What is the Imprest System?
Imprest System is a type of financial accounting system that is designed for tracking and documenting how cash has been utilized. Most common example include petty cash system that accounts each and every petty cash transactions to maintain an equilibrium in the fund that is equal to the total of petty cash receipts and additional cash that is left in the fund.
An Ltd is seeking to create a reserve for maintaining 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. 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. The petty cash Imprest system is one of the most common types of an imprest system that is used to record petty transactions during times when it is inconvenient or impractical for the users to cut cheques.
Petty cash accounts usually maintain a pre-determined amount of cash that can be used for various purposes like reimbursing employees’ expenditures, payment of 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 a book of accounts that records the everyday business transactions in separate ledger accounts. The entries made in a ledger can be verified by getting a NIL balance on summing up all the ledger account amounts in the trial balance. of an organization.
- In the next step, the company must identify all its nominal expenses that are paid with cash and accordingly document all of them in the system with receipts.
- To maintain a pre-determined set balance, the company must top its petty cash fund from time to time.
- 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 in case it finds any discrepancies.
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 report of discrepancies much easier which ultimately aids in the detection and rather the elimination of the possibilities of frauds.
#2 – Reduction in Errors
The cashier reviews the petty cash book at frequent intervals, and in case there lies any mistake or errors, then the same can be easily traced and rectified.
#3 – Regulation of Petty Expenses
Petty expenses are managed with the set limits of the imprest system, which makes it almost impossible for the petty cashier to spend higher than the petty cash that is available in the account.
#4 – Reduces the Chief Cashier’s Burden
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
Compared to other methods, this is way too quick, simple, accessible and convenient at the same time. The method can be quickly used to provide funds for employees’ purchases. It is one of the best methods known for making nominal purchases.
#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 book is a largely outdated and inefficient system, and it does not fulfil the needs and expectations of the company’s current requirements. Now there are better alternatives such as prepaid cards available with the companies that are 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 opposite for larger expenses.
#3 – Accounting Errors
Since there is no secondary documentation system to track nominal cash expenditures, therefore, 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. 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 facing overspending on purchases.
#5 – Theft
In the absence of 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..
- Usually, petty cash funds are monitored by custodians who help in handling the accounts and dispense cash to the company’s employees. In return, the latter furnishes such receipts that are totally business-related.
- Petty cash funds are established with a pre-determined amount, and the same 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 that are paid from the petty cash funds must be necessarily documented along with receipts.
- Imprest system can also be used to 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., dividendsDividendsDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company., incentives, bonuses, rewards, and travel expenses too.
- The petty cash account is a widely used Imprest system where nominal expenditures are recorded. The petty cash system is a straightforward and user-friendly method that enables the replenishment of all the expenditures. The aforesaid system can help an organization in numerous ways.
- Organizations can use petty cash system for the reduction of errors, elimination of fraud, control of petty expenses, reducing 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. The organizations must, therefore, design a set of policies that dictates how cash must be handled for avoiding all the associated problems.
This has a guide to What is the Imprest System & its meaning. Here we discuss its examples along with advantages and disadvantages. You can learn more about bookkeeping from the following articles –