What is the Imprest System?

Examples

The petty cash Imprest system is one of the most common types of an imprest system that is used to record petty transactions when it is inconvenient or impractical for the users to cut cheques. An Ltd seeks to create a reserve to maintain all its petty cashPetty CashPetty cash means the small amount that is allocated for the purpose of day to day operations. It is unreasonable to issue a check for such small expenses and for managing the same custodians are appointed by the company.read more transactions. As an administrative department of A ltd, guide the same with the formal procedures with the help of which it can create a petty cash fund.

Petty cash accounts usually maintain a pre-determined amount of cash that can be used for various purposes like reimbursing employees’ expenditures, paying petty expenses, etc. An ltd can create a petty cash fund by recognizing and recording all the petty cash transactions with the help of the following steps-

  • A pre-determined amount of cash is allocated for creating a petty cash fund. This account is separately recorded in the general ledgerGeneral LedgerA general ledger is an accounting record that compiles every financial transaction of a firm to provide accurate entries for financial statements. The double-entry bookkeeping requires the balance sheet to ensure that the sum of its debit side is equal to the credit side total. A general ledger helps to achieve this goal by compiling journal entries and allowing accounting calculations.
  • read more of an organization.In the next step, the company must identify all its nominal expenses that are paid with cash and accordingly document them in the system with receipts.To maintain a pre-determined set balance, the company must top its petty cash fund occasionally.The company must regularly monitor the petty cash fund so that there are no possibilities of any discrepancy between the expected cash amount and the actual cash amount.The administrative department must conduct an appropriate investigation process if it finds discrepancies.

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Imprest System (wallstreetmojo.com)

Advantages of the Imprest System

#1 – Detection of Fraud 

The Imprest system eliminates the possibilities of unauthorized spending as the funds are designated for pre-determined purposes. This, in return, makes tracking of expenses and reporting of discrepancies much easier which ultimately aids in the detection and elimination of the possibilities of fraud.

#2 – Reduction in Errors

The cashier reviews the petty cash book at frequent intervals, and if there are any mistakes or errors, they can be easily traced and rectified.

#3 – Regulation of Petty Expenses

Petty expenses are managed with the set limits of the imprest system, making it almost impossible for the petty cashier to spend more than the petty cash available in the account.

#4 – Reduces the Chief Cashier’s Burden

A petty cash book relieves both the cash book and the Chief Cashier from the burden of recording petty and nominal expenses.

#5 – Simple and Quick Method

The method can be quickly used to provide funds for employees’ purchases. It is one of the best methods known for making nominal purchases. Compared to other methods, this is way too quick, simple, accessible, and convenient simultaneously.

#6 – Ease in Reconciliation

The reconciliation of the petty cash book is simple and uncomplicated too.

Disadvantages of Imprest System

#1 – Outdated System

Petty cash books are a largely outdated and inefficient system that does not fulfill the needs and expectations of the company’s current requirements. Now there are better alternatives, such as prepaid cards, with the companies specifically designed, keeping in mind today’s needs and requirements.

#2 – Inconvenient for Larger Expenses

One of the major drawbacks of using an Imprest system is that it causes huge inconvenience for larger expenses. The system is highly compatible and convenient for smaller expenses while the opposite for larger expenses.

#3 – Accounting Errors

Since there is no secondary documentation system to track nominal cash expenditures, the chances of accounting errorsAccounting ErrorsAccounting errors refer to the typical mistakes made unintentionally while recording and posting accounting entries. These mistakes should not be considered fraudulent behaviour first-hand as this can happen with anyone and by anyone.read more in the petty cash system cannot be denied.

#4 – Overspending

Not setting the expenditure limits for every nominal transaction can even put an organization at the risk of overspending on purchases.

#5 – Theft

Without appropriate controls, the company’s petty cash account can be misused by employees, and it will become tough to find out who took out the cash.

#6 – Misappropriation

In the absence of adequate controls, there are high chances for the same to get misappropriated by the company’s employees since petty cash is a type of liquid assetLiquid AssetLiquid Assets are the business assets that can be converted into cash within a short period, such as cash, marketable securities, and money market instruments. They are recorded on the asset side of the company’s balance sheet.read more.

Important Points

  • Usually, petty cash funds are monitored by custodians who help handle the accounts and dispense cash to the company’s employees. In return, the latter furnishes such receipts that are business-related.Petty cash funds are established with a pre-determined amount, which is accordingly recorded in the entity’s ledger.The administrative department of an organization is charged with the responsibility of maintaining the petty cash book.All the expenditures paid from the petty cash funds must be documented along with receipts.The Imprest system can also cover employees’ payrollPayrollPayroll refers to the overall compensation payable by any organization to its employees on a certain date for a specific period of services they have provided in the entity. This total net pay comprises salary, wages, bonus, commission, deduction, perquisites, and other benefits.read more, dividendsDividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more, incentives, bonuses, rewards, and travel expenses too.

Conclusion

  • The system described above can help an organization in numerous ways. The petty cash system is a straightforward and user-friendly method that enables the replenishment of all expenditures. The petty cash account is a widely used Imprest system where nominal expenditures are recorded.Organizations can use a petty cash system to reduce errors, eliminate fraud, control petty expenses, reduce the burden of the senior cashiers, and whatnot.But the users of the Imprest system must also be aware of its multiple drawbacks like chances of theft, misappropriation, overspending, etc., and utilize the same accordingly. Therefore, organizations must design policies that dictate how cash must be handled to avoid all the associated problems.

This has a guide to What is the Imprest System & its meaning. Here we discuss its examples along with its advantages and disadvantages. You can learn more about bookkeeping from the following articles –

  • Accounting StatementMonetary AssetsEmbezzlementBusiness Transaction