{
  "question_id": "Q-0028",
  "slug": "how-to-run-petty-cash-with-proper-documentation",
  "display_title": "How do I run petty cash with proper documentation?",
  "format": "article-v2",
  "applies_to": {
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  "general_concept": true,
  "summary": "Hold the fund at a fixed amount with one custodian and a payment limit. Every payment needs a voucher recording date, recipient, purpose, amount and account, signed by recipient and approver, with the receipt attached or, failing one, an explanation. Someone other than the custodian counts, sometimes unannounced: cash plus vouchers must equal the fixed amount. Replenish from a voucher summary, posting expenses then, record differences separately, and never pay workers or contractors from it.",
  "body": "## Why must petty cash be a fixed amount rather than a drawer you top up?\n\nIn the petty cash example in IRS Publication 583, the fund is set at a fixed amount, and the unspent cash plus the amounts on the petty cash slips should equal that amount.\n\nThat equation is the control: every dollar is either in the box or on a voucher, so a count shows at once whether money is missing. A drawer topped up whenever it looks low has no figure to reach, so a leak never shows.\n\n## How do you set up the fund?\n\nMake four decisions and record them in a dated note the owner signs:\n\n- **The fixed amount.** AccountingTools' article on the petty cash fund sizes the fund from the expected volume and size of minor cash expenditures, how often it must be replenished and the cost of running it, and says risk tolerance and internal control considerations further influence the size.\n- **One custodian.** Name one person who holds the cash and answers for it, and an alternate for absences.\n- **A payment limit and an approver.** Set the most one voucher may pay and name who approves vouchers; AccountingTools' petty cash procedure has someone other than the custodian approve expenditures. Larger payments need the owner's approval.\n- **Locked storage.** AccountingTools' petty cash procedure also says the fund should be locked at all times when not in use. Keep it apart from any till or deposit cash.\n\nThe establishing entry moves money from the bank into the fund; AccountingTools' article on petty cash accounting gives it as a debit to petty cash and a credit to cash. For a fund of 300.00:\n\n| Account | Debit | Credit |\n|---|---|---|\n| Petty cash | 300.00 | |\n| Checking account | | 300.00 |\n\n## What must every voucher record, and who signs it?\n\nIRS Publication 583 says to make out a petty cash slip for each payment from the fund and attach it to the receipt as proof of payment, and that supporting documents for expenses should show the amount paid and that it was for a business expense. If you cannot get a receipt for a cash payment, it says to make an adequate explanation in your records at the time of payment. In this fund that explanation goes on the voucher when the cash is paid out, signed by the approver; a voucher with neither a receipt nor that explanation is not paid.\n\nA receipt alone does not show who took the cash, why the business paid or who allowed it. Washington State's accounting manual has its agencies support each disbursement with a receipt or voucher bearing the payee's signature and recording the date, payee's name, purpose, amount paid, authorizer's signature and account charged. Use those fields on every voucher, and attach the receipt too.\n\nThe recipient signs on taking the cash; AccountingTools' petty cash procedure explains that this proves the custodian did not fill out the voucher and pocket the money. The approver signs before payment. Number vouchers in sequence so a missing one shows at the count. Which receipts the IRS accepts, and when one is required, is a separate question.\n\n## Who should count the fund, and how often?\n\nA count compares the cash in the box plus the vouchers held with the fixed amount, to the cent.\n\nAccountingTools' petty cash procedure divides petty cash duties among employees whenever practical, with periodic surprise counts by someone independent of the custodian, the approver and the bookkeeper. In a small business that is usually the owner, and never the custodian. Washington State's manual has its agencies reconcile each fund at least monthly and audit it frequently.\n\nRun each count this way:\n\n- Count at every replenishment and at least monthly, with surprise counts in between; a busy fund needs more.\n- The counter counts the cash and reads every voucher personally, never relying on the custodian's figures. Each voucher needs both signatures, a receipt or explanation (an open advance has none until it settles; the count sheet lists each open advance with its date, and one not settled within days is chased at once and, if still unsettled, handled as cash gone with no proper voucher in the table for when the count is over or short) and an amount within the limit or the owner's approval.