Liquidation of Petty Cash and VAT Recognition Made Easy
Liquidation of Petty Cash and VAT Recognition Made Easy
Petty cash is all about speed and convenience but when it’s time to liquidate, things can get messy if you don’t follow the right process. Without clear procedures, your small transactions could lead to big compliance problems, especially when it comes to VAT recognition.
Let’s break down the liquidation process and how your ERP system like Dynamics 365 can simplify it all.
- What Is Liquidation in Petty Cash?
Liquidation is the process of accounting for the petty cash you’ve spent. It’s not just listing expenses it’s:
- Collecting official receipts (ORs)
- Matching them to cash disbursements
- Validating the business purpose
- Recording proper accounting and tax treatment
It’s your proof that funds were used properly.
- Step-by-Step: Liquidating in a Compliant Way
Here’s a simple framework:
- Gather all receipts and disbursement slips
- Encode each transaction in your ERP (or petty cash logbook)
- Categorize expenses (e.g., supplies, transport, meals)
- Compute and separate VAT input where applicable
- Submit to accounting for review and approval
If you’re using Dynamics 365, you can automate most of this, from encoding to generating liquidation reports.
- Recognizing VAT from Petty Cash Transactions
Many companies miss this: even petty cash is subject to VAT rules.
Example:
- You buy markers worth ₱560, and the receipt shows 12% VAT.
- Breakdown: ₱500 expense + ₱60 input VAT.
- That ₱60 can be claimed if recorded properly.
In Dynamics 365, this process is automatic. The system reads the transaction, classifies the VAT, and reflects it in your input tax accounts.
- Red Flags to Avoid
Avoid these common mistakes:
- Missing or unofficial receipts
- Incorrect VAT computation
- Misclassified expenses
- Delayed liquidation beyond cutoff
The longer you wait to liquidate, the harder it is to recover VAT or defend the expense in an audit.
Liquidation isn’t just paperwork it’s a critical control and a BIR requirement. With proper process and automation via your ERP, you save time, reduce risk, and stay compliant.
Up next: Our next blog will dive into BIR rules and how they apply to petty cash transactions.