Working with Petty Cash in Xero

Most businesses deal with Petty Cash at some stage. For the sake of clarity here I will define “Petty Cash” to refer to managing disbursements from a central pool of cash. The following are not meant to be addressed in this article as they are covered elsewhere:

• Reimbursing owners or employees for out of pocket expenses by cheque or direct payment (see Expense Claims module )
• Managing the cash float or paying expenses from the cash register of a retail store

Petty Cash can be complicated when people “borrow” money and then repay it (IOUs), people take an amount of cash for an expense and then return the unspent portion, or when you receive cash payments from customers.

There are three common ways of dealing with Petty Cash that I have worked with in Xero. The first is my preference, but does take a little more work. I will explain each method and its pros and cons.

Using a fake Bank Account

This is the most comprehensive method but also gives the best visibility and is more likely to get sales tax transactions appearing in the correct period on the sales tax reports. The Xero web site also has some guidance on this.

To set this up you need to create a new bank account in Xero. It doesn’t matter what bank or account number you say the account is with as you will not be setting up bank feeds (you can just enter “Petty Cash” as both the bank name, account name and the bank account number).

Here is how you handle the various transactions:

1. Ensure that all disbursements, receipts and transfers/replenishments have been entered into Xero as above.
2. Count the Petty Cash and compare it to the Balance in Xero.
3. Create a Spend Money (if Xero expects more cash than there is) or a Receive Money (if Xero expects less than there is) transaction to record the difference. I usually code this to General Expenses – but if the amount is large then you have probably missed a transaction or two.
4. Now your Xero Balance should agree with your physical cash. Now you need to switch on the Mark as Reconciled function in Xero, select all transactions in the Petty Cash account (or at least the unreconciled ones) and mark them as reconciled . This will force your statement balance to agree with your Xero balance and will allow you to spot new transactions next time.

Using a Non-Bank Account with periodic reconciliation/data entry This is possible slightly faster than my preferred method and does not clutter up the dashboards with another bank account, but does result in a loss of detail and has a reliance on Manual Journals, which (if not done properly) can result in problems in your ledger.

To set this up you need to create an account in the Chart of Accounts in Xero. I usually tell Xero that it is a Current Asset account. What is important is that you check the “Enable Payments to this account” box in the Account Details.

Here is how you handle the various transactions:

1. Generate an Account Transactions report for the Petty Cash account.
2. Ensure that all disbursements, receipts and transfers/replenishments have been entered into Xero as above.
3. Count the Petty Cash and compare it to the Balance in Xero (regenerate the Account Transactions report if you have added transactions).
4. Create a Manual Journal (if Xero expects less than there is you would credit Petty Cash; if Xero expects more than there is you would debit Petty Cash) to record the difference. I usually code the other leg to General Expenses – but if the amount is large then you have probably missed a transaction or two.
5. Now your Xero account balance should agree with your physical cash.

Using a Non-Bank Account coding only replenishment transactions

This method is generally the simplest and may be good if you replenish your Petty Cash regularly or have a low number of transactions. It doesn’t code any transactions until there is physical cash movement through the bank account (such as withdrawing cash to top up the Petty Cash account or depositing surplus cash. The cons are that transactions do not appear on the sales tax reports until you replenish the cash fund. It is not recommend if you receive payments from customers against invoices or making payments to suppliers against bills already entered into Xero (you should use either of the methods above; the rest of this section assumes that you do not need to interact with invoices/bills in any way).

To set this up you need to create an account in the Chart of Accounts in Xero. I usually tell Xero that it is a Current Asset account. This account will only ever hold the balance of the petty cash float, and not the transactions within it.

When you withdraw cash from the bank, cash a cheque, or deposit surplus cash you will need to code the movement within the petty cash tin using a spend or receive money transaction in the bank account that moved the cash. You are likely to need more than one line in the transaction so you will need to click “Add Details” to get to the full screen. You should enter each disbursement or receipt as a separate line and code them appropriately. If you are doing a spend money then disbursements will be positives and receipts will be negative (reverse this for a receive money/deposit). Don’t forget to check the tax rates. If you have any unaccounted for cash you might want to code that to General Expenses.

If you are changing the value of the Petty Cash float (e.g., you usually have $200, have $150 in disbursements to reimburse, but want to increase the float to $300) then you should code only the increase float amount to the Petty Cash account (in this example, $100 – no tax).

Still having problems?

If you are still having trouble getting things working, never fear. Not only is Fuel a Xero Partner, but we have Xero Certified staff. In addition, we are a Xero award-winning firm (2012 Most Valuable Professional award to Peter McCarroll for his contribution to the Xero Community Forum – helping people solve their Xero problems).

Our clients are eligible for our “10 minute no-charge” support policy (conditions apply). If you are not a Fuel Accounting client we can still help – please send an email (getincontrol@fuelaccounting.ca) or call us on 647-367-0876 and we can help you sort out your Xero problems quickly and easily (fees apply).