Rent to own Accounting By John Day, MBA
Author of "Real Life Accounting for Non-Accountants"

I’ve seen owners who are shocked to find a major discrepancy between the cash receipts and the sales when they are reconciled at the end of the month. They had no idea they were taking that much money out for lunches
John Day

Why Petty Cash? It is the difference between sloppy bookkeeping and managing your money properly. You have your own small Rent to Own business, so why not grab a twenty out of the till when you need some pocket money? It may not be the end of the world if you do, but it presupposes a certain attitude toward your business.

Keeping track of your finances is one of the most important tasks an RTO business owner has. A lackadaisical approach in this area can spell trouble. For instance, I’ve seen owners who are shocked to find a major discrepancy between the cash receipts and the sales when they are reconciled at the end of the month. They had no idea they were taking that much money out for lunches, etc. In addition, what if you have employees who decide they can dip into the till? There is no way to know who took the cash, the owner or the employee. In accounting, this is an issue known as “Internal Control”. Internal controls are established to maintain the integrity of the accounting system. These are procedures that provide checks and balances to ensure that the figures reported on a financial statement are what they say they are.

In a small RTO business that is large enough to have employees who handle bookkeeping functions such as preparing a bank reconciliation, making bank deposits, and recording entries into the general ledger, an internal control procedure known as the “division of labor” should be instituted. Division of labor means that the same person preparing the bank reconciliation should not also make the bank deposits. The theory here is that it is less likely that two employees will “collude” with each other to commit a crime.

The petty cash system is part of a company’s internal control procedures. A set amount, such as $100 is established by withdrawing the cash from the bank and placing it in a separate locked box. When cash is removed from the box, a voucher is filled out for the exact amount of cash and signed by the person removing the cash. This voucher amount and the remaining amount of cash in the box must total $100. When the item is purchased, the receipt is placed in the box in lieu of the voucher. If the box were audited, the auditor would find receipts, vouchers, and cash that equal $100.

You can find locking cash boxes and pads of petty cash voucher slips at your local stationer store. If your business is small enough not to warrant a petty cash box, then you should at least use the voucher slips to replace any money you take out of the cash register till. Follow the same procedures above, and you will always know where your cash went and what it was spent for.

Replenishing Petty Cash
How to properly replenish petty cash has been a source of confusion for many small business owners, not just RTO owners. As a practicing accountant, I find clients making the same mistake constantly, and it comes from not understanding the full concept of petty cash. The concept is not difficult to understand; you just need to make sure you understand it.

First, think about what you are doing. You take a certain amount of money out of the bank; let’s say $100, and put it into a cash box. Remember, that Cash-in-Bank is an asset. An asset, you may recall, if you have taken my Accounting for Non-Accountants course, is an unused economic resource that your business owns (has possession or control of). All you have done is shift $100 from Cash-in-Bank to another asset account called Petty Cash. You deplete the cash in the box when you purchase such items as postage, office supplies, meals, gas for an auto, etc. When most of the cash is gone, you must replenish the fund. You do that by withdrawing more cash from the bank for the amount that has been depleted; let’s say $92.50. You should have $92.50 in receipts for expenses in the box. Those expenses are posted to their respective categories and the offset is, of course, Cash. Here is the journal entry:

DEBIT: Postage $37.00; Office $14.50; Meals $36.50; Auto $15.00; CREDIT: Cash $92.50.

The mistake occurs when you try to do this:

DEBIT: Petty Cash $92.50; CREDIT: Cash $92.50.

If you went with this second journal entry, you would end up with $192.50 in the Petty Cash account, which is an asset on your balance sheet, and zero in the expense accounts for postage, office, meals, and auto. This doesn’t seem right, does it? If you audited the petty cash box you would not find $192.50 in cash, vouchers and receipts. You would only find $100.00. The Petty Cash amount remains the same as originally established, unless you purposefully decide to increase it. Otherwise, petty cash expenditures must be recorded to their appropriate expense categories.

There you have it. You now know why it’s important to use a formal petty cash system and how to properly make it work. So if you are going to do it, why not Do it Right?

John Day is an accomplished author and contributing Editor to RTO Online and RTO Magazine Print Edition.