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. The following steps should be used to reconcile petty cash.
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.
If the company uses a formal reconciliation form, obtain a blank copy and use it to document the following steps.
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 The result is the amount of cash withdrawn from the fund.
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 Subtract this amount from the calculated amount of cash withdrawn.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 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.
There are several accounting issues linked to the petty cash reconciliation. They are as follows: