Sometimes cash is an unavoidable part of business. Customers choose to pay with it, vendors will only accept it. But how do you protect yourself in an audit when your sales or purchases occurred in cash? Create a paper trail. As detailed and as much as possible.
If you are a buy-and-sell type store it may not be enough to a government auditor that you documented the date and the item. How can the auditor trust that you did not skip recording some of these purchases and sales?
Issue receipts to every customer that pays you cash or that you pay cash to. If a receipt is not a possibility, at a minimum, write down all the details relating to the transaction and have the other person sign the paper and provide their contact information.
For example, if you picked up a large antique desk at a yard sale for use in your office, you likely paid in cash. An auditor will only see a cash withdrawal from your business bank account, assume it to be a personal withdrawal and deny the expense that may very well be a deductible capital asset. By having written confirmation from the seller acknowledging what, when, who and how much, it demonstrates to the auditor that the cash was legitimately used for a business purpose.
The best way to avoid the lack of evidence associated with cash is to use cheques, or other documented sources of payment. The cancelled cheques can be returned to you and will show to whom each cheque was made. Detail on each cheque the purpose of it so that the auditor can tie in your cheques to your reported expenses.
Another beneficial strategy is to obtain a ruling from the CRA asking them to confirm what evidence would be sufficient for your specific business.
If you must receive cash for your revenue, deposit it. If you do not deposit the amount and it goes directly into your pocket, the auditor will consider that both unreported income and shareholder appropriation. It is cleaner for the books to deposit it and not to use your cash sales as petty cash. By depositing all your cash sales it is far easier and more accurate to determine your actual sales.
As well, instead of withdrawal cash and using the cash for your business expenses, find out if the vendor will let you pay on interact so that the transaction will show up on your bank statement. Or try to find a vendor to do business with that will accept a method of payment that is not cash.
If cash is avoidable, it is always preferred to pick an alternative method of payment or receipt. Keep cash to a minimum and keep your audit that much smoother.
