8 steps for petty cash reconciliation
Most people don’t give petty cash too much thought, other than that it’s a relatively simple way to handle smaller office payments.
But just because it’s petty cash, it doesn’t mean you throw usual expense processes, like reconciliation, out the window. In fact, many would argue that it’s even more important to properly manage cash spending in a business, especially since coins and notes are so annoyingly difficult to track.
In this article, we’ll explain the eight steps of the petty cash reconciliation process, along with some of its common challenges, how to overcome these as well as some options on how to upgrade this outdated system.
How to reconcile petty cash
Petty cash reconciliation usually happens once per month, after the funds in the petty cash jar have been spent.
When your float (more on this in just a second) is depleted, all recorded transactions need to be verified and matched to the general expenses. This way, your accountants can move forward with processes like month-end close, without having to worry about the small cash payments.
Right, let’s run through the eight steps of reconciling petty cash.
1. Find out the float amount
The first step is to find out the original float amount. Also known as the imprest amount, this is the initial sum of cash that was put into the petty cash box at the beginning of the month.
It’s important to know the float amount because petty cash is a finite resource and your team needs to be conscious about how much it’s being eaten into.
2. Count the remaining cash
Next up, it’s time to count what cash is left in the box. This should be fairly simple, as you’ll just tot up the value of the notes, alongside any coins left in the petty cash tin.
3. Calculate transaction total
As part of double-column accounting, total up the transactions and look at what’s left in the petty cash tin.
💡Double column accounting just means that the maths is checked in two different ways, to verify that it is correct.
The first requires you to add up the sum of all the receipts. These have been submitted monthly after the petty cash has been spent. Alternatively, if your company uses petty cash vouchers, simply total these up instead.
4. Petty cash calculation
When calculating the petty cash, you’re trying to see if the numbers make sense.
In theory, the float amount minus the total transactions should equal the cash remaining.
By replacing the actual numbers into the equation, you can check whether the petty cash spending has been recorded properly, or if the spy gear needs to come out to do some investigating.
5. Investigate any discrepancies
If things aren’t adding up it’s time to figure out why. There could be a number of reasons for this, like if some receipts haven’t been submitted or if cash was taken for an unauthorised purchase.
Either way, it’s important to at least attempt to figure out where the problem lies, otherwise it could happen time and time again.
6. Categorise payments in the log book
Diving deeper into the payments side of things, you’ll have to categorise each entry into the petty cash book into one of several groups. This is down to your company’s categorisation process, but some could examples include:
- Food & drink
- Office supplies
Every single petty cash expense must fit into one of your budget categories.
7. Record expenses in the general ledger
Those categories that you just sorted out? Now it’s time to log them into the general expenses ledger. Saving you the hassle of copying across every single petty cash book entry.
Not only does this free up time, but it provides the insight to your finance team which budgets are being eaten into.
8. Replenish that float
Now, it’s time to return the float to the imprest amount. Your bookkeeper or accountant will take funds from each expense budget, depending on the category that has been spent.
If £30 of last month’s petty cash was spent on food and drink, then £30 will be taken from the food and drink budget and transferred to the petty cash box.
Do this for each category until the original imprest float is reached.
The challenges with petty cash reconciliation
With all those steps, there’s bound to be complications when you try to reconcile your petty cash manually.
When the staff lack respect for the petty cash as a whole, they’re likely to undermine the system. This could mean they treat it like a free-for-all and just take the cash for unapproved purchases. A more likely scenario is that your people may not make a note to keep receipts or fill out petty cash vouchers properly. All of these issues can create a huge challenge for the petty cash custodian (aka the employee put in charge of keeping that petty cash box in order).
Cash tracking problems
Cash is easy to lose. That’s a fact.
Without a digital footprint, there’s no clear way to trace where your cash has been, or where it’s gone. Unless you rigorously collect receipts and make clear cash records, it can be a huge faff.
Since there’s a ton of paperwork associated with petty cash management, the entire process is pretty slow and inefficient. For most finance teams, this time is better spent elsewhere, where they actually feel like they can add value to the business.
Inconsistent payment frequency
Payments with petty cash are typically sporadic. Some months, it seems like everyone has a birthday! Other times, the only petty cash spent was on some colourful paper clips.
The wildly varying nature of petty cash spending makes it difficult to budget your time for managing petty cash reconciliation.
What is the calculation for petty cash reconciliation?
As we covered earlier, the calculation for petty cash reconciliation is as follows:
Let’s use a petty cash reconciliation example:
- The imprest amount is £200
- Your petty cash receipts add up to £110
- The cash amount left in the petty cash box is £75
£200 - £110 = £90, not what was expected (£75).
This means that the difference (£15 of the petty cash) is MIA and will need to be found. Whether it’s a receipt that hasn’t been submitted, or the remaining cash has not been counted correctly - it’s something that needs to be straightened out.
My petty cash balance doesn’t match my calculated amount: what to do?
In the example above, we found a £15 discrepancy between what was expected in the petty cash box versus what was actually there. This type of problem is super common, with many companies reporting instances of missing petty cash.
There could be several potential reasons for the shortage. Poor record-keeping, such as when a payment has been made but not recorded. Or the receipt doesn’t match the petty cash voucher if the items were thought to be on sale but actually weren’t. Finally, it could be a custodian error in the handling of the petty cash or errors on the reconciliation form.
The thing is, if the cash is truly missing and can’t be attributed to anywhere, it will have to be written off as a loss by the accountants. Quite literally a waste of money
How to prevent cash discrepancies
Of course, there’s no need to worry about petty cash problems if it can’t go missing in the first place. Your organisation can put several measures in place to prevent issues with petty cash.
Training your petty cash custodian
With proper training, your keyholder feels confident about the processes and systems of managing petty cash. Which means nothing falls through the cracks.
Alongside guidance on expenses management itself, the petty cash custodian should receive training on handling petty cash requests, their approval system, and how to store receipts and record other cash accounts.
Write up a petty cash policy
Alongside a petty cash custodian, a robust petty cash policy should give your staff a clear understanding of what can and cannot be purchased with petty cash.
For example, your petty cash policy might only allow food and drinks purchases relating to working outside of normal office hours (like staying late in the evenings to finish that deadline).Meaning that those naughty staff lunches have to be saved for the general expenses.
Ramp up cash box security
The cash box is your last line of defence. It shouldn’t be easy for rogue fingers to dip into the petty cash tin. So a lock and key is essential. If you can go even further by keeping the petty cash box out of sight, or buying one that’s made of a strong material like metal, it will better protect those cash funds.
Manual vs automated reconciliation
There are two accepted ways to perform petty cash reconciliation.
The first is manual, using spreadsheets to get your petty cash in order. This is fairly easy to work with, and doesn’t require a huge commitment to get to know new technology, since most of us are already familiar with Excel.
By feeding your data through a software program, you’re less likely to get errors in the final calculations. Plus, it can offer a way to properly track your petty cash spending, which is much harder to do manually. However, you should consider the learning curve that comes with working with any new technology – ensuring that there’s enough time for your finance team to learn the ropes.
Give your petty cash management system an upgrade
For the automation software without the learning curve, the Pleo petty cash management app is all you need.
With the ability to add categories and sort payments in-app, you immediately cut out steps of the lengthy reconciliation process for the finance team. The other hero is our in-app receipt scanner, which allows your people to snap a photo of their receipt in real-time.
Leaving no excuses for missing receipts and no petty cash discrepancies.
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