Managing small business expenses shouldn’t be a big headache. Whether it’s a quick office supply purchase or a sudden need for courier service, petty cash ensures that your team can respond to immediate needs without disrupting operations. But without a proper system, petty cash can quickly become a black hole of undocumented spending and compliance risks. 

Here’s how to set up a petty cash fund properly using Dynamics 365 (or any similar ERP platform), with controls, transparency, and readiness for BIR audits. 

1. Define the Purpose and Scope

Before creating any fund, it’s important to determine: 

• What expenses petty cash will cover (e.g., snacks, transportation, office supplies) 

• Who is authorized to use it 

• The maximum amount allowed per transaction 

This prevents misuse and sets clear expectations within the organization. 

2. Assign a Petty Cash Custodian

Designate a responsible team member as the custodian of the fund. This person should: 

• Safeguard the cash 

• Keep receipts and documentation 

• Monitor balances and usage 

In your ERP system, this role should have limited access to specific petty cash functions only, with approval routing set up for transparency. 

3. Set Up the Petty Cash Account in Dynamics 365

Using Dynamics 365’s Cash and Bank Management module: 

• Create a Petty Cash journal 

• Assign a specific GL account for tracking the fund 

• Define rules, thresholds, and required supporting documents 

• Automate alerts for replenishment levels 

With a digital setup, all transactions are recorded with timestamps and audit trails crucial for internal reviews and external audits. 

4. Establish Documentation and Liquidation Rules

Require receipts or official receipts (ORs) for every transaction. These should include: 

• Date and purpose 

• Payee and amount 

• Indication of VAT, if applicable 

A proper liquidation process ensures that every peso spent is accounted for. When integrated with your ERP, you can automate liquidation reports linked to expense categories. 

5. Replenishment Process: Stay on Track

Once the fund nears its limit or a monthly cycle ends: 

• Summarize all expenses 

• Submit receipts and reports for approval 

• Replenish the exact amount spent 

In Dynamics 365, this can trigger a replenishment journal entry that updates both your petty cash balance and expense accounts. 

6. Ensure BIR Compliance from Day One

Even small expenses are subject to BIR rules, especially those involving input VAT. Petty cash should follow the same tax recognition standards as regular disbursements. 

With a properly configured ERP system: 

• VAT is automatically calculated and posted 

• Reports can be generated for Form 2307 and VAT relief files 

• You’re ready for any surprise audit 

Petty cash may involve small transactions, but when managed correctly, it plays a big role in smooth operations and tax compliance. Setting it up in your ERP system like Dynamics 365 ensures everything is transparent, trackable, and audit-ready.