Unlike cheques, interac transfers, credit card payments and so, cash does not leave a nice paper trail. For some situations that might be a blessing, but if you want to keep track of your business finances, you need to keep an eye on the cash. RentMaxPro will help you do that with ease.
The basic concepts are as follows:
There are two separate types of entities. There is your business – which might be a corporation, a partnership or just yourself operating as a sole proprietor. Either way, you should always consider this as ‘the Company’ and keep it, and its finances, separate from your personal finances. Your Company has bank accounts that hold its money. Even if it is just you as a sole proprietor, you should still have a separate bank account for your ‘Company’ and always keep your personal and business monies separate.
And then there are yourself, your partner, your employees, and everyone else, all of whom are separate from your Company. Eash of these has their own personal bank accounts, but these are of no concern to the Company. We can also consider that each person also has a ‘virtual account’ of how much of the Company’s cash/money they have in their ‘pockets’ – a loose term that can also include their personal bank accounts etc. If the Company’s cash has been taken out of the Company’s bank account, and has not yet been spent on behalf of the Company, then it must be sitting in someone’s pocket somewhere. That is what we need to track.
Now consider the following sequence of events:
Let’s asume that Catalina goes down to the bank and withdraws $300 through the ATM from the Company bank account. On your bank statements there will be a record of the money going out, but no indication of where it went. She now has $300 of the Company’s money in her pocket, and at some point she needs to pay that back.
When you do your bookkeeping you will enter this as a cash withdrawal by Catalina, and her ‘virtual account’ will be increased by $300. You can do this by navigating to Income & Expenses -> Cash Withdrawal/Deposit.
Catalina then uses the cash to pay $273.56 to the window cleaner. She now has $26.44 of Company money left in her pocket, and also a receipt from the window cleaner.
This expense will be entered (Income & Expenses -> Expenses -> Enter New Expense) as a payment made by Cash to the window cleaner. Ideally she will do it on the phone there and then so that she can also upload a photo of the receipt. Her ‘virtual account’ will be decreased by $273.56 since she no longer has that cash in her pocket.
Catalina’s next stop is to pay the gardener. He too is old-school and wants to be paid in cash. So she pays him $163. But she only has $26.44 of Company cash in her pocket, so she now has to dig into her own personal wallet to pay the rest of it. Being old-school he doesn’t do receipts, but we can still enter this as an expense, paid by cash, with a note explaining the circumstances. For small ‘petty-cash’ transactions like this the tax man is usually happy enough. Catalina’s ‘virtual account’ gets updated again, decreasing by $163 putting her now at minus $136.56. In other words, the Company now owes Catalina that amount.
Later that day one of the tenants pays her $1200 in cash for his rent. She writes out a paper receipt to give him and then decides to head straight to the bank to pay that money in. Since she has paid in exactly the same amount as she was given, she does not need to involve her own ‘virtual account’ in the procedure. It is simply a direct payment into the bank from the tenant that will show up on the bank statement as an ATM deposit. So she records it as a rent payment, paid as a ‘Direct Deposit to Branch’. Her ‘virtual account’ remains static at minus $136.56.
While she is there, however, she figures she probably should take a bit more petty cash out of the bank, so does an ATM withdrawal for $200. Her ‘virtual account’ goes up to a balance of $63.44 – Company money that she now owes us.
Over the coming weeks there will be more cash transactions so her ‘virtual account’ will be constantly going up and down. Provided those ATM transactions on the bank statement get accurately identified with the right person you can always know exactly how much Company money is in Catalina’s pocket – and whether she owes the Company, or the Company owes her.
At some point before the end of the tax year you should look up her Cash Balance in RentMaxPro and then balance it out with her so that the balance is then zero. Just go to Income & Expenses -> Reconciliation -> List Cash Transactions and filter it for the person and time span that concerns you.
The same process is also used for other ‘personal’ transactions. It might be that Beckett pays in his pay cheque into the Company bank account instead of his own personal. He pulled out the wrong bank card and did not notice until doing the reconciliation at the end of the month. No problem. When reconciling or recording the new payment, select the ‘Payment For’ as ‘Personal’. The deposit will be recorded as a ‘loan’ from Beckett by recording a decrease in Beckett’s ‘cash account’ – money that the Company must pay back to him at some time.
Likewise if Beckett, by mistake, uses the Company credit card to book a flight to Mexico, this will again get entered as a ‘Personal‘ transaction and will be recorded as an increase in his Cash Account – money that he needs to repay the company at some point.
Normally one would consider petty cash transactions like this to be short term, aiming to balance them out by year’s end. However there may be times when you want to take a longer view on them. That can be done by transferring the active balance on the Cash Account to a Shareholder’s account that will get repayed in the more distant future. You should discuss the implications of this with your accountant if significant sums of money will be involved.
By following these procedures you will have nice tidy accounts to keep your accounting bills down, the tax man happy, and you will always know where your money is.