An imprest balance is the fixed amount that is assigned to a petty cash fund at the start of an accounting period. This is the maximum amount of cash that is meant to be held in the fund at any given time. The imprest balance serves as a control mechanism for managing minor cash expenses.
The imprest balance works as follows:
- The company decides on a fixed amount for the petty cash fund (the imprest balance). This is usually based on the estimated amount of small cash expenses that the company expects to incur in a given period.
- As cash is used from the fund to pay for small expenses, receipts are collected and kept in the fund to account for the cash spent.
- At the end of the accounting period (or when the cash in the fund is running low), the fund is replenished back to the original imprest balance. The amount of the replenishment should be equal to the total of the receipts collected.
- The total of the cash in the fund and the receipts should always equal the original imprest balance, providing a mechanism for auditing and controlling petty cash transactions.
For example, if a company establishes a petty cash fund with an imprest balance of $200, the total of cash and receipts in the fund should always equal $200. If there’s $50 in cash and $150 in receipts, the fund would be replenished with $150 to bring the cash balance back to the original $200 imprest balance.
Example of an Imprest Balance
Let’s take an example of a retail store that uses a petty cash fund with an imprest system.
- The store decides to establish a petty cash fund with an imprest balance of $300. This amount is chosen based on an estimate of minor cash expenditures the store anticipates for each month.
- Over the course of the month, employees use money from the petty cash fund for various small expenses. For instance, an employee might spend $20 to buy cleaning supplies for the store, $30 for postage to mail a package to a customer, and $50 for an emergency repair by a local handyman. Each time they use petty cash, they put a receipt in the petty cash box that indicates how much they spent and what it was spent on.
- By the end of the month, employees have spent $100 in total, leaving $200 in the petty cash fund. The receipts in the petty cash box add up to $100.
- At this point, the store replenishes the petty cash fund back to the original imprest balance of $300. They do this by writing a check for 0 (the total of the receipts), cashing it, and putting the cash into the petty cash box. In their accounting records, they record the $100 as an increase in petty cash (a debit) and a decrease in their bank account (a credit). The receipts are then recorded against the appropriate expense accounts.
- The process repeats each month, with the petty cash fund always starting the month with the imprest balance of $300.
In this way, the imprest balance serves as a control mechanism to help the store manage and track its petty cash expenses.