account would be a debit to Petty Cash and a credit to Cash. Cash Short and Over is the standard account for recording missing petty cash amounts. Decreasing the amount of money in the petty cash fund would be recorded in the journal with a debit to Cash and a credit to Petty Cash.