\n- The counter and the custodian sign and date a count sheet showing the fixed amount, cash, vouchers and any difference.\n\n### What if the custodian also keeps the books?\n\nThe owner supplies the independence: count the fund personally and without notice, sign each replenishment check only after reading every voucher against its receipt, and follow those checks on bank statements the owner gets directly from the bank. Where the owner is the custodian, the owner also writes the replenishment check, and an outside accountant can count the fund and review the vouchers at the year-end close.\n\n## How does replenishment work, and why is that when expenses are posted?\n\nNothing is posted to the books when the custodian pays out cash; AccountingTools' article on petty cash accounting says there is no journal entry at that point. The expenses reach the books at replenishment:\n\n1. Count the fund and record any difference, as explained below.\n2. Sort the expense vouchers by account and add them up on a replenishment summary. An advance not yet settled stays in the box on a voucher marked \"advance\": it counts as a voucher at the count but stays off the summary until its receipt and change come back, when it becomes an ordinary voucher for the amount spent.\n3. Someone other than the custodian, as Washington State's manual requires of its agencies, checks and approves the replenishment, reading each voucher against its receipt and the summary.\n4. Someone other than the custodian writes the check: the summary total plus any shortage, or less any overage, which always equals the fixed amount less the cash counted and any open advances. Publication 583's example restores the fund with a check for the total of the outstanding slips, which is the right amount only when the count shows no difference and no advance is open.\n5. Record the check by the summary: AccountingTools' article on the imprest system debits each expense the vouchers support and credits cash. That entry is the check's only record; never record the check, or its bank line, again. Record the checks and deposits behind the establishing, resizing and closing entries once each, too.\n6. The approver watches the new cash counted into the box. File the summary, vouchers and receipts together, marked so none can be submitted twice.\n\nReplenish at every month end and at the year end even when the fund is not low, because vouchers still in the box have not reached the books, and settle every advance before the year-end count.\n\n### What does one count-and-replenish cycle look like?\n\nA fund fixed at 300.00 is counted at month end: 38.65 in cash and five vouchers, none of them advances.\n\n| Voucher | Account | Amount |\n|---|---|---|\n| 41 | Office supplies | 46.80 |\n| 42 | Postage | 63.00 |\n| 43 | Office supplies | 29.15 |\n| 44 | Postage | 35.00 |\n| 45 | Cleaning supplies | 82.40 |\n| Total | | 256.35 |\n\nCash of 38.65 plus vouchers of 256.35 is 295.00, so the fund is 5.00 short. By account, the summary is office supplies 75.95, postage 98.00 and cleaning supplies 82.40, totalling 256.35. The check is the summary plus the shortage, 261.35, which is also 300.00 less the 38.65 counted:\n\n| Account | Debit | Credit |\n|---|---|---|\n| Office supplies | 75.95 | |\n| Postage | 98.00 | |\n| Cleaning supplies | 82.40 | |\n| Cash over and short | 5.00 | |\n| Checking account | | 261.35 |\n\nHad the count found 48.65 in cash, the fund would be 5.00 over: the check would be 251.35, and cash over and short would be credited 5.00.\n\n## What do you do when the count is over or short?\n\nNever hide a difference inside the replenishment. The check still restores the fixed amount, but the shortage or overage goes on its own voucher and its own line to cash over and short, and is followed up as below. AccountingTools' article on the imprest system records a difference in a cash over and short account during replenishment, a shortage as an expense and an overage as miscellaneous income; its article on reconciling petty cash writes an unexplained amount up on its own voucher.