Imprest system - What is the imprest system?
The imprest system is an accounting system designed to track and document how cash is being spent. The most common example of an imprest system is the petty cash system.
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If a business uses the imprest system, they will create an imprest account to pay for small, routine, or incidental expenses. This account has a fixed balance, and is replenished using another account, such as cashing a cheque drawn from a bank account.
Unlike the accrual accounting system which recognises expenses as they happen, within the imprest system, expenses are recognised when cash replenishments are made to the imprest account. When cash is paid, the entry is debited to various expenses and credited to the cash account.
This means that the general ledger account for imprest will never have another entry unless the amount of cash assigned to it is deliberately changed.
Example of the imprest system – petty cash
Petty cash is a small reserve of used for transactions and expenditures where it doesn’t make sense to write cheques. The petty cash system follows a general process:
1) A petty cash fund is created and allocated a set amount of cash. This is recorded as a separate account in the company’s general ledger.
2) Any expenses paid with petty cash are documented with receipts.
3) The petty cash fund is regularly topped up to maintain a set balance.
4) The fund is regularly monitored to ensure there are no discrepancies between expected cash (based on the documented receipts) and the actual cash.
5) If discrepancies are found, these are investigated .
By documenting expenses with receipts and confirming that the cash balance is maintained, the petty cash system is that it helps monitor how the money is being spent and protects the money from being stolen.
The imprest system in decline
Due to the rise of electronic transactions, the imprest system is becoming less common. Many businesses now prefer to use credit cards for incidental purchases or to ask employees to pay in cash then apply for reimbursement.
These are seen as easier options than the petty cash system which depends heavily on accurate recording and therefore, if not done properly, can risk causing leakage from the business.