A petty cash reconciliation is a formal review of petty cash records. The intent of this activity is to see if there have been any undocumented disbursements. Such disbursements are a common problem in petty cash, where there is a high risk of fraud. Also, since most petty cash custodians are not trained as accountants, they may incorrectly record disbursements. For these reasons, a petty cash reconciliation should be conducted at regular intervals.
The review can be treated as an audit, which means not warning the petty cash custodian of the arrival of the reviewer. This lack of warning is useful for detecting any personal withdrawals from the petty cash fund by the custodian.
Take the following steps to reconcile petty cash:
- Ascertain stated balance. Review the company’s petty cash policy and determine the stated petty cash balance for the fund to be reviewed. Petty cash funds can have different stated balances, since some experience higher transaction volumes than others.
- Obtain reconciliation form. If the company uses a formal reconciliation form, obtain a blank copy and use it to document the following steps.
- Calculate withdrawn cash. Count the cash remaining in the petty cash fund and subtract it from the stated balance for the fund. The result is the amount of cash withdrawn from the fund.
- Summarize vouchers. Add up the total expenditure listed on each petty cash voucher in the petty cash fund (the information can also come from the petty cash book). Subtract this amount from the calculated amount of cash withdrawn. The result should be zero. If there is a residual balance, then there is a cash overage in the fund. If there is a negative balance, there is a cash shortage in the fund.
- Investigate variances. Investigate any differences between the stated amount of the petty cash fund and the actual total of cash and vouchers. If the difference is unexplained, complete a voucher stating the unexplained amount, and charging it to a predetermined departmental account in the general ledger.
It is useful to charge unexplained differences to an expense account set aside for that purpose. By doing so, it is much easier to track the cumulative amount of undocumented losses over time. Also, consider having a policy that requires the internal audit staff to be notified if the amount of an unexplained shortage in a petty cash fund exceeds a certain amount.
Finally, flag petty cash funds for more frequent reconciliations if you detect an ongoing pattern of errors. Increased review frequency can uncover problems before material losses accumulate.