\n\n| What the count shows | What to do |\n|---|---|\n| Cash short, no explanation | Recount with the custodian present and look for a missing voucher. Record the shortage on a voucher the counter and owner sign, and investigate. Repeat shortages call for more surprise counts, a new lock or combination, or a new custodian. |\n| Cash over | Recount and look for a voucher written for more than was paid out, or personal money mixed in. Record the overage on a voucher, and hand it to no one without evidence it is theirs. |\n| Cash gone with no proper voucher, such as an IOU | Have the person who took it complete a voucher with the receipt, and have the approver sign it. Publication 583's alternative to a receipt is an explanation made at the time of payment, which a later one is not, so without a receipt, recover the cash. If an employee took it for a business purchase and neither substantiates nor returns it, do not record it as a shortage: Publication 15 says that if the expenses aren't substantiated, or amounts in excess of the substantiated expenses aren't returned within a reasonable period, the amount paid in excess of the substantiated expenses is treated as paid under a nonaccountable plan, and that payments under a nonaccountable plan are wages. Send it to the owner and whoever runs payroll. Record a shortage only for cash no one can be shown to have taken. An IOU is never a voucher; an unpaid IOU goes to the owner. |\n\nIf a difference points to theft, change the lock or combination at once, alongside the investigation rather than after it, and keep the vouchers and count sheet as found.\n\n## Which payments must never come out of petty cash?\n\n| Request | Answer |\n|---|---|\n| A small purchase of goods or postage within the limit, or reimbursing an employee who bought one and claims promptly | Pay on a complete, approved voucher. |\n| A purchase above the limit, or a cash advance for a purchase not yet made | Only with the owner's approval on the voucher; an advance is settled within days by its receipt plus the change, and one that is not goes to the owner, as in the table for when the count is over or short. |\n| Wages or any other pay to an employee | Never from the fund; send it to payroll. |\n| Paying a person or firm to do a job for the business, however small, such as cleaning, repairs, a courier or delivery run or freelance help | Never from the fund; send it to normal payments. |\n| A supplier's invoice, rent, a loan or IOU, or cashing a personal check | Never from the fund; send it to normal payments. Invoices and rent need normal approval, and the IRS page on whether you must file a Form 1099 lists rents that reach the applicable reporting threshold among payments reported on Form 1099-MISC; a loan, IOU or cashed personal check buys nothing for the business, so no voucher can support it. |\n\nWhen unsure whether a request is a purchase or pay for work, send it to normal payments. One payment split across vouchers to stay under the limit is a request above the limit.\n\nIRS Publication 15 says the pay subject to federal employment taxes may be in cash or in other forms. Publication 583 says employers generally must withhold federal income tax from employees' wages and deposit federal employment taxes, and that wrongly classifying an employee as an independent contractor can make you liable for that worker's employment taxes plus a penalty. Cash pay from the box skips all of that.\n\nReimbursing an employee for a purchase can be different. Publication 15 says amounts paid under an accountable plan aren't wages, and that such a plan must require employees to meet three rules: they paid or incurred allowable expenses while performing services as your employees, and the payment is for those expenses, not an amount that would otherwise have been paid as wages; they substantiate the expenses within a reasonable period; and they return any excess within a reasonable period. Under Publication 15, payments under a nonaccountable plan are wages. In this fund, a reimbursement is paid only against a voucher and receipt brought in promptly after the purchase, and each advance is settled within days. That routine is built to follow those three rules; whether your business's arrangement meets them is not settled by the routine alone.\n\nFor anyone else paid for work, the IRS page on whether you must file a Form 1099 lists services performed by someone who is not your employee among payments reported on Form 1099-NEC once the year's payments exceed its reporting threshold. Publication 583 says reports of such payments must include the payee's identification number, and that if the payee does not provide one, you may have to withhold part of the payments as backup withholding. The fund collects none of that information.\n\nDeclined requests go to the owner or whoever runs normal payments, where worker status, taxpayer details, reporting and withholding are decided.\n\n## How do you hand the fund to a new custodian or cover an absence?\n\nCalifornia's State Administrative Manual, for state revolving funds, has the employees concerned perform a personal audit of the fund when custody transfers, the newly assigned custodian give a receipt to the one being relieved, and a copy signed by both go to the accounting officer. A business can follow the same order:\n\n1. The outgoing and incoming custodians count the cash and vouchers with the owner or usual counter; any difference is attributed to the outgoing custodian's period of custody and handled like any other count difference.