What does ‘cash on hand’ mean in bookkeeping?

When your POS totals don’t match your bank deposits, the mystery usually comes down to three little words.  Don't worry, our favorite Bookkeeping Mensch, Paul Rosenblum, is here to break down the tricky world of cash on hand. From POS systems and sales tax to tips, deposits, and those frustrating month-end discrepancies, he explains how this account works, why it’s so confusing, and what both bookkeepers and business owners need to understand, including:

• 💳 How POS systems track sales, tax, and tips
• 🏦 Why deposits rarely match end-of-month sales
• 📊 What “cash on hand” looks like in the books
• 💵 Common mistakes with cash, checks, and payroll
• 🤝 How communication between owners and bookkeepers prevents messy books

With real-world examples and clear explanations, Paul gives you the clarity and confidence to spot cash-on-hand issues before they snowball into messy books and costly fixes.

IRS $6K deduction

Transcript

Season 6 Episode 2

It’s post Labor Day, and it feels like things are back to normal in my bookkeeping life with the September 15th deadline and then the October 15th deadline coming up, but I am also still working on summer projects.  2 of them are very close to being finished, and 2 still have substantial work to do to get them totally caught up, but I’m getting there.  I have cut down on the number of clients since last year, but because companies are expanding along with my summer projects, it seems as if I am just as busy.  But I’ll do bookkeeping until I physically can’t, or my passion for it disappears. And of course, I feel the same about this podcast.  

The last episode was the first Q&A, and I just have to say thank you for all the very nice responses. I wasn’t planning on doing another one for a little while, but after the deadline, a question came up which was such an important and complicated one to answer, that I thought that it made sense not to wait and to dedicate a full episode to explain this one.

  This episode is not only for bookkeepers, but for your clients and all business owners as well. So, tell your small business owners to listen to this episode -- I think it will help them to understand how important this subject is.  Before we begin, this will be an episode that I taught in a classroom setting many times when I had a whiteboard to demonstrate with.   Today, with this podcast, I am going to have to only use words to explain this -- but before we start, if you have been enjoying this podcast, please tell your friends and business associates about it, and leave me fan mail, email or voicemail with your thoughts.  It’s much appreciated.   I’m Paul Rosenblum.

So, grab your notebooks, or computer and open up your favorite note taking software. And get ready to type.  A LOT. Today’s episode is about 3 little words.  The question comes from Roxanne -- and thanks for this big question on a big subject, Roxanne.   

Thanks Roxanne!  Three little words.  ‘Cash-On-Hand’.  And it doesn’t even mean literally the cash that you have on hand.  So, it even starts out confusing. Ready?  Here we go! ----

This account as an ‘other asset’ on the chart of accounts quite simply is an accounting of funds that get deposited into the bank account that are sales, sales tax, CC tips, and any other revenue going through the Point of Sale System (More about that in a minute). The cash on hand account is mostly used in the retail business.  Restaurants, bars, and even retail operations that sell products off the shelves. I use it for one client who sells through Etsy and every month they get a report on their Sales figures, and 3 different kinds of fees that they are charged.  For product-based companies, the Point of Sale (or the POS) system is a third-party software that keeps track of the inventory, the sale, and the sales tax collected as well as the credit card tips and deliveries of food (if the business is a restaurant). Many of these POS systems can be attached directly to your accounting system and those numbers can be imported to them automatically.  As you can probably guess, I don’t do that --   I make monthly entries taking the numbers from the POS system and recording sales to the accounting system, as well as sales tax, tips, and anything else that is meaningful for the accounting of the company.  

For those of you who don’t know what a POS system looks like by name --  it’s the device that, when you are at a restaurant and pay for your meal, for one example, the server gives you a tablet to swipe or scan your credit or debit card into and allows you to sign and add a tip to the bill. 

I’m going to use the example of a new business using a POS system from day one of their opening. Let’s make this business example a hair salon which also uses their spacer for parties and events.

All month, (at least in theory), every sale that’s made is tracked by the POS system. At the end of the month, a report is run by the bookkeeper or the owner of the business.  In my case, I have access to the online POS system, and I can run the reports that I need. 

In this example, let’s say that the POS report shows $20K of Net sales (sales which do not include sales tax and tips- in other words, taxable income to the business). This report is from Jan. 1 – Jan 31. (It includes $1,775 in sales tax collected, and $500.00 in CC tips collected). So, in this case, the total amount is $21,775.00 PLUS the $500 in credit card tips which aren’t income. So, the gross sales are $21,775.00 and the net sales are $20,000.00. The collected tips are $500.00.

