How to Reconcile Petty Cash
Aug 06, 2020 | By Michael Whitmire
Debit cards and smartphones are quickly becoming the favorite ways for the younger generations to pay for things, but even so, many small businesses find that maintaining a petty cash fund for small purchases still makes sense. It’s certainly much easier than filling out an expense report and waiting for the next billing cycle to get reimbursed, especially when it’s a small amount of money. But since cash is very easy to steal or misuse, keeping an eye on it is essential. The best way to do that is by performing regular petty cash reconciliations.
What is Petty Cash Reconciliation?
Reconciling petty cash is a formal review of the purchases made with a company’s petty cash fund and comparing those purchases with the cash balance in the petty cash fund. This helps to make sure that the cash was used for legitimate, business-related expenses. Part of the task is also ensuring that the records for disbursements are being kept correctly. At many companies, the petty cash custodian -- while obviously being trustworthy enough for the responsibility -- is not an accountant or bookkeeper by training, and so that person may make mistakes.
Knowing how to reconcile petty cash is a crucial component of any petty cash management system. If you’re just setting up your petty cash fund, you’ll want to read this post on how to manage that fund.
How do you perform a petty cash reconciliation?
The basic idea is to reconcile the total disbursements with the amount of cash remaining in the fund, and to ensure that the disbursements all fall within the approved uses for the fund. Here are the basic steps of the reconciliation process:
1. Determine what the float is
As an example, we’ll walk through the month-end reconciliation for ABC Plumbers. They set up a petty cash fund of $500, which can be used to buy supplies, gas for company trucks, and snacks for the crew. Here, the float, or initial balance, is $500.
2. Count the cash
The next step is to count the cash in the petty cash box and subtract that amount from the float. The result should be the total of the disbursements. We find total cash of $139.34 in the box, so the total of the disbursements should be $360.66 ($500 - $139.34).
3. Organize disbursements into categories
Petty cash disbursements should be recorded in a log by the custodian. Some companies also use paper vouchers filled out by the employee requesting a reimbursement. Ideally, the custodian will have receipts for all of the disbursements, which, in today’s world, may be in electronic format. At some companies, employees are allowed to take a cash advance from the fund as long as they leave a signed IOU behind.
After comparing the receipts to entries in the petty cash log and sorting them into categories for entry into the bookkeeping system, we have $208.78 for plumbing supplies, $25.84 for office supplies, $75.38 for gas (which includes a signed IOU for $20), and $48.39 for snacks and other food. These all fit into the approved categories of transactions for the petty cash fund. The petty cash log, vouchers, and receipts should be retained with the rest of your cash records.
4. Add up disbursements
The total amount of the disbursements is $358.39. Ideally, the total of the actual disbursements should match the total we found in step 2, but we’re off by $2.27. For some reason, we have an overage of $2.27 more in cash than should be in the lockbox.
5. Investigate variances
Any variances should be reported to the person in management who is responsible for the fund. After consulting with the accounting manager, we determine that the $2.27 overage is immaterial. According to ABC Plumbing’s accounting policies, variances under $10 need no investigation. Maybe the person who took the $20 for gas brought back the change, but didn’t leave a receipt, but this isn’t worth looking into further. Other causes for variances might be missing receipts or mistakes in logging disbursements.
6. Record transactions in the GL
We’re doing this reconciliation as part of the month-end close, so this is also the right time to replenish the petty cash fund. The company bookkeeper cashes a check for $360.66 to bring the fund balance back to $500. Here’s the journal entry to record the disbursements and the top up:
|Auto Expense - Gas||$75.38|
Memo: To record petty cash transactions
Any overage, or shortage, is recorded as a debit to the account Cash Over/Short, which is also used to record variances for bank reconciliations. Ideally, the balance in this account should fluctuate close to zero. But if this balance grows, you might need to fine-tune your petty cash management system.
If you record petty cash transactions at the same time the fund is replenished, you’ll notice that the balance in the Petty Cash account is always equal to the float.
Reconcile Petty Cash Regularly
Regular monitoring of something as susceptible to theft as cash is crucial, so performing regular reconciliations of petty cash is an essential internal control. At the very least, this should be done as part of the month-end close process, which is also an ideal time to replenish the fund back to its original float. Doing this at additional random times throughout the month also helps to keep everyone honest.