Petty Cash Reconciliation: What is it & How to do it?

Introduction

Petty cash is a small amount organizations keep on hand for minor expenses like office supplies. But do you know, despite its small amount, petty cash can quickly add up and increase the scope of financial mismanagement for your organization if not reconciled and managed properly? 

This guide looks at the importance of petty cash reconciliation for organizations. Furthermore, we will explore the importance of petty cash expenses for financial management, the best practices for managing and reconciling them, and the tools and software that can help make the process easier and more efficient.

Read More: Petty Cash Meaning: A Guide to Record, Manage and Example

What is petty cash reconciliation?

Petty cash reconciliation is verifying and reconciling transactions involving petty cash funds. The process involves comparing the total petty cash expenses in the accounting records to the actual cash disbursed from the petty cash fund.

The petty cash account reconciliation process primarily ensures that petty cash funds are used appropriately and that the cash records accurately reflect the expenses. It also acts as an internal control mechanism for fraud prevention by identifying discrepancies or inconsistencies in using the petty cash fund.

For instance, let’s assume a small business has a petty cash fund of INR 20,000 to cover minor expenses. During the month, the employees used the petty cash fund to make several small purchases worth INR 12,000. 

At the end of the month, the finance manager would review the cash receipts and other documentation for each expense withdrawal and compare them to the amount of cash disbursed from the petty cash fund. Any discrepancies in the petty cash fund will be identified and resolved.

Quick Read: Petty Cash Accounting: 6 Steps to Setup, Reconciliation, Challenges

When should petty cash reconciliation be used?

Petty cash reconciliation should be used regularly, preferably monthly or bi-monthly, to ensure financial records match the expenses.

Regular reconciliation of petty cash is essential in the following ways:

• Helps identify discrepancies in the use of the petty cash fund 
• Provides an opportunity to review the expenses and ensure that they are authorized
• Allows to investigate and resolve minor discrepancies before they become bigger issues
• Helps establish a pattern of usage that is useful for budgeting and forecasting purposes
• Identifies areas of opportunity to reduce expenses or improve processes

Important terms related to petty cash reconciliation

Here are the important terms related to petty cash reconciliation essential to ensuring the effective management of petty cash funds:

• Float: It is the fund’s starting balance determined by the organization’s financial policies and procedures.
• Log: It is a document that records all petty cash transactions. The log includes the transaction date, the amount, and the purpose of the payment.
• Vouchers: They are part of the log system and show individual petty cash payments.
• Disbursements: It is the payment made using petty cash funds. 
• Custodian: It is the person responsible for managing the petty cash fund.

Future Read: Petty Cash Book: Types, Format, Operations, Pros and Cons

How to do petty cash reconciliation?

Suggested Read: 10 Best Expense Management Software and Tools

Components of a successful petty cash reconciliation process

A successful petty cash reconciliation process should include the following components:

• Clearly defined policies and procedures
• Designated custodian
• Adequate starting float
• Petty cash log system
• Petty cash vouchers
• Regular reconciliations
• Review and audit

Establishing a petty cash reconciliation system

Here are some steps that can help you establish a solid petty cash reconciliation system for your organization:

STEP 1: Define petty cash policies and procedures

Defining clear policies and procedures should include specifying guidelines for who can access the petty cash funds, how they will be used, and how they will be replenished.

STEP 2: Assign a custodian

The custodian should be trained on the policies and procedures and understand the reconciliation process well.

STEP 3: Determine the starting float

The starting float should be determined based on the organization’s needs and sufficient to cover expenses for 15 to 30 days.

STEP 4: Establish a petty cash log system

The system should include a logbook that records the transaction’s date, purpose, and amount and the name of the person who received the cash.

STEP 5: Issue petty cash vouchers

Petty cash vouchers should be issued to employees who need to make petty cash transactions.

STEP 6: Conduct regular reconciliations

Reconciliations should happen at least once a month and involve comparing the cash in the petty cash box to the total of the vouchers.

STEP 7: Update accounting records

Accounting records should be updated regularly to reflect petty cash transactions. This should include debiting the appropriate expense accounts and crediting the petty cash account.

Future Read: What You Should Know About Petty Cash Reimbursement?

Best practices for effective petty cash reconciliation

Here are some best practices you can consider for conducting effective petty cash reconciliation for your organization:

• Regular reconciliations: Regular reconciliations should be conducted at least once a month to ensure that the petty cash funds are managed effectively.
• Clear documentation: All petty cash transactions should be documented in a logbook, including the date of the transaction, the purpose of the transaction, the amount of the transaction, and the name of the person who received the cash.
• Segregation of duties: Different individuals should be responsible for managing petty cash funds and conducting reconciliations. It ensures there is a system of checks and balances in place.
• Clear policies and procedures: A well-defined set of policies and procedures for managing petty cash funds should be established. This should include guidelines for who can access the funds, how they can be used, and how they will be replenished.
• Regular audits: A regular audit ensures the petty cash reconciliation process is working effectively and helps identify areas of improvement.

Petty cash reconciliation procedures and policy

While petty cash is a convenient way to manage small expenditures, it can also be vulnerable to theft and misuse. Having robust petty cash reconciliation procedures and policies thus becomes crucial. Without proper procedures, employees can easily take advantage of the system and siphon off funds for personal use. 