Before making any entries from the POS, I enter and reconcile the bank statement.  After that process, you would think the bank statement would show the total monies collected in the POS --  $22,225.00 in deposits. That would include net sales plus sales tax plus CC tips.  However, at the end of the month, most of the time, there are sales made but the funds are deposited at the beginning of the next month in your bank account. So, the cash on hand almost never matches what is deposited into the bank in a single calendar month.  

The bank, however, is showing a $485.00 difference between what the POS says that sales are in Jan. Why do you have $485.00 less in your bank account than the POS says that you have in sales and sales tax and possible tips?  Where IS that $485.00? 

Think of the last day of the month, Jan. 31st.  You made $400.00 (plus sales tax collected ($35.00) plus CC tips ($50.00) on that day, but that money didn’t show up in the bank or the bank statement until Feb. 1-3rd, maybe because of a weekend.  So that money is recorded as of Jan. 31st as a taxable sale in the POS, CC tips, and sales tax collected, but not in the bank yet. This way, your monthly sales will be correct, but monies not deposited into the bank yet, would show in the cash on hand account in February.  This is what the cash on hand procedure is all about. It’s similar to an Escrow account that a lawyer uses to collect monies from clients or settlements, to turn around and pay their client and to pay themselves. Eventually, the escrow account gets to zero.  However, the cash on hand account rarely gets to a zero balance.

As a bookkeeper, when the bank account deposits are entered when using a POS system, the deposit goes to the bank account as a ‘debit’, and rather than crediting sales directly like you would other sales without the use of a POS system, you would credit the ‘Cash on Hand’ account. If that account starts at $0.00 (when the company first opens), then there will be a negative amount in that account at the end of the month before the sales adjustments are made. The adjustment entry from the POS reports would be $20,000.00 in net sales to credit the sales account in the chart of accounts and a debit to the cash on hand. There would be a credit to the sales tax payable account, and a credit to a liability of Tips Payable (because even though they were collected, they haven’t been paid out yet through payroll). 

  A Negative figure of $485.00 that would remain in cash on hand would represent the net sales, sales tax and CC tips collected on the last day of the month. It would represent the money that has not yet been deposited into the bank because of the change in calendar months.  Even in a cash basis tax reporting, when the sale is made, it’s income taxable and sales taxable.  Not when those funds are deposited into your bank account.  

Are you confused yet? Don’t worry -- this whole concept and the bookkeeping procedures took me a while to understand and to enter the data correctly when I first learned it. So, at the end of each month and at the end of each year, the cash on hand account will not be at zero, unless you run a business that sells Sunday through Thursday, and all monies get deposited by Friday to the bank and New Year’s Day doesn’t fall on a Friday.   Whew!

 After the first month, you should be showing a positive cash-on-hand account after all sales adjustments are made. And that’s because of the beginning of the month there is a lag from the last day or two of sales from the previous month and the same at the end of each month. 

 That’s the story on a regular picture-perfect scenario. Not easy, huh?  And you think this episode is over?? (NOOOO!)

Now, join me in my life as a bookkeeper, as I know you have been just by listening to this podcast.  

Here are the ‘imperfect’ situations using a POS system: 

