I received a Cash Payment; now, What Do I Do?
Effectively managing petty cash accounts can be one of the most common challenges for business owners. Physical cash can be difficult to monitor and account for if detailed records, such as receipts or transaction reports, are not maintained.
Digital transactions, such as expenses paid through a checking or credit card account, can be automatically recorded and easily reconciled. However, cash deposits and expenses require a hands-on approach to ensure accuracy.
Cash can be easily misplaced, miscounted, or possibly subjected to internal theft without proper records. These aspects can create significant issues for business operations.
When a customer pays with cash, the first step should be to record this payment in the accounting or invoicing software. Recording the cash transaction immediately after receiving the cash from the customer helps ensure an accurate transaction record.
Software to make it Simple
Most businesses use a dispatch or invoicing system–such as HouseCall Pro or Service Titan, software programs used to create jobs and invoice customers. These invoicing systems simplify the tracking of payments in accounts receivable by directly associating payments with a specific invoice number. Invoice tracking software reduces the risk of missed or duplicated entries.
Once a cash payment is recorded, it is important for the cash to be handed over to the employee responsible for preparing bank deposits. For smaller businesses, this responsibility might require the business owner. In larger organizations, a designated financial officer or another trusted staff member may be responsible for preparing bank deposits.
Separating these two tasks–collecting the cash and depositing the cash–reduces the chance of error or misuse. This process helps to ensure the money received matches the payment corded against the invoice. In turn, they are keeping the business’s financial records accurate.
Tracking Cash Responsibilities
Effective cash management requires strong internal controls. The main critical control that was mentioned previously is the segregation of responsibilities.
The employees receiving the cash from the customers should differ from those responsible for depositing the money into the bank. Additionally, regular checks or audits should be in place to ensure the cash payments recorded in the invoicing software match the deposited amounts. Another important control to have in place is reconciling the bank and cash accounts every month to catch any discrepancies early.
Unlike bank accounts or credit card accounts, which offer automated detailed reports, bookkeepers do not have automatic access to any form of system-generated records that track cash expenditures each month. Managing petty cash entries in the accounting software requires the business owner to gather information. Business owners provide bookkeepers with accurate, detailed, and timely information on how the cash was spent. Without regular communication and consistent oversight, the risk of mismanagement or unaccounted cash increases, which leads to discrepancies.
Furthermore, without regular updates to the cash ledger, a business owner may unknowingly have a significant petty cash balance at the end of the fiscal year. Large cash balances can raise serious questions, as they turn into questions of ‘What happened with that cash?’ or ‘How was this cash utilized, and why was it not documented properly?’. If left unresolved, these issues can create significant accounting challenges, as unrecorded cash expenses can lead to financial discrepancies, inaccurate tax filings, and potential audits from tax authorities.
Cash tracking has significantly evolved since the early 2000s, as most financial transactions are now computerized or digitized. This shift has made it nearly impossible for business owners to attempt to hide cash payments. For example, if a business owner uses HouseCall Pro or a similar invoicing software, any cash payment recorded against an invoice will automatically export to QuickBooks, making the transaction visible to the bookkeeper.
Once this cash is received and recorded, action must be taken regarding the money. Typically, the cash is deposited into a business bank account. However, if the money is spent, it is up to the business owner to inform the bookkeeper.
Generally, the bookkeeper relies on the business owner to determine what cash expenses should be recorded. The business owner typically can provide documentation, such as receipts, to the bookkeeper outlining what the cash was spent on.
Audits, Cash & You
Many business owners mistakenly believe that it is acceptable to receive cash from a customer without recording the payment on an invoice, either out of convenience or in an attempt to avoid having a higher tax liability. However, failing to report cash payments is not only a poor business practice but also a fraudulent act. Also, some business owners may assume they can delete cash payments from their dispatch or accounting systems, unaware that these deletions leave a digital footprint.
In nearly all accounting and invoicing software programs, deleted invoices and payments are easily traceable through audit trails. Even if a cash payment is removed from either type of system, the deletion would still be visible. In the case of an audit, the auditor could uncover this information during a thorough review.
As bookkeeping increasingly shifts to digital platforms, it has become easier for auditors to access and analyze business records. Auditors often request or subpoena records from accounting applications like QuickBooks or Xero. It is also possible for dispatch or invoicing systems to be subjected to a subpoena, making it impossible to fully conceal transactions.
Suppose a business records cash payments and later deletes them in an attempt to hide transactions. In that case, auditors can quickly and easily track these changes made within the accounting and dispatch systems.
The discovery of deleted cash payments not only raises serious red flags but can also lead to serious legal and financial consequences for the business owner. These consequences could expose the business to penalties, fines, or tax evasion charges.
Ultimately, it does not directly matter what happened with the petty cash. Cash is still considered part of the business’s income, and taxes must be paid on it regardless of how it was spent. The tax implications remain the same whether the cash was spent on personal or business expenses or remains unspent in the account. However, most of the time, a business owner only has a small amount of petty cash on hand for long periods.
If a significant amount of petty cash is recorded, it likely has been received and spent in some manner. It is common for business owners to provide some money to employees to buy materials, pay for day labor, cover small operational expenses, or even pocket the cash personally.
All these transactions are acceptable practices; however, if these transactions go unrecorded on the books, the petty cash balance will most likely continue to rise. This is why business owners need to communicate frequently with their bookkeepers, especially when they require specific direction or clarification from the business owner.
What Cash does to your Financials?
Another detail to consider is that petty cash expenses recorded on the books contribute to the bottom line of the profit and loss statement. This statement, a fundamental financial report for any business, provides an overview of a company’s revenues, expenses, and net profit or loss over a specified period. The net figure, or ‘bottom line,’ of the profit and loss statement is vital for determining the business’s overall profitability. It plays a significant role in calculating a company’s tax liability.
If cash transactions are recorded on the books, the business may take advantage of valuable line item deductions for job materials, office supplies, or other incidental expenses. It is recommended that a physical document or receipt support all petty cash transactions. Receipts are significant in the case of an audit, as the IRS tends to scrutinize petty cash more closely due to the absence of formal statements for petty cash transactions.
Maintaining detailed documentation ensures compliance and protects the business from any potential financial or legal repercussions. We recommend using a receipt management software to help support your business.
Petty cash transactions do not only affect the profit & loss statement; they also impact the balance sheet. The balance sheet is a financial statement that reports a company’s assets, liabilities, and equity over a particular period of time. Petty cash is categorized as a current asset on the balance sheet.
An inaccurate petty cash balance can cause the asset section of the balance sheet to be overstated or understated, leading to discrepancies in the company’s financial position. For example, if a substantial and inaccurate petty cash balance is recorded, the current assets on the balance sheet could be significantly inflated, misrepresenting the company’s financial standing.
Although tracking petty cash can sometimes be viewed as an annoyance, it is a necessary process that can yield significant benefits for a business. Properly tracking petty cash expenses can help simplify preparations during tax season.
The importance of maintaining clear, organized, and transparent records of all petty cash expenditures cannot be overstated. This diligence not only helps to prevent internal issues but also safeguards the business in the event of an external audit, providing peace of mind and financial security. In summary, effective petty cash management is a critical component of financial practices that support a business’s overall health and integrity.
Check out our youtube video Creating processes and managing your cash on hand as a business owner James to give you a first hand recap
If you need additional help or have any questions, Waterford Business Solutions is happy to help. Feel free to call us at 864-351-0852 or email us at Info@WaterfordBusiness.com.