Getting Cash, Payroll, and Petty Cash Right

Cash, Payroll, and Petty Cash Puzzles: Bookkeeping isn’t just “data entry”—it’s detective work that keeps your books accurate and your business safe. Our favorite Bookkeeping Mensch, Paul Rosenblum, gets into the messy reality of handling petty cash, payroll checks, tips, and owner contributions in this episode, using a real client case as a guide. From partner paychecks cashed through the register, to undocumented utilities paid with personal money, to tips that must be reported correctly, Paul explains how these situations can create a jigsaw puzzle if not recorded properly. He shows where cash on hand belongs, how to document unusual transactions, and why open communication between business owners and bookkeepers is essential to avoid costly mistakes. Because in bookkeeping, every dollar tells a story—and it’s never just data entry.

Transcript

Season 6 Episode 3

Happy Autumn to all!  (Is that a ‘thing’)?  Well, if it isn’t, it is now!  Welcome to the third episode of Season 6 of the pod.  The first two episodes have been getting back to basics talking about some of the technical aspects of bookkeeping, and today’s episode follows that same theme.  

And you’ll see that some things that I will talk about today are related to ‘cash on hand’, which we delved into in the last episode. As someone wrote recently in a bookkeeping forum that I’m a part of – He reacted to what someone wrote about bookkeeping being “just data entry”, and he wrote back --- It’s not just ‘data entry’, it’s much more than that.  

It takes thinking, and sometimes detective work, and recently, a part of my day is spent pulling my hair out (just kidding), but it also could drive me to drink (but I’m a nondrinker – I know, boring, but NOT BORING, really). 

Remember, send me voicemail from the website at bookkeepermensch.com or leave me email with any suggestions for episodes.  What’s on your mind?  Ok -- let’s dive into it.  I’m Paul Rosenblum.

The client’s business in today’s episode is a restaurant.  I use petty cash, cash on hand, and cash register payouts for items purchased when they run out of things and have to run to the grocery store, for one example. There are two partners, and the company is an LLC filing taxes as an S Corp. 

When I first “inherited” their books about 3 years ago, they were an utter mess. I wouldn’t even consider them ‘books’, they were more ‘work papers’ for the CPA to put together a tax return from. Every shortcut ever invented was used, and they were entered incorrectly. The Chart of accounts was a mess, the bank accounts had reconciliation discrepancies almost every month for two or more years, and there were paychecks entered in the bank register without ever being reconciled and the balance sheet wasn’t even close to the correct balances, mostly in bank accounts.  Since I was responsible from the beginning of 2022, I went back to Jan. 1st and adjusted the opening balances to what they should be for the bank accounts (3 of them), undid the reconciliations back to Jan 1st, and redid them correctly, and then worked with the new tax preparer to start fixing the rest. I knew it was going to take a long time to get the books to where we both wanted them to be. 

The client sends me a monthly email with the cash register payouts (without vendors, just categories and amounts), so it’s done as a journal entry every month, and they email me the POS revenue from two (yes, I said TWO) POS systems which would be another journal entry. 

They also provided tips paid as cash to employees, cash withdrawals from the bank which went to specific vendors and the total dollar amount of paychecks being cashed in-store from the cash register and cash sales which were being counted in the POS but not deposited into the bank account, hence not touching cash on hand. 

I was just building a relationship with this new client, so I wasn’t about to ask them if the payroll was a 100% legal one -- I was still working on the chart of accounts and reconciling bank accounts and getting some structure in their books. So, I let it slide for a while.  When I gave the books to the tax preparer the first year, I told him what the story was, and we would have to do a lot of work because petty cash was off and cash on hand made no sense, and I didn’t really know why.  The tax preparer ended up having a face-to-face meeting with both partners and they started to explain to him what they were doing. Not the whole story (it was only the first year). But slowly, it was beginning to be explained over time.  The whole story, or most of the story, took 3 years to complete.

It's now 3 years later, and after the stressful time that the tax preparer and I had to adjust the books in September of 2025 for 2024 taxes, we both swore that this will not happen again.  So, I had a long talk with one of the partners about procedures in-store moving forward.  

These are some of the things that I found out. 

