Explain the imprest system petty cash

Banking & FinanceFinance ManagementGrowth & Empowerment

In this imprest cash system, the balance of petty cash funds always remains fixed or constant. The amount to be fixed is decided at the start or first time at a fund established. During the period, the petty cashier pays the expenses and maintains vouchers for that.

At the end, the cashier submits the vouchers to the chief cashier along with vouchers. After reconciliation, cash spent on expenses is reimbursed and maintains the imprest cash fund to the initial fixed amount. Float is the term used for a granted amount.

At any time, cash held plus petty cash vouchers should be equal to initial imprest amount.

Process

The process for imprest system petty cash is as follows −

Fund establishment

Fixed amount of imprest petty cash is drawn from the cash account at the starting of an accounting period and the same amount will be continued.

In journal entries, a petty cash account will be credited and the cash account will debit. An important point to remember is that the imprest fund is not altered and no further recordings are made in the general ledger for petty cash accounts.

Payments

After the fund was established, now petty cash is used for payments during a certain period of time. For each payment, an invoice or payment proof is attached with a dual signature of the petty cashier and the party.

Fund replenished

At the end of the period, the petty cash book is balanced and reconciled. Amount is cross checked with vouchers and amount for that is reimbursed to maintain the original imprest amount.

Errors

If there is any error between cash held and petty cash vouchers, it may be a recording error and these errors are required to be corrected/written off. If the error is not detected, the still amount is reimbursed to maintain an initial imprest amount. The error amount is recorded as sundry expenses in petty cash journal entry.

Increase in petty cash

If the company wants to increase the petty cash fund, then posting is made in a general ledger (petty cash account). Now, total amount is recorded in receipt side of petty cash book

The advantages and disadvantages of the imprest system petty cash are as follows −

Advantages

  • Minimizes error.
  • Cost saving.
  • Efficient method.

Disadvantages

  • Should be reviewed periodically.
raja
Published on 09-Jul-2021 13:09:08
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