1. A check was accepted for our salon/event space client for a private party to take place in December. The check was entered into the POS system as a sale. However, it was not deposited into the bank account.  
   1. That will affect the cash on hand account, since the check was counted in net sales, but was never deposited in the bank, so never hit the bank account or the cash on hand account. You will have a higher value of cash on hand than you’d expect and if it happens often, at the end of the year, the cash on hand could be thousands or tens of thousands of dollars and that can’t be. 
2. A cash sale is made, recorded in the POS system and put in the cash register.  The cash was then used for expenses for the business.  
   1. Again, the cash sale would reflect to the sales in the accounting system but not to the cash on hand account since it was never deposited to the bank. If the bookkeeper is working remotely, unless the client tells them (or me) what they do with cash sales, how do we (I) know?  If the cash from a cash sale is used to pay for an expense, then the Debit is not to the bank account, it should be to Petty Cash (another asset, usually set up as a bank account for data entry purposes). And the credit is still to cash on hand since the cash sale is recorded in the POS.  However, if we don’t know about it, the cash sale is reflected in the revenue for the business, but not in the expenses or petty cash.  The client should keep a log of how much cash went into ‘Petty Cash’ (and when), so that the bookkeeper can fund the petty cash account within the accounting system and be able to reconcile the petty cash account like a regular bank account, and what the cash collected was used for, so the expense entries by the bookkeeper would be against the petty cash account (reducing that value), and debiting the expenses, to increase the deductions for tax purposes.   It comes back to what I have talked about before.  Communication, communication, communication.  Communication between the client or the client’s representative or manager and the bookkeeper. 
3. A cash sale is made, entered into the POS system, but is put in the pocket of the owner of the business. 
   1. Since the sale is accounted for, this is allowed.  But again, that cash would have to go into either a draw account for a single member LLC, or a distribution account for an S Corporation or a partnership LLC.  The bookkeeper has to be kept informed. 
4. This one is very common in a retail operation -- and that is--- using cash from sales for part of the payroll.  All of the cash sales are entered into the POS, but if the bookkeeper knows that cash is being used for a payroll, then the bookkeeper has to book those payouts somewhere. Temporarily, they can be booked to Petty cash. But eventually, at the end of the year, (or at the end of the month or quarter) you can’t show a balance sheet with $75 thousand dollars in Petty cash when in reality, there is $0.00.  This has to be explained to the owner of the business that we can’t show that in the books under a payroll expense, because the payroll numbers in the books have to match the W-2 forms sent to employees -- and that we will have to put those expenses somewhere. I follow what the tax preparer would like me to do. I don’t make these decisions myself. These entries, as I split in different categories, I will always memo “Per Client request”. I’m very uncomfortable doing this, but the tax preparer knows, the client knows, and it’s the client’s tax return, not mine. The responsibility falls on the taxpayer. The tax preparer signs the tax return, the client signs it, but I, thankfully, don’t have to.
5. A Cash sale is NOT entered into the POS system but is deposited to the bank. Again, the cash on hand account will be off again in the opposite way to the earlier examples, but in this case, a sale was made and not recorded, and if the cash was used for a deductible expense, it would be what we call ‘double dipping’.  A sale was made, not counted as taxable revenue but was spent on an expense. Can’t do that. That’s against the IRS code. If I find out about it, after a 15-minute lecture by me to the client, I will insist that we count those sales as revenue within the POS system. I will not let the client take an expense from unreported income.  
6. The business accepts a check just like earlier, (for an event or party) (re-listen to #1), but it was invoiced directly to the client. It did not get entered into the POS.  It’s an accounts receivable directly in the accounting system.  If it doesn’t get entered into the POS, those funds shouldn’t touch cash on hand either.  This is an invoice to the customer, paid against the accounts receivable, and deposited into the bank directly.  You can have another section in revenue in the books for ‘Event Revenue’ or ‘Direct Sales’.  And you can even label it --- NOT in the POS system.

This is complicated stuff. For some, the concept itself is complicated and to implement it--- is complicated.  If you are a bookkeeper and have never done this before, give yourself a break – there’s definitely a big learning curve. 

If you are a business owner, please understand that our job as bookkeepers is to give you a true accounting of your business, and to adhere the best we can to the IRS tax rules and, at the same time, to eventually save you money with your tax preparer.  If we give the tax preparer messy books with negative values of cash on hand and $50K in petty cash at the end of the year, this will cost you more for your tax preparer to fix it.  So, work with us before the tax preparer sees it and get this part right the best way, we all can. 

Remember, the cash on hand account is directly related to revenue and indirectly related to the bank account deposits.  It’s also related to Petty cash, sales tax payable, tips payable and any additional revenue streams going into the POS system.  ALL income must be reported. Period.

Even if all of this is done 100% correctly, when the 1099K comes in at the beginning of the year, calculating only credit card sales, and since they do not deduct the chargebacks or refunds (at least usually), the figures will be a little bit off (or sometimes a lot off).  And the 1099K’s only counts credit or debit card sales.  They don’t account for cash, Zelle, PayPal, Venmo or sales received by check. So, at the end of the year, run an annual POS report and see what the numbers are. Your books have to match that. An adjustment might be needed to adjust to the POS using a journal entry. 

Got that?   I’ll email a pop-quiz to every person who listened to this.  ***NOOOO*** …. I’m just kidding --- don’t worry!  

Feel free to reach out with specific questions about this.  And I’ll answer each one personally. Voicemail is the best way, but if it’s a long question, feel free to email. Both bookkeepers AND business owners’ questions are welcome. 

Ahhh…  I think I have a Bookkeepers Therapy session today on just this subject.  (Listen to the last 2 episodes). I have a headache just recording this one!  

Just remember, business owners, it’s called Accounting.  We have to account for all financial transactions that you make, in one way or another so that they make sense!  And no, it’s not just categorizing expenses.  And reconciling the bank accounts. In this day and age of third party software and inventive deals that people make with their landlords for leasehold improvements, and lots of other 21st century procedures and tools available, it’s not something anyone can do without real training. I will be happy to be your guide in the “Twilight Zone” of Cash on hand procedures. 

I don’t know about you, but I’m taking a nap right about now.  But I’ll be standing by for your voicemail or email.   I’m Paul Rosenblum.