1. The utilities were being paid for in cash, not always from the business because of the business’s bad cash flow. I was not being told about these payments, hence they were not in the books. They were personal money.
2. The paychecks that were being cashed through the cash register were 99% partners’ paychecks.  Not the workers. 
3. I never got an actual accounting of each payroll check being cashed in-store, so by the spreadsheets that they emailed me every month, the tax preparer and I decided that we would put them into Petty cash and deal with it at the end of the year.  
4. The tips that were paid out in cash every week to each employee from the cash register were 100% legal, because the tips were being reported to their payroll company and taxed as they should be , and showing up on the employees W2, but employees were not being paid for the tip wages on their paychecks since they were being paid cash in-store. So, they were not ‘double dipping’ and the W-2’s and all of the payroll was 100% correct.  
5. One of the partners was cashing previous year’s payroll checks through the bank.  For an example, I saw a 2024 payroll check being cashed in September of 2025 after the 2024 taxes were filed. What to do about that? So, some checks were going through the bank, others were being cashed in the store directly from cash sales. 
6. In reality, they really don’t have petty cash. All of that money in the register ends up getting spent in grocery store runs, payroll checks cashed, tips payouts, or bills that must get paid when deliveries come. So, at the end of the year, if they have $300 of petty cash in the safe, that would be a high amount.

Just data entry.  Really??  Nope. (((Noooo!))) It’s a jigsaw puzzle that has to be put together monthly very carefully, but the bookkeeper MUST have the information from the client. Hear that, you business owners out there?  We are not magicians or mind readers. Nope, we are not ‘Kreskin’ (Google that, younger people) 😊

We need to know what is happening.  The good news here is that payroll is 100% correct and legal. It’s how to account for all the abnormal stuff going on.  Legal, but not normal and average. 

When you have a paycheck that’s cashed from the register from cash sales, that check still has to be in the accounting system somewhere.  You can’t put it in cash on hand or in petty cash.  It should be in a cost of goods account called “Cash Register Payouts” and then debited to payroll expenses or if it’s an owner or a partner’s paycheck, to officers’ payroll for that specific person.  This way, payroll will be the right numbers at the end of the year, and you won’t be affecting petty cash or cash on hand. 

If a paycheck is cashed through the cash register, you can’t just rip it up and put it in a drawer somewhere for safe keeping.  The owner should take a picture of that check and email it to the bookkeeper.  Or put it on Google Drive or whatever you are using to store files. That has to be accounted for without any questions as to what it is. 

If there are bills being paid for in cash NOT from sales or withdrawals from the bank, and it was personal money by the owner or partners, then that money has to be put into the books with an Equity account for the partner who invested the money or a shareholder’s loan account if an S Corp. Otherwise, how is that legitimate expense for the business going to be part of the profit and loss? The debit is to utilities, for one example, but there has to be a credit somewhere. That’s Accounting 101. 

***Insert Tax Tip*** 

Just to go back to payroll for a minute, if the W-2 forms at the end of the year are 100% correct, which they are in this case, and one partner has 15 checks that he hadn’t cashed yet in the current year, then he’s paying tax on the income that shows on his W-2 but never received the cash. Then he’s suffering if the other partner cashes all of his payroll checks because the company has the cash flow only for the lower amount of that paycheck. 

Scary stuff, huh? (It’s close enough to Halloween, isn’t it?)  

This is why it’s so important for business owners to tell the bookkeeper exactly how they are running their businesses so that the bookkeeper (more remote these days than not, at least in NYC), knows what’s going on and can account for these things properly.

I know that’s hard to do in reality, if you are starting to work with a newly hired bookkeeper. It takes a while to build that trust with them (or us), and there is hesitation in telling the bookkeeper what things you are doing that are slightly ‘out of the box’.  However, business owners, it’s important to do.  It’s going to end up making your books more accurate, and if audited, your sleep won’t be interrupted at night (or whenever you DO sleep).  

Petty Cash, cash on hand, payroll, tips, cash expenses.  All inter-related in a thousand-piece jigsaw puzzle every month for the bookkeeper. It’s not just ‘data entry’. I’ll say it one last time.  “It’s not just DATA ENTRY”!!  

Ahhh. I feel better now.  

I’m Paul Rosenblum