How to do petty cash reconciliation
Apart from access to larger purchases your teams also need to have some cash at their disposal for small incidental expenses such as birthday cards for an employee or smaller office supply purchases in between bulk orders. The cash amount kept aside for these purposes might be relatively smaller, however, these too count as transactions that need to be reconciled and verified.
To ensure this cash that you have allocated is used appropriately, with proper transaction records and employee accountability, you need to conduct regular petty cash reconciliations. Cash payment reconciliation is an effective way of making sure that the cash you have allotted to teams or individuals is not misused and protected against fraudulent activity.
The cash that you set aside for typically incidental or ancillary purchases is what is being referred to as your petty cash fund. The process of conducting a formal review of this fund and the purchases made with it, subsequently also matching the balance leftover in the petty cash fund with these purchases, is called a petty cash reconciliation process.
These expenses or purchases could include anything ranging from office supplies to cards for customers, flowers, or even catered lunches. Simply put, you can reconcile petty cash by taking the total cash balance leftover after a period of time, records of the transactions or purchases for the total cash withdrawn, and comparing the two with the total amount of cash you had originally placed in your company drawer or box. Reconciling petty cash expenses can help you ensure that the cash funds you had set aside are being used for legitimate, business-related expenses. This, consequently, can also help protect you against fraudulent activities and keep your accounts audit-ready.
Petty cash reconciliation systems might vary a little from company to company, depending on how you organize your finances. However, the general approach to the task is essentially universal and can be summed up in the following 6 steps:
Start by counting the balance left over in your petty cash fund box or drawer. Remove and separate the paper cash and coins, add the totals of the two up and write the particulars of the two down under two separate columns. Your ‘Total Cash’ balance leftover will be the sum of these two subtotals.
Next, remove all receipts, invoices, withdrawal vouchers, and other documents that stand as proof of cash payment and use. You should then move on to affirming the presence of proof of purchase for each payment recorded in your log. If all transactions do not have documents supporting them, you should then proceed to send an inquiry asking for an explanation to the employee responsible for the transaction in question.
You should then move on to categorizing all the withdrawals that have been logged under headings such as ‘Office Supplies’, ‘Food & Beverages’, ‘Travel’ ‘Miscellaneous’ etc. Starting with the first category, add all the amounts listed for cash payments related to that category, write the subtotal down and repeat the same process with the rest of your expense categories. Once you’re done individually categorizing and adding up the withdrawals you can then add the subtotals up to get what is called your ‘Total Withdrawals’.
Once you have your ‘Total Withdrawals’ and ‘Total Cash’ numbers you can then proceed to adding the two and comparing their sum with the original balance of your petty cash fund. What you do next will depend on the outcome of this comparison, to ensure the process is error-free you can match and recheck your totals two or three times.
If the sum of the two is lower than the original balance you have to mention the difference amount with ‘Cash Short’ written beside. If, on the other hand, the original balance amount is lower than the sum of total cash and withdrawals you have to write down ‘Cash Over’ with the difference amount next to it.
The next step is where you have to restore your petty cash fund to its original balance. You can do this by writing a check to cash for the difference amount required. The check amount will be the sum of Total Withdrawals if the original balance equals your combined total of cash and withdrawals. If you have Cash Short the check has to be written to the sum of Total Withdrawals and Cash Short. On the other hand, if you have Cash Over you have to pay the remaining amount you get when you subtract Cash Over from Total Withdrawals.
Lastly, you fill in a form to reconcile your payments. At this point, you need to add a note that presents the reasoning or explanation behind cash shortage or overage. Finding the exact reasoning behind mismatches in original balance and total cash and withdrawals is important. You should prioritize investigating the transactions that are in question. If, however, you are unable to you should also mention that in your note. The petty cash reconciliation form must then be filled, signed, and filed away for future reference.
Cash funds are by default harder to keep track of and reconcile than a card or online payments. They can easily be misused, misplaced, or mismanaged. Each of the steps involved in petty cash accounting is susceptible to errors and delays. If your transactions are all accounted for, your original balance matches the sum of totals cash and withdrawals and your documentation is in order petty cash reconciliation is really not that hard. However, this is hardly ever the case.
It’s not always clear why an expense was made, logs of such purchases may be incomplete or entirely vague. Not all your employees will always understand the importance of logging expenses accurately. The more concerning situations, however, arise when proof of purchases or cash itself is missing or damaged.
All in all, errors and inaccuracy is bereft in manual petty cash reconciliation and there is always the fear of theft and, or, fraud. Moreover, your accounts teams end up spending way more time than they should on reconciling relatively smaller amounts of money.
Related page: How to reconcile expense reports?
A tried and tested approach to ensure total visibility and control over your cash funds is to reconcile them regularly after periodic intervals that are not spread too far wide. Ideally, petty cash reconciliation should be at least a monthly practice.
Going digital can do wonders for reconciliation. Manual petty cash reconciliation is highly prone to errors and other risks. If, instead, you have a digital system that logs, processes, and matches balances on your behalf, the time and effort you need to reconcile petty cash can be more than halved.
While lowering the maximum cash available in your petty cash funds won’t exactly get rid of the issues that come with reconciling it. But, it could still help reduce the number of issues you’ll have to deal with.
The use of cash is already on the decline and has been for a good few years now. Consequently, the need to use petty cash for small expenses is also increasingly looking like a task that is soon going to be replaced, digitized, because of the number of issues that arise with using and reconciling it.
This modernization of petty cash reconciliation has come courtesy of software that can digitize and automate petty cash accounting, e.g. Volopay. Platforms like Volopay offers an accounting automation and spend management services that render the need for a physical petty cash fund or drawer redundant. It lets you issue physical or virtual cards that come equipped with expense tracking, recording, processing, and auto-approval features.
You can issue such cards to any employee that needs to make purchases without the fear of risks or fraud. You can also preset spend limits and approval workflows that can help you maintain complete control over your company’s spending in real-time. Furthermore, these cards are also linked to Volopay’s expense management software that is capable of automatically calculating your withdrawals and cash totals and reconciling the same to ascertain Cash Over or Cash Short itself.