\n2. Both custodians sign the count sheet; the outgoing custodian keeps a signed copy as their receipt, and the owner keeps the original.\n3. At that moment, collect every key, count them against the keys issued, and change the lock or safe combination.\n\nIf the outgoing custodian is unavailable, the owner counts with the new custodian and changes the lock or combination before the handover. For a short absence, the box either stays locked and unused or passes to the named alternate through the same count, and comes back through another.\n\n## When should the fixed amount change, and how is the fund closed?\n\nResize when usage changes: frequent replenishing means the fund is too small, and cash untouched for months means it is too large. Do it straight after a count and replenishment, so the fund starts in balance. To raise a 300.00 fund to 400.00:\n\n| Account | Debit | Credit |\n|---|---|---|\n| Petty cash | 100.00 | |\n| Checking account | | 100.00 |\n\nLowering it reverses this entry once the excess cash is deposited; Washington State's manual returns money from its agencies' reduced or abolished funds to the account it was advanced from.\n\nTo close the fund, settle any advance, count it, post the vouchers still held, deposit the cash and clear the petty cash account. Closing a 300.00 fund with 120.00 of office supply vouchers and 180.00 in cash:\n\n| Account | Debit | Credit |\n|---|---|---|\n| Office supplies | 120.00 | |\n| Checking account | 180.00 | |\n| Petty cash | | 300.00 |\n\nA closing difference goes to cash over and short. How petty cash shows in the bank reconciliation is a separate question.\n\n## What if several locations or departments each hold a fund?\n\nRun each as its own fund, with its own fixed amount, custodian, vouchers, counts and replenishments; AccountingTools' article on the petty cash fund says a custodian is responsible for each fund. AccountingTools' article on the imprest system states a fixed fund in a separate general ledger account; give each fund its own, such as Petty cash – Warehouse, so a shortage stays traceable, and add the fund accounts together only when reporting total cash. Never move cash between funds or count two as one.\n\n## What records do you keep, and for how long?\n\nKeep each replenishment as one package: the summary, every voucher with its receipt, and the count sheet. Publication 583 notes that proof of payment, by itself, does not establish a tax deduction, so the expenses rest on that package rather than on the replenishment check.\n\nThe IRS page on how long to keep records says you generally must keep records that support an item on your tax return until the period of limitations for that return runs out; for a package, that is the return its expenses appear on. The page sets these periods for income tax returns and says that, unless stated otherwise, the years run from the date the return was filed, not from the date of the voucher, and that a return filed early counts as filed on its due date:\n\n| Situation | Keep records for |\n|---|---|\n| None of the last three rows applies | 3 years |\n| You file a claim for credit or refund after you file your return | 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later |\n| You file a claim for a loss from worthless securities or bad debt deduction | 7 years |\n| You do not report income that you should report, and it is more than 25% of the gross income shown on your return | 6 years |\n| You do not file a return | Indefinitely |\n| You file a fraudulent return | Indefinitely |\n\nThe same page says not to discard records no longer needed for tax purposes until you check whether you must keep them longer for other purposes.\n\nPublication 583 says all requirements for hard copy records also apply to electronic storage systems, which must index, store, preserve, retrieve and reproduce the records in legible format and give a complete and accurate record the IRS can access; it refers to Revenue Procedure 97-22 for details. It allows the paper originals to be destroyed only once the system has been tested to show it reproduces them in compliance with IRS requirements and procedures are in place to keep it compliant, and you remain responsible for any other records you must keep. It warns that a system that falls short may bring penalties unless the originals are kept in a way that lets you and the IRS determine your correct tax. Once scans replace the paper, it says the system must be kept as long as it is material to the administration of tax law. Until both conditions for destroying the paper are met, keep the paper.",
  "sources": [
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      "id": "REF::1",
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