How to reconcile petty cash
/A petty cash reconciliation is a formal review of petty cash records and the cash remaining in the fund. Its purpose is to identify undocumented or incorrectly recorded disbursements and detect possible fraud. Because petty cash custodians may have limited accounting training, errors can occur. Reconciliations should therefore be performed regularly. An unannounced review can be particularly effective, since it reduces the custodian’s opportunity to conceal shortages, unsupported payments, or personal withdrawals from the fund. The following steps should be used to reconcile petty cash:
Ascertain the 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 the reconciliation form. If the company uses a formal reconciliation form, obtain a blank copy and use it to document the following steps.
Calculate the amount of withdrawn cash.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 The result is the amount of cash withdrawn from the fund.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 Subtract this amount from the calculated amount of cash withdrawn.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 charge it to a predetermined departmental account in the general ledger.
Accounting for a Petty Cash Reconciliation
There are several accounting issues linked to the petty cash reconciliation. They are as follows:
Track unexplained variances. 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.
Notify the auditors. 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. Their investigation may determine that someone is stealing petty cash from the company.
Alter the reconciliation frequency. 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.
Petty Cash Reconciliation FAQs
How does petty cash replenishment relate to reconciliation?
Petty cash replenishment typically occurs after the fund has been reconciled to confirm that vouchers and remaining cash are accurate. The reconciliation determines the exact amount needed to restore the fund to its authorized balance. This process ensures that replenishment is based on verified and properly documented expenditures.