What Is a Change Fund and How Is It Accounted For?
Gain clarity on business change funds. Understand their core function, daily operational needs, and proper financial accounting treatment.
A change fund is a fixed amount of cash a business maintains to provide customers with correct change during transactions. This fund is separated from daily sales revenue and is designated to facilitate sales operations, particularly in retail or service environments. It ensures businesses can consistently process cash payments without delays.
Understanding a Change Fund
A change fund is a dedicated pool of money used exclusively for making change for customers. Its primary purpose is to ensure a business can readily provide the exact change required for cash transactions, streamlining the sales process and enhancing customer service. This fund is not considered part of the day’s sales or receipts; it is a constant, fixed amount of money that remains separate from incoming revenue.
Typically, a change fund consists of various denominations of currency, including coins and small bills. The specific composition and total amount of the fund are determined by the business’s average daily cash transactions and the volume of change needed. It is a working capital asset that facilitates the conversion of customer payments into the precise amount owed back to them.
Establishing and Managing a Change Fund
Establishing a change fund begins with drawing the initial amount from the business’s general operating bank account. This transfer creates the dedicated fund, which is then physically stored in a secure location, such as a cash register drawer or a safe, accessible only to authorized personnel. The amount established should be sufficient to cover a normal day’s change requirements.
Daily management involves procedures to maintain its fixed balance. At the start of each business day or shift, the fund is counted to ensure it matches the established amount. Throughout the day, as cash sales occur, the change fund is used to provide change, but it is not commingled with the sales revenue.
At the close of each day or shift, the change fund is again counted and verified to confirm it still equals its original, fixed amount. If the fund runs low on certain denominations, it can be replenished by exchanging larger bills from the day’s sales with smaller denominations, or by making a formal withdrawal from the business’s bank account to restore its specific composition.
Accounting for a Change Fund
From an accounting perspective, a change fund is classified as a current asset on a business’s balance sheet. This reflects its nature as cash available for immediate use in daily operations. The initial establishment of a change fund involves a journal entry to record the transfer of cash.
To establish the fund, the accounting entry involves debiting an asset account named “Cash – Change Fund” and crediting the general “Cash” or “Cash in Bank” account. For example, if a business sets up a $200 change fund, the entry would be a debit to Cash – Change Fund for $200 and a credit to Cash for $200. This entry segregates the amount in the accounting records.
The change fund’s balance remains fixed in the accounting system unless a decision is made to increase or decrease its total amount. Daily overages or shortages discovered during reconciliation are recorded separately, often in a “Cash Over/Short” account, which flows through the income statement as a miscellaneous revenue or expense. This ensures the change fund asset account maintains its consistent, designated balance.