What are the main features of an imprest system?

An imprest is a cash account that a business relies on to pay for small, routine expenses. Funds contained in imprests are regularly replenished, in order to maintain a fixed balance.

Table of Contents Show

Definition of an Imprest System of Petty Cash
Free Financial Statements Cheat Sheet
Advantages of the Imprest System
Disadvantages of Imprest System
Important Points
Recommended Articles

The term “imprest” can also refer to a monetary advance given to a person for a specific purpose.

Imprest refers to a type of cash account maintained by a company used to pay for small incidental or routine expenses.
A fixed account balance is established in the imprest account and refunded as needed when money is withdrawn for items like payroll, travel, or petty cash.
Because of its small and fixed nature that is easily monitored, imprest discourages unauthorized or lavish expenses.

The most well-known type of imprest is a petty cash account, which is used to cover smaller transactions when it’s impractical or inconvenient to cut checks. Such accounts maintain a set amount of cash on-site, which can be used to reimburse employees and pay for small expenses. Petty cash funds are typically handled by custodians who monitor the account and dispense cash to employees, who in turn furnish business-related receipts.

Imprests may also be used to cover employee payroll, dividends, employee travel, and bonuses. After these outgoing expenses are paid, the fund is typically reimbursed by capital from the company's primary bank account.

Imprests deter the use of unauthorized spending because the funds are earmarked for specific purposes. Consequently, imprests typically pay out the same amount of money on a regular basis, which ideally brings the account to a near-zero balance, before it's automatically replenished with that same set amount of money. This system makes it easier to monitor expenses, flag discrepancies, and ultimately detect fraud.

The imprest system involves the following steps:

A petty cash fund is established, with a set amount of cash. This is recorded in the company's ledger.
Any expenses paid through the petty cash fund must be documented with receipts.
The fund is replenished regularly with disbursement receipts to maintain a fixed balance.
The fund is monitored closely for any discrepancies between expected cash (based on documentation) and actual cash. If any discrepancies exist, they are investigated.

As companies increasingly rely on electronic transactions, the imprest system is steadily falling out of favor. It's often easier to use a company credit card than an imprest, because the former offers electronic documentation of transactions, and doesn't trigger a need to replenish any outgoing funds.

Companies keep cash on hand in imprest to pay for incidentals like office supplies, small reimbursements, or other minor expenses. Similar to petty cash, imprest should not be used for material expenses such as utilities or to purchase assets for the firm.

The word is derived from the early Italian or medieval Latin imprestare, which meant to lend. Thus, an imprest now means a small advance of funds used for incidentals, and which must be replenished after use.

In addition to funds used by a business, an imprest may also refer to money paid to someone for doing work on behalf of a government. In this case, the government advances the funds prior to the work being completed.

Petty cash refers to a small amount of currency and coins that a company uses to pay small amounts without writing a check. The amount of petty cash (also known as the petty cash fund) varies by company or organization. For now, let's assume that the amount is $100.

One person is designated as the petty cash custodian. This person is responsible for disbursing the small amounts
and for documenting each payment with a petty cash receipt.

Definition of an Imprest System of Petty Cash

An imprest system of petty cash means that the general ledger account Petty Cash will remain dormant at a constant amount. If the amount of petty cash is $100, then the Petty Cash account will always report a debit balance of $100. This $100 is the imprest balance. As long as $100 is adequate for the organization's small disbursements, then the general ledger account Petty Cash will never be debited or credited again.

When the currency and coins on hand gets low, the petty cash custodian will request a check to replenish the coins and currency that were disbursed. Since the requested check is drawn on the organization's checking account, the Cash account (not the Petty Cash account) will be credited. The debits will go to the expense accounts indicated by the petty cash receipts, such as postage expense, supplies expense. In other words, the general ledger account Petty Cash is not involved in the replenishment. (Replenishment means getting the total of the currency and coins back to the imprest amount.) The petty cash custodian will cash the check and add the amount to the other cash.

Under the imprest system, the petty cash custodian should at all times have a combination of currency, coins, and petty cash receipts that equals $100 (the imprest petty cash balance).

Control over the petty cash occurs during the replenishment process. The person approving the check for the petty cash custodian to cash should review the petty cash receipts and attach them to the check request. Control can also occur when an independent person confirms that the petty cash custodian's cash and receipts adds up to the imprest amount.

Free Financial Statements Cheat Sheet

Imprest System is a type of financial accounting system designed to track and document how cash has been utilized. The most common example is the petty cash system that accounts for each petty cash transaction to maintain an equilibrium in the fund that equals the total of petty cash receipts and additional cash left in the fund.

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 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-

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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 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 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’ payrollPayroll 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, dividendsDividends 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.