A clear and transparent reconciliation process helps deter fraudulent activity and ensures petty cash is used for its intended purpose. Furthermore, strong petty cash procedures ensure accuracy and accountability in financial reporting. Your financial statements will be accurate and comply with applicable accounting standards.

Petty cash reconciliation problems and solutions

Here are some common petty cash reconciliation problems and solutions that can help organizations prevent future problems:

1. Errors in recording

It happens when transactions are not properly documented, or there are mistakes in adding or subtracting funds. You should establish clear guidelines for documenting transactions and ensure all employees are trained to record transactions accurately. Regular checks should also be conducted to prevent errors.

2. Discrepancies in cash balances

Discrepancies occur when there are differences between the amount of cash on hand and the recorded cash balance. This may be due to theft, fraud, or recording or counting cash errors. You should regularly audit your petty cash balances and establish clear guidelines for managing petty cash.

3. Lack of documentation

It usually happens when receipts and other documents are not properly collected, or there is insufficient documentation to support transactions. You can establish clear guidelines for documenting transactions and conduct regular checks to ensure robust documentation practices.

Read More: Solving Top 5 Branch Petty Cash Problems with Happay

Manual vs. automated reconciliation

Here are some key differences between manual and automated reconciliation

Highlights	Manual Reconciliation	Automated Reconciliation
Speed	Slow and time-consuming	Quick and efficient
Accuracy	Prone to human errors	More accurate and reliable
Scalability	Limited to a certain volume of transactions	Can handle large volumes of transactions easily
Ease of Use	Can be difficult and time-consuming, requires expertise and attention to detail	User-friendly interface, easier to use and navigate
Cost	Relatively low cost, no need for software or technology investments	Requires investment into software and technology
Customization	Limited customization	Customizable to meet specific business needs
Security	Limited security measures, more susceptible to fraud and errors	Advanced security measures to protect against fraud and errors
Integration	Limited integration with other financial systems	Seamless integration with other financial systems

How does petty cash management software work?

Petty cash management software automates and streamlines petty cash management, including petty cash reconciliation.

Here’s how petty cash management software helps with petty cash reconciliation:

• Recording Transactions: Petty cash management software records all petty cash transactions digitally, eliminating the need for manual record-keeping.
• Real-time Visibility: Custodians can easily track how much petty cash is available and whether it is sufficient for their needs.
• Reconciliation: The software streamlines the reconciliation process by automating matching receipts with transactions. It ensures all transactions are properly recorded and reconciled.
• Approval workflow: The software includes an approval workflow that streamlines the process of approving and processing petty cash transactions.
• Audit trail: An audit trail of all transactions makes it easier to identify and address any bookkeeping issues that arise.

Tools for effective petty cash reconciliation

Here are some tools that can help you with effective management and reconciliation of petty cash:

1. Happay

Happay offers a digital petty cash management solution that replaces cash with Happay cards. The solution allows for easy petty cash expense tracking and real-time visibility into expenditures.

Quick Read: A Comprehensive Guide to Choosing the Right Expense Tracking Software

2. Spendesk

Spendesk offers spend management software and smart debit cards that allow you to manage small expenses easily. Smart debit cards can be used for petty cash expenses, and the software allows for easy reconciliation of petty cash transactions.

4. Pleo

Pleo offers petty cash software that allows petty cash transactions to be recorded in real-time. The software allows employees seamless management of petty cash expenses, including appropriate approvals.

5. MYND

MYND helps eliminate cash pilferage by allowing on-time reconciliation. The software provides real-time visibility, which helps eliminate errors and reduce the risk of fraud.

How can Happay assist you with petty cash reconciliation?

Here’s why Happay is a one-stop automation solution that simplifies petty cash management and reconciles it to ensure compliance:

• Replaces cash with Happay cards: With Happay’s automation tools, petty cash management becomes much simpler, eliminating the need for cash and the associated challenges of managing cash, such as the risk of theft or loss.
• Offers a cloud-based platform: All the data is stored securely in the cloud and is accessible from anywhere. This allows finance teams to manage petty cash expenses in real-time and access data from multiple locations.
• Allows funds disbursal on cards: Funds disbursed on cards can help manage petty cash expenses, making tracking expenses easy and ensuring that all transactions are recorded.
• Allows tracking expenses across locations: Finance teams can track their petty cash expenses across different locations, making it easy to manage expenses and track trends over time.
• Allows easy verification of expenses with receipts: Happay’s dashboard provides real-time data on expenses, ensuring that all expenses are legitimate and properly recorded.
• Provides ready summaries through smart algorithms: Algorithms automatically calculate how much is due to the employee or the company for each transaction, which makes it easy to reconcile petty cash expenses at the end of the reporting period.

Bottom line

Petty cash reconciliation allows organizations to maintain accurate financial records and prevent fraud. Effective reconciliation ensures that petty cash expenses are properly recorded, verified, and reconciled with receipts. It ultimately helps finance teams track organizational expenses and make informed decisions about their financial operations. It also helps to prevent cash pilferage and reduces the risk of errors in accounting records.

If you’re looking for an automation solution to manage your petty cash, consider using Happay’s digital petty cash management platform. With Happay, organizations can easily manage their petty cash expenses, track their finances in real time, and reduce the risk of fraud or errors.

FAQ’s