Petty cash balance after reimbursement reverts to back to the level of the float. A fixed balance simplifies reconciliation, allowing discrepancies to be quickly identified and resolved. This is especially beneficial for small businesses with limited resources for financial oversight. The International Financial Reporting Standards (IFRS) encourage such streamlined processes for efficient financial management.
Types of Imprest Systems
Petty cash is a small reserve of cash kept on-site at a business location for incidental cash needs. The imprest system is designed to provide a rudimentary manual method for tracking petty cash balances and how cash is being used. This replenishment will come from another account, e.g. petty cash may be replenished by cashing a cheque drawn on a bank account or using an ATM.
- Imprests have several advantages over other payment methods, such as improved expense tracking and enhanced security.
- It is important to keep accurate records of all petty cash expenditures for bookkeeping purposes.
- Comprehensive records, including receipts and justifications, are essential for tax compliance and financial reporting.
- ABC Ltd will take the money from the petty cash fund, kept aside for this purpose.
- Under this system, a fixed amount of cash is set aside in a petty cash fund, which is used to pay for small and infrequent expenses like office supplies or postage.
This process helps maintain a consistent balance within the imprest account, making it easier to monitor expenses and detect any potential discrepancies or instances of fraud. A constant or unchanging amount imprest balance that is often used when referring to petty cash. For example, if the petty cash account in the general ledger has an imprest balance of $100, the account balance will be a constant $100. Any difference in these amounts is entered into the account Cash Short and Over. Effective management involves setting up an account, documenting expenses, closely monitoring cash balances, and regularly replenishing the fund to maintain the fixed balance. Adherence to these practices helps prevent unauthorized spending and improves overall control over small expenses.
Advantages of imprest system:
Companies may have several bank accounts where they can keep their cash for safekeeping. Most large transactions that include the transfer of cash occur through bank accounts. However, companies may also need cash to pay for daily operations or revenue expenditures.
Imprest accounts improve financial oversight by setting a predetermined limit, controlling spending, and preventing unauthorized expenditures. Regular reconciliations ensure all disbursements are documented and justified, providing transparency during audits and when preparing financial statements. An imprest system of petty cash means that the general ledger account Petty Cash will remain dormant at a constant amount. If the amount of petty cash is $100, then the Petty Cash account will always report a debit balance of $100. As long as $100 is adequate for the organization’s small disbursements, then the general ledger account Petty Cash will never be debited or credited again. Imprests may also be used to cover employee payroll, dividends, employee travel, and bonuses.
Double Entry Bookkeeping
If the petty cash fund is consistently depleted before the replenishment cycle, the imprest amount may need to be increased. This analysis should align with budget reviews to ensure the imprest system remains cost-effective. This unique feature of the imprest system of petty cash is one of its most important advantages as it allows spot checks on the petty cash fund at any point in time. The amount of petty cash is rarely presented separately in a reporting entity’s balance sheet, because the balance is so small. Instead, it is aggregated into the cash line item, which likely includes the ending balances in all checking accounts and savings accounts held by the organization. An example of this presentation appears in the following balance sheet exhibit.
Advantages
Doing so is an excellent way to maintain a high level of control over cash disbursements. However, the downside is a high level of documentation in comparison to the amount of funds expended, which is inefficient. By rearranging the above formula, companies can easily calculate the amount they need to replenish. Usually, it will be the sum of the authorized expense vouchers and remaining IOUs. Similarly, it will remove any receipts during the period from the replenished amounts. Petty cash books are a largely outdated and inefficient system that does not fulfill the needs and expectations of the company’s current requirements.
At any point in time, the cash held plus the value of the petty cash vouchers for expenses paid should be equal to the original fixed imprest system amount. An imprest system of petty cash can also help regulate small expenses and reduce administrative burdens. It allows for better reconciliation of petty cash balances while also keeping the system quick and simple. A petty cash book is a type of cash book that is used to record minor regular expenditures such as office teas, bus fares, fuel, newspapers, cleaning, pins, casual labor, etc. These small expenditures are usually paid for using coins and currency notes rather than checks.
Paying Expenses from the Petty Cash Fund
The debits will go to the expense accounts indicated by the petty cash receipts, such as postage expense, supplies expense. In other words, the general ledger account Petty Cash is not involved in the replenishment. (Replenishment means getting the total of the currency and coins back to the imprest amount.) The petty cash custodian will cash the check and add the amount to the other cash.
- This fixed sum is periodically replenished to maintain a constant balance, ensuring that all transactions are documented and accounted for efficiently.
