An imprest system is a system of financial management in which a set amount of money is allocated for a specific purpose, such as a petty cash fund, and is regularly replenished to maintain that set amount. This system is most often used to control the expenditure of petty cash in businesses.
Here’s how the imprest system typically works:
- The company determines a fixed sum of money for the petty cash fund. This is the maximum amount of cash that is meant to be held in the fund at any given time.
- As cash is spent from the fund for small expenses, an equivalent amount of receipts are collected.
- When the petty cash fund is nearly depleted or at the end of an accounting period, the fund is replenished back to the original amount. The amount of the replenishment should be equal to the total of the receipts collected.
- The total of the cash and the receipts in the fund should always equal the original fixed amount, making it easy to audit and control petty cash transactions.
The primary benefit of the imprest system is that it helps manage and control cash expenditures. It also provides a mechanism to review and categorize expenditures when the fund is replenished. Furthermore, by limiting the amount of cash on hand, it minimizes the risk of loss due to theft or fraud.
Example of an Imprest System
Let’s consider an example of a small company that uses an imprest system to manage its petty cash.
- The company decides to establish a petty cash fund and sets a fixed amount of $200 for this fund. This amount is chosen based on the estimated minor cash expenses that the company expects to incur in a month.
- Over the month, employees use money from the petty cash fund for small expenses like buying office supplies or paying for postage. Every time they take money out, they leave a receipt in the petty cash box, detailing the amount spent and what it was spent on.
- At the end of the month (or when the cash is running low), the receipts in the petty cash box add up to $150, meaning there should be $50 left in cash. The petty cash custodian counts the cash and confirms that there’s indeed $50 left.
- The petty cash custodian then replenishes the fund back to its original amount of $200 by requesting a cash withdrawal or check for $150 (the amount of the receipts) from the main company account. The $150 is added to the petty cash box, bringing the total back to the original $200.
- The petty cash custodian also records the $150 in the company’s financial books, noting down the different expenses as detailed by the receipts.
- This process repeats each month, with the petty cash always starting at $200 at the beginning of the month. The amount of cash plus receipts in the fund should always equal $200, making it easy to track and manage expenses.
This example illustrates how an imprest system can help a company efficiently manage and control its petty cash, by always maintaining a fixed balance and regularly accounting for all expenses.