Petty Cash Reconciliation: What It is, How to Do It, & Best Practices

The panic sets in when the custodian makes the entries for petty cash expenses and the balance mismatches by, let's say, AED 1500. 

When discrepancies happen, you have two options: mark it as a write off, or spend hours carrying out an investigation. Write offs are generally not accepted in companies and can lead to problems during audit season. The best option is to investigate. 

While the amount is meager, this cashier must scrutinize each voucher and receipt for the next few days to find the loophole. The employee in question will have to review over 100+ documents to spot the discrepancy, disrupting the petty cash operation and causing delays in closing the books.

This post will cover how to reconcile petty cash and optimize the process, so you never have to face this situation. We will look at some best practices to ensure the custodian does not spend weeks accounting for the missing AED 1500.

What is Petty Cash Reconciliation?

Petty cash reconciliation is the process of matching opening and closing balances of petty cash, where the difference must be equal to the total of documented petty cash expenses. 

Either the custodian or someone from the finance department performs this function to ensure the accuracy and completeness of records. It helps identify and rectify discrepancies that may arise due to errors of omission, commission, or principle. 

How Often Should Petty Cash Be Reconciled?

Petty cash reconciliation is generally done once a month if you rely on manual processes for petty cash management. It allows for timely identification of discrepancies, ensures efficient tracking of small expenses, and facilitates prompt resolution. 

However, if you have an expense management platform to record all the petty cash expenses digitally, you reconcile petty cash in real time. Since you directly add all the transactions on the platform, reconciliation becomes easy with the ability to track each cash money movement in an auditable platform. As a result, you identify discrepancies at the earliest and avoid a balance mismatch.

What Are the Steps of Cash Reconciliation?

If you use a digital platform for petty cash management, reconciliation becomes easy as the system highlights any discrepancy in the real time. So, it is as simple as flagging transactions with missing receipts.

However, if you have a manual petty cash process, here are the petty cash reconciliation steps:

1. Ascertain Fund Balance

Begin by determining the existing balance in the petty cash fund. This involves counting the physical cash on hand and comparing it to the initial amount allocated to the fund.

2. Gather Documentation Proofs

Collect all receipts and documentation related to petty cash expenditures. Ensure each expense is supported by a valid receipt, providing a clear record of how the funds were used.

3. Categorize Total Withdrawals and Spends

Categorize the various expenditures based on their nature (e.g., office supplies, refreshments, etc.). Tally the withdrawals within each category to gain insights into the distribution of expenses.

4. Reconcile Differences

Compare the total of documented expenses with the physical cash on hand. Identify any discrepancies or amounts that are unaccounted for. This step is crucial for ensuring that all expenditures are correctly represented.

5. Record in General Ledger

Record the reconciled petty cash transactions in the general ledger. It formalizes the financial entries and ensures that the petty cash activity is accurately reflected in the organization's overall accounting system.

6. Replenish

If the petty cash fund is running low or depleted, replenish the funds. Submit the reconciled documentation to the finance or accounting department for approval and allocate the necessary funds to restore the petty cash balance.

Challenges of the Manual Petty Cash Reconciliation Process

Here are the top four challenges of the manual petty cash reconciliation process:

1. Risk of Fraud, Waste, and Misuse

With manual reconciliation, it becomes easier for individuals to manipulate or misappropriate funds without proper oversight. The absence of real-time tracking leads to instances of waste or misuse of petty cash, posing a significant challenge to financial integrity.

For instance, an employee might submit duplicate receipts for the same expense, pocketing the reimbursement and leading to financial discrepancies. Duplicate receipts are difficult for custodians to keep track of when there are 1000’s of receipts. 

2. Custodian Chasing for Receipts

In a manual system, the petty cash custodian has to press the employees for the collection of receipts for expenses. It is time-consuming and delays the reconciliation process. It also leads to incomplete and missing documentation.

3. Lack of Internal Control

Manual processes lack the robust internal controls that automated systems offer. This absence of controls makes enforcing consistent adherence to organizational policies challenging and increases the risk of errors or unauthorized use of petty cash.

For example, an employee may submit incomplete or inaccurate receipts for petty cash expenses, leading to inconsistencies. As a result, it becomes difficult to ensure adherence to documentation standards.

4. Missing Cash or Documentation

The manual handling of petty cash poses a threat to losing physical money or documentation. Misplacement of receipts or cash, whether intentional or accidental, leads to hindrances in the reconciliation process and compromises the accuracy of financial records.

For instance, an employee may unintentionally misplace a set of petty cash receipts during an office activity. The missing documentation will create difficulty reconciling expenditures, introducing uncertainty into the financial records.

From these challenges, we understand that while we focus on optimizing the reconciliation process, we must first refine our petty cash management process. 

Instead of focusing on improving the assessment process, we shall first work on the internal procedures of approvals and documentation. It will ensure the completeness and accuracy of records and save custodians from spending weeks matching the balances.

Best Practices for Petty Cash Reconciliation

To avoid mismatches and ensure the accuracy of records, adopt the following best practices:

Maintain Receipts Digitally

Digitally store receipts using an electronic system or expense management platform to ensure a secure and easily accessible record of all transactions. It eliminates the risk of physical receipt loss or damage and facilitates efficient reconciliation.

Stringent Documentation and Regular Review

Ensure clear and detailed receipts for all expenses to enhance accountability. Regularly review these documents for prompt identification of discrepancies. It fosters transparency and helps maintain a true and fair view of the financial statements.

Set Controls

Establish precise petty cash policies and procedures for petty cash management, including predefined spending limits and approval processes. Such controls prevent misuse and ensure that expenditures align with organizational guidelines. You can additionally specify the expense category and vendors for enhanced control.

Securely Store Cash and Documents

Designate a locked and controlled space, like a safe or lockable drawer, for physical cash and accompanying documents in the petty cash system. Limit access to authorized personnel to minimize theft or mishandling risks. Regularly reconcile cash on hand with documented transactions to promptly identify and address any discrepancies, ensuring the overall integrity of the petty cash process.

Maintain a Log

‍

Keep a detailed log or ledger of all petty cash transactions, including dates, amounts, and purposes. It serves as a comprehensive record for reconciliation and provides a historical overview of petty cash usage. A better way would be to maintain a digital log, which will be more accessible and accelerate the reconciliation process as well.

Use of Virtual Cards

Shift to virtual or prepaid cards for the petty cash process. Virtual cards allow for controlled and traceable spending with transactions automatically recorded. This digital approach enhances security and simplifies the reconciliation process. 

However, these virtual cards should not be mistaken for shared corporate cards or employees' personal debit cards, which could be reimbursed later. Such confusion makes the petty cash process more chaotic and takes away the ease of reconciling with digitization. You lose visibility, and the employees wait weeks to get reimbursed.

‍

Digitization Simplifies Petty Cash Reconciliation

Petty cash reconciliation strengthens when the foundation is set right. It means having defined policies and methods. 

An expense management platform further assists the teams to manage effectively by providing real-time visibility. It helps you enforce the policies with advanced control and simplifies the approval and documentation process by providing all the details on a single dashboard, leaving no loopholes for any mistakes. 

Book a demo today! See how you can digitize your petty cash process to save time and ensure that a mismatch, even of an insignificant amount, never haunts your team.