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How to Handle Cash Transactions in Your Business Records

Properly documenting cash transactions is crucial for accurate financial reporting, tax compliance, and maintaining a clear audit trail. Based on the provided documents, here’s a comprehensive guide on how to handle cash transactions in your business records.

Recording Cash Receipts

When you receive cash in your business, you need to document these transactions thoroughly:

Avoid writing checks payable to cash. If you must write a check for cash to pay a business expense, include the receipt for the cash payment in your records. If you cannot get a receipt for a cash payment, you should make an adequate explanation in your records at the time of payment. IRS – Publication 583: Starting a Business and Keeping Records

A customer has made a payment under this section if the transaction would be considered a payment by a taxpayer using the cash receipts and disbursements method of accounting. Tresuary Reg. 1.263A-11

For each cash transaction, record:

• Date of the transaction
• Amount received
• Purpose of the transaction
• Name and information of the customer (when applicable)
• Description of goods or services provided

Daily Cash Management Practices

Each teller or cashier should maintain an individual cash control sheet to record daily transactions. The cash control sheet should detail the amount of cash received by denomination. Also record additional internal cash transfers that occur during the day. IRS IRM 4.26.9 Examination Techniques For Bank Secrecy Act Industries

The daily record of cash received should be prepared and maintained in such manner that each entry is made on or near the date the income is received. A daily record made on or near the date the income is received has a high degree of credibility not present with respect to a record prepared subsequently when generally there is a lack of accurate recall. An entry is made “near the date the income is received” if the required information with respect to receipts and payments for the day is recorded at a time when you have full present knowledge of those receipts and payments. Tresuary Reg. 31.6053-4

Cash Transaction Documentation

Documentary evidence consists of copies of any documents that contain (i) amounts that were added by customers and paid over to you or (ii) amounts that were paid by a customer for goods or services. Examples of documentary evidence are copies of bills, credit card charges, or charges under any other arrangement containing amounts added by the customer. Tresuary Reg. 31.6053-4

For each payment of an expense, your general ledger should show (1) the date, (2) the dollar amount, (3) the type of expense (e.g., utilities, rent, etc.), (4) the payment method (i.e., cash, check, credit card, or electronic funds transfer), and (5) sometimes, the identity of the payee. Dawson U.S. Tax Court Opinions: Laurel Alterman & William A. Gibson

Reconciling Cash Transactions

To reconcile your account, follow these steps:

• Compare the deposits listed on the bank statement with the deposits shown in your checkbook. Note all differences in the dollar amounts.
• Compare each canceled check, including both check number and dollar amount, with the entry in your checkbook. Note all differences in the dollar amounts. Mark the check number in the checkbook as having cleared the bank. After accounting for all checks returned by the bank, those not marked in your checkbook are your outstanding checks.
• Prepare a bank reconciliation.
• Update your checkbook and journals for items shown on the reconciliation as not recorded (such as service charges) or recorded incorrectly. At this point, the adjusted bank statement balance should equal your adjusted checkbook balance. IRS – Publication 583: Starting a Business and Keeping Records

Reporting Large Cash Transactions

If your business receives large cash payments, be aware of special reporting requirements:

Any person who is engaged in a trade or business, and who, in the course of such trade or business, receives more than $10,000 in cash in 1 transaction (or 2 or more related transactions), shall make a return with respect to such transaction at such time as the Secretary may by regulations prescribe. IRC § 6050I(a)

A business must file a report for each cash-in or cash-out currency transaction it handles that is more than $10,000. It must aggregate multiple currency transactions if the cash-in or cash-out amounts during a single business day total more than $10,000. It would treat the cash-in or cash-out transactions as a single transaction and as though conducted by or for the same person. It isn’t necessary to personally observe the multiple transactions. The books, records, logs and computer files should contain the information showing that the reportable currency transactions occurred. IRS – Publication 3908: Gaming Tax Law and Bank Secrecy Act Issues for Indian Tribal Governments

Multiple transactions are those that are aggregated and total over $10,000. Some examples:

• From a Multiple Transaction Log (MTL), a customer is identified as making five trips to purchase items which total over $10,000.
• An individual repays a $15,000 debt in installments of $5,000 each with currency. Note: For Form 8300 reporting, multiple transactions occurring beyond a 24-hour period, which are related, must be reported. Multiple payments on a single debt are related regardless if they are conducted within or beyond a 24-hour period. IRS IRM 4.26.12 Examination Techniques for Form 8300 Industries

Section 6050I of the Code requires that the recipient receive the cash payments exceeding $10,000 in one transaction (or 2 or more related transactions). The “transaction” is the underlying event precipitating the payer’s transfer of cash to the recipient. Transactions include (but are not limited to) a sale of goods or services, and may not be divided into multiple transactions in order to avoid reporting under section 6050I of the Code. For example, a person who has an agreement to purchase $36,000 in goods may not recast the transaction into four separate $9,000 transactions to avoid the reporting requirements. TAM-128309-04

Accounting Methods for Cash Transactions

You should choose whether your organization will use a cash or accrual accounting method – or some sort of combination of the two. Under the cash accounting method, revenue and expenses are recorded in the period they are actually received or expended in cash. Under the accrual method, revenue and expenses are recorded in the period they are earned or incurred, regardless of whether cash is received or disbursed in that period. With a combination – or “hybrid” accounting method, cash accounting is used for some items and accrual is used for others. IRS – Publication 5551: Maintaining Section 501(c)(3) Tax-Exempt Status Overview

For purposes of reporting, gross amount means the total dollar amount of aggregate reportable payment transactions for each payee without regard to any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts or any other amounts. The dollar amount of each transaction is determined on the date of the transaction. Tresuary Reg. 1.6050W-1

Organizing Cash Transaction Records

Every retail dealer shall provide and keep in his place of business a record in book form of all items received, showing the quantity thereof and from whom and the dates received, or shall keep all invoices of, and bills for, all items received. IRC § 5122(a)

Records sufficient to establish whether a transaction is reportable and any amounts must be kept. Any person required to retain records must keep sufficient information to establish the transaction and the amount, including documentation and work papers supporting the calculation. Tresuary Reg. 1.871-15

The records and documentation must be created substantially contemporaneously. A record will be considered to have been created substantially contemporaneously if it was created within 10 business days of the date of the transaction. Tresuary Reg. 1.871-15

Common Mistakes to Avoid

Based on the provided documents, here are some common mistakes to avoid when handling cash transactions:

Many business owners leave invoices incomplete. On many invoices they omit the date. On others they omit the name of the other party to the transaction. They often omit the descriptions and number of items purchased or sold. And they often omit the purchase amount, the total amount of the gross purchase or gross sale, and the method of payment.

Some business owners do not keep their invoices organized. Although they may be prenumbered, they grab them in stacks and carry them around. They grab random invoices and occasionally drop them off in a tray at their store. At various times they take the invoices from the tray to store them in a box according to the year. At audit time, they may be unsure which invoices relate to which year. Dawson U.S. Tax Court Opinions: Steven Mileham

Best Practices for Cash Handling

• Use a dedicated cash register or point-of-sale system to record all cash transactions
• Issue receipts for all cash payments received
• Maintain a daily cash log showing opening balance, receipts, disbursements, and closing balance
• Deposit cash regularly into your business bank account
• Separate duties between employees who handle cash and those who record transactions
• Conduct regular cash counts to verify that physical cash matches your records
• Use prenumbered receipts and account for all receipt numbers in sequence
• Document any cash removed from the business for personal use or other purposes

Conclusion

Proper handling of cash transactions is essential for maintaining accurate business records and complying with tax requirements. By implementing a systematic approach to recording, documenting, and reconciling cash transactions, you can ensure your business maintains proper financial controls and is prepared for any potential audit.

Remember that the IRS and other tax authorities pay particular attention to cash transactions due to their potential for underreporting. Maintaining thorough and accurate records of all cash receipts and disbursements will help protect your business and provide peace of mind.

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