Step Away From the Cash and Hand Over Your Receipts

Documentation is an important key to any bookkeeping system. Income, expenses and everything in between require a thorough and accurate paper trail. This is even more crucial for cash transactions because the paper trail is virtually non-existent and without proper records, the business cannot claim the cash expenses on its tax return.

I have found that most business owners tend to treat cash by a different set of rules. It is in their possession, there is no record of it and it is free to use as they wish. However, these undocumented transactions affect gross income, overall expenses and the business’ bottom line profitability. And deep down inside everyone knows how the IRS feels about it!

Cash income needs to be deposited into the bank account along with other forms of payment received. If business expenses are paid with cash, it must be documented with receipts (see QuickBooks Tip below). This is also true of ATM withdrawals from the business account. Receipts verify where the cash was spent and any remaining cash should be deposited back into the account with full disclosure of the cash source (ie: “remainder of ATM withdrawal 10-12-09”).

Retail businesses might find it helpful to have a Daily Cash Sheet to record each day’s activity. This sheet will help track the cash receipts as well as the cash expenses that have occurred. If cash receipts accumulate for several days, the total of the eventual cash deposit must equal the sum of the cash receipts for all the days included.

Often an owner/shareholder will use personal cash for a business expense. There should be an equity or liability account to code owner cash transactions. An accountant can recommend the appropriate type of account for tracking this based on the situation. It is important to keep good records of how much money an owner/shareholder has given her company as this money could either be repaid or recorded to increase the equitable value of the company.

A business may not have a locked petty cash box, but handle business cash as if that box existed. Document every penny – who, what, where, when and why. These documented transactions will outline a history whereby the petty cash activity can be reconciled just like a bank account. These methods will keep the business IRS compliant and maximize the ability to analyze the business’ activities.



QUICKBOOKS TIP:  Making a deposit where income cash was spent on an office expense

1. Receive Payment from the customer as cash.

2. Create Deposit in bank account.

3. On an additional line of the deposit, enter the source of the expense (Office Max), the expense account (Office Supplies) and then the expense amount as a negative number.

This method will decrease the total to match the deposit slip and will also increase the business expense. The client gets full credit for their payment, the business expense has been documented and the deposit matches the bank statement activity making the monthly reconcile easier.