Mastering petty cash reconciliation - Importance, how to and best practices
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.
What is petty cash?
Put simply, petty cash is a small amount of money the company puts aside for minor expenses such as office supplies or smaller employee expenses.
Petty cash is typically easily accessible to your employees in the event that they need to make a business purchase, so it should be available on hand and kept in an easily accessible place.
Importance of petty cash reconciliation
1. Accountability and transparency
Because petty cash is provided upfront and can be easily used, it’s important to ensure that the usage is just as easy to track—even when a payment authorizer isn’t present.
Petty cash reconciliation introduces higher levels of accountability regarding its usage.
2. Prevention of fraud and mismanagement
When employees are aware that petty cash is to be reconciled regularly, it will dissuade internal fraud attempts.
They will think twice about managing the petty cash available, as the finance department will be able to determine if out-of-policy purchases or money is missing.
3. Financial accuracy
Like every other finance-related process in your organization, you want to maintain the accuracy of your petty cash expenses and reports.
It’s good practice to reconcile petty cash because it promotes overall financial accuracy, which will help with budgets and forecasts.
4. Budgeting and expense control
As with every other financial aspect of your business, it’s important that you put some considerations and proper planning into your petty cash budgeting.
When you reconcile petty cash regularly, spending patterns will become more apparent, helping you budget more efficiently.
5. Compliance with accounting standards
Reconciliation is a standard accounting procedure, as it ensures that your records are accurate and match with the actual accounts balances.
Petty cash reconciliation is no different. If there are any discrepancies, the reconciliation process helps you resolve this and remain in compliance.
6. Timely reimbursement
Sometimes your petty cash disbursements aren’t enough to cover employee expenses, requiring employees to make out-of-pocket spending.
Performing petty cash reconciliation helps you determine which expenses need to be reimbursed. It also allows you to determine when you need to replenish your petty cash.
7. Preventing duplicate payments
Say you need to pay a small invoice. An employee used your petty cash to pay the vendor upon delivery, but the invoice is still entered into the system.
Petty cash reconciliation ensures that everyone knows you don’t need to make another payment.
8. Preparation for audits
Audits are notoriously tedious, especially when you haven’t been keeping track and reconciling your accounts.
Without petty cash reconciliation, you may find yourself struggling to trace your steps just to determine how the company funds you put aside as petty cash was used.
9. Enhancing financial discipline
It’s simply good practice to reconcile petty cash regularly.
Not only does it promote transparency across the organization, but it also motivates you and your employees to put more thought into your finances. Your petty cash may be a small amount, but it adds up.
10. Data for decision-making
Petty cash reconciliation helps you lay out exactly how it was used.
This is valuable data when it comes to decision-making. You’ll be able to tell if your petty cash was used efficiently and whether or not you should add or subtract from it.
11. Minimizing loss and theft
The unfortunate truth is that cash is a risky payment method because it’s difficult for a business to track its usage, which can result in loss and theft.
Ensuring that you reconcile petty cash helps cash missing money or theft attempts.
12. Streamlining accounting processes
Closing your books at the end of the month, quarter, or year is already a stressful process. Without regular petty cash reconciliation, however, it can become even more difficult to do.
Ensuring that your petty cash account is reconciled helps streamline your accounting.
Enhance control and streamline expenses
Problems with petty cash reconciliation and solutions
1. Missing receipts
● Problem
With loose receipt documents, you run into the risk of misplacing or losing them. In these cases, it becomes difficult to perform petty cash reconciliation without the purchase records.
● Solution
Equip your team with an automated petty cash reconciliation system that helps you capture and store receipt data easily. All you’ll need to do is snap a picture of your receipt.
2. Inaccurate record-keeping
● Problem
Unfortunately, the traditional way of reconciling petty cash is prone to human errors, especially when recording your reconciliation is done manually. This will become an issue whenever you refer to your records for forecasts or audits.
● Solution
Eliminate the risk of errors by automating your reconciliation process. Not only does this minimize the time needed to perform and record petty cash reconciliations, but you’re also guaranteed better accuracy.
3. Cash discrepancies
● Problem
One common problem that you may run into is seeing a discrepancy between your cash and the receipts or purchase records that you may have. Because cash is easy to misplace, this could cause issues.
● Solution
Petty cash must be always counted carefully. The money should be stored in a secure location. Alternatively, reduce the need for petty cash and equip employees with corporate cards.
4. Staff turnover
●Problem
The higher your staff turnover rate is, the harder it will be to maintain efficient and accurate petty cash reconciliation. This is because you’ll constantly have to train staff on the matter.
● Solution
Implement petty cash reconciliation software to make your process simpler. Even newer staff will find it easier to acquaint themselves with both the tools and procedures regarding petty cash.
5. Lack of oversight
● Problem
Typically you would appoint one or two staff members to supervise your petty cash usage and reconciliation. However, you could run into a lack of oversight, especially when they’re out of office.
● Solution
When you automate the reconciliation process, your system will be able to flag any discrepancies or suspicious activities. Even when a supervisor isn’t around, you can assure that your petty cash reconciliation is monitored accordingly.
6. Delayed reconciliation
● Problem
Because the reconciliation process is tedious to perform manually, you may end up behind schedule even if you have regular reconciliations. This will hamper the end-of-month closing of your books.
● Solution
Stop delaying your petty cash reconciliation and leverage technology to automate the process. With automatic data capture, you can easily match your receipts with your petty cash account reports.
7. Inadequate petty cash fund
● Problem
Your employees may need to urgently use petty cash to make a purchase, but there’s not enough money. This could lead to complex reimbursement processes or operational delays.
● Solution
Petty cash reconciliation can help you determine when you need to replenish funds for further use. But if you don’t want too much cash on hand, an alternative is to issue employee corporate cards.
8. Lack of training
● Problem
As petty cash reconciliation can be tedious and complex, you’ll need the right staff to perform it. Without the appropriate training, you could end up with an error-riddled process instead.
● Solution
Make sure that you host regular training sessions for your finance staff so they’re aware of how to efficiently reconcile expense reports and petty cash. Using a system with a user-friendly interface makes training easier.
9. Fraud or misuse
● Problem
The problem with petty cash is that while it’s easily accessible, there’s also not much security around it. Internal or external fraud attempts could arise when anyone could simply take the cash and use it.
● Solution
Reconciling petty cash regularly helps detect any fraud attempts or misuse, meaning that you can nip it in the bud quickly. Use reconciliation software and encourage instant easy reporting.
10. Disorganized record-keeping
● Problem
It’s important to reconcile petty cash regularly, but when you perform it so often, you risk losing track of your records. Disorganized records will cause problems during tax and audit seasons.
● Solution
Put all your records in a centralized location to ensure that you have organized and easily accessible data. Using petty cash reconciliation software will help you do this.
What is petty cash reconciliation software?
Instead of having loose physical cash and receipts to manage during the reconciliation process, petty cash reconciliation software allows you to perform reconciliation digitally.
With petty cash reconciliation software, you won’t have to perform all the key reconciliation steps, which are notoriously time-consuming and often complicated, manually. You can leverage the software’s additional automation features to streamline the process.
Many software providers give you the ability to link your petty cash account with a web dashboard, which you can use to track how every penny is spent.
Employees can scan receipts and store them digitally, making it easy for your finance team to match accounts with receipts when you reconcile petty cash.
What are the benefits of using petty cash reconciliation software?
Avoid the common problem of running into errors in your reconciliation process by implementing thorough checks.
It may be easier said than done when you’re dealing with petty cash, —as it is used frequently—but using an automated and digital reconciliation system is key to improving your accuracy.
One of the downsides of doing your reconciliation process manually is that there’s no easy way to integrate your records with the accounting system you use.
With petty cash reconciliation software, however, you won’t need to manually enter data anymore.
You want to choose a software provider that offers built-in compliance feature for your petty cash reconciliation.
It helps you ensure that all the documentation of your reconciliation process complies with accounting standards, as well as local and industry-specific regulations.
Appointing a custodian for your petty cash or relying on a single person to do reconciliation can come with risks, such as a lack of accountability.
On the other hand, using petty cash reconciliation software means that you have unbiased technology to hold everyone accountable.
Your software of choice will have built-in security features, such as the ability to automatically flag discrepancies or odd records automatically.
With enhanced detection, you’ll be able to pinpoint any possible fraud attempts quite easily, allowing you to resolve them as soon as possible.
If it’s company policy to make expenses in cash, your software may not be able to automatically record and track the cash usage.
However, most automation software has mobile accessibility and custom forms, allowing your employees to easily fill out reports in no time.
It’s no secret that reconciliation takes a lot of time.
You need to do it regularly to stay organized and audit-ready, but it’s not an easy feat to do.
With a petty cash reconciliation system, you can save time by automating steps.
Typically, petty cash will be on hand in a physical location.
However, the members of your finance team may be working remotely even when they reconcile petty cash.
When everyone has digital access, remote work is not a problem.
When using reconciliation software you get your data stored digitally on one centralized platform.
All your petty cash historical data is easily accessible for you to leverage insights, complete with data analytics capabilities that you can take advantage of.
Say goodbye to disorganized records.
There’s no more need for scavenging around your file cabinets to prepare for audits.
With the help of your new digital system, your reconciliation audit trail is well-organized and can be accessed in just a few clicks.
It's essential to acknowledge that there will be additional costs during the implementation stage of your petty cash reconciliation tools, but don’t be fooled.
In the long run, utilizing the services of a software provider will prove to be more cost-effective than manually reconciling petty cash.
Often it’s hard to tell how your petty cash has been used until it’s time to reconcile your accounts.
With the right software, however, you can ensure that your expenses are tracked accordingly.
The finance team will know how money is spent at all times.
When you reconcile petty cash manually, you will have to rely on employees submitting purchase receipt documents.
Even when documents are submitted on time, the finance team will have to sift through them.
Using reconciliation software helps you track how your money is spent in real time.
Petty cash reconciliation software providers know that you want the easiest way possible to reconcile petty cash.
As a result, you’ll find user-friendly interfaces that don’t create further confusion during the reconciliation process.
It helps if non-finance members of the team can utilize it for reporting purposes.
Manage your petty cash with ease!
How to reconcile petty cash
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:
Step 1: Ascertain fund balance
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.
Step 2: Confirm documentation proofs
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.
Step 3: Categorize and add withdrawals
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’.
Step 4: Check for ‘Cash Over’ or ‘Cash Short’
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.
Step 5: Restore original balance
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.
Step 6: Reconcile payments
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.
Related read- What is a chart of accounts in accounting and how to map one
Best practices for petty cash reconciliation
Establish clear procedures
Confusion and miscommunication could really hamper how smoothly your processes go, including the way you reconcile petty cash. Make sure that you have clear procedures and schedules. Communicate this with the entire team so that everyone is on the same page.
Implement internal controls
The best businesses have a solid internal control process to ensure their operations are effective and efficient. Make sure that you have a set of internal controls and monitor your petty cash and its reconciliation to promote integrity and accountability.
Appoint a responsible custodian
Considering that petty cash is available on hand for employees to use in day-to-day business operations, it’s important that there is someone responsible for that money. Appoint a custodian, such as a manager, to be in charge of the petty cash usage.
Maintain an organized petty cash log
You can reconcile petty cash by reviewing all the purchase receipts from a certain period but relying on that is not enough. Introduce a petty cash log and ensure that employees are maintaining it. Expenses made should be recorded on the log.
Regular reconciliation
Reconciliation is most useful when it’s done regularly. Once a month is a typical schedule, but some companies may do once a week if there is a lot of petty cash usage. Stick to your schedule to avoid any untracked expenses.
Reduce the use of petty cash
The best way to ensure smooth petty cash reconciliation is to minimize its necessity. Look into corporate cards and replace your petty cash with cards for office supplies, employee expenses, and many more.
Use receipts and documentation
One of the best ways to ensure that you are accurately reconciling petty cash is to refer to the receipts and documentation of purchases made with the money. By comparing your petty cash usage with its corresponding documents, you can pinpoint and address discrepancies, if any.
Use a standardized reconciliation form
Perform and document your reconciliations following a standardized format. This gives everyone a clear understanding of what is expected during petty cash reconciliation. Reading past forms will also be easier, making audits, forecasts, and even new staff training less tedious.
Identify discrepancies promptly
You don’t want to waste your time when performing petty cash reconciliation. This is why it’s important that as soon as you find a mismatch in your records, you identify the source of the discrepancy. The sooner it is resolved, the better.
Make adjustments appropriately
If you run into discrepancies when you reconcile petty cash, you will have to get to the root cause of the discrepancies. Depending on the case, adjustment entries may correct them. Make sure that your accounting team is making adjustments appropriately.
Transparency and accountability
Make sure that transparency and accountability are emphasized in your policies. Encouraging employees to instantly report their expenses, for example, will introduce a higher level of accountability. You also want to be transparent with your employees about your petty cash reconciliation.
Training and educate your employees
Educate your employees on why petty cash reconciliation is so important. This will help get everyone on the same page and make training more effective. You also want to regularly host training sessions to get your employees familiar and comfortable with your reconciliation tools and processes.
Count cash carefully
It’s no surprise that plenty of discrepancies come from miscounting cash. Counting your cash too fast could result in mismatches due to misplaced or skipped bills. You want employees and finance team members to remember to count cash carefully for smoother reconciliation.
Digital tools and software
Manual petty cash reconciliation can be tedious and time-consuming. Instead of wasting your time and running into plenty of errors, leverage technology and use digital tools and software to automate the process. It’ll also help you accurately compare and match records.
How does Volopay help in petty cash reconciliation?
There’s no need to overcomplicate the petty cash reconciliation process. With Volopay, you can say goodbye to slow and tedious manual tasks that make reconciling your petty cash difficult—no matter how important it is.
Use the scan receipt feature and capture all purchase receipts in just one photo click via the Volopay mobile app. All your data will automatically be captured and ready for reconciliation!
Instead of relying on a physical cash drawer for your petty cash, simplify your reconciliation processes by reducing the need for petty cash in the first place. Replace your physical cash drawer with a digital bank account that is easily accessible by employees, while still remaining secure.
For everyday expenses, equip your employees with Volopay corporate cards. Manage your office supplies, employee expenses, transport costs, and much more easily with a corporate card.
Each employee can have their own corporate card, eliminating the need for card sharing. Every time a card is swiped to make a purchase, the transaction will be automatically recorded on your accounting automation platform- Volopay. All your employees need to do is complete their expense reports and snap the receipt picture using their mobile phones. No more hassle reconciling petty cash!