Petty Cash ManagerHow to reconcile petty cash, step by step
Reconciling petty cash means proving that the cash in the box plus the receipts you paid out still add up to the float you started with. Here is the five-step method most accountants use, with a worked example that includes VAT and a small shortage.
The one formula you need
Most businesses run petty cash on the imprest system: the custodian gets a fixed float (say SAR 5,000), spends from it, and is topped up back to the same amount. With a fixed float, this must always be true:
Anything left over is a shortage (if less) or an overage (if more).
If you top up during the period instead of only at the end, use: opening float + top-ups − vouchers paid = expected cash. Our free petty cash template does this calculation for you.
The 5 steps
- Count the cash. Count every note and coin with the custodian present, and write the count down by denomination.
- Total the vouchers. Add up every petty cash voucher or receipt paid since the last top-up. Check each one is signed and numbered, with no gaps.
- Compare with the float. Cash counted plus vouchers should equal the float.
- Investigate any difference. Look for a missing voucher, an adding mistake, an IOU, or a top-up that wasn't recorded, before you call it a shortage.
- Top up and post the entry. Give the custodian enough cash to bring the float back to its full amount, and record the expenses, VAT and any difference in the books.
Worked example
A custodian holds a float of SAR 5,000. At month end the vouchers are:
| Category | Net | VAT 15% | Total paid |
|---|---|---|---|
| Office supplies | 800.00 | 120.00 | 920.00 |
| Fuel & transport (no tax invoices) | 1,450.00 | 0.00 | 1,450.00 |
| Meals & refreshments | 600.00 | 90.00 | 690.00 |
| Postage & courier | 352.50 | 0.00 | 352.50 |
| Total vouchers | 3,202.50 | 210.00 | 3,412.50 |
The cash count:
| Denomination | Count | Amount |
|---|---|---|
| 500 | 2 | 1,000.00 |
| 100 | 5 | 500.00 |
| 50 | 1 | 50.00 |
| 10 | 3 | 30.00 |
| 1 | 2 | 2.00 |
| 0.50 | 1 | 0.50 |
| Cash counted | 1,582.50 |
Now reconcile:
| Float | 5,000.00 |
| Less: vouchers paid | (3,412.50) |
| Expected cash | 1,587.50 |
| Cash counted | 1,582.50 |
| Shortage | 5.00 |
| Top-up needed (vouchers + shortage) | 3,417.50 |
After a recount and a check for missing vouchers, the SAR 5.00 can't be explained, so the manager approves it as a shortage. The custodian receives SAR 3,417.50, which brings the box back to SAR 5,000.
The journal entry
Petty cash itself doesn't change on the books (it is still SAR 5,000 after the top-up). The entry records what was spent:
| Account | Debit | Credit |
|---|---|---|
| Office supplies expense | 800.00 | |
| Fuel & transport expense | 1,450.00 | |
| Meals & refreshments expense | 600.00 | |
| Postage & courier expense | 352.50 | |
| Input VAT | 210.00 | |
| Cash over and short | 5.00 | |
| Bank | 3,417.50 | |
| Total | 3,417.50 | 3,417.50 |
Only claim input VAT on valid tax invoices, and check the rate matches your current local rate. If you use Zoho Books, QuickBooks or Xero, you can post this as an expense or journal against a petty cash account; ask your accountant which they prefer.
If the cash doesn't match
- Recount with a second person present.
- Look for missing vouchers: check the numbers run in order, and ask about anything bought without a receipt.
- Check the adding on the voucher total.
- Look for IOUs or advances that were given out but not recorded.
- Check for unrecorded top-ups if the cash is over.
- If a difference remains, record it in cash over and short with the manager's approval. Small, rare differences are normal; regular shortages are a warning sign.
FAQ
How often should petty cash be reconciled?
At least every time the float is topped up, and at month end. Busy funds are often counted weekly, and a surprise count now and then is good practice.
Who should do the reconciliation?
Someone other than the custodian, ideally with the custodian present during the count. The reconciliation should be signed by both.
What is the journal entry for petty cash replenishment?
Debit each expense account with the net amount, debit input VAT with the tax on valid invoices, debit (shortage) or credit (overage) cash over and short, and credit the bank with the total top-up.
Should the float ever change?
Only when you decide to make it bigger or smaller. Then you record a separate entry between bank and petty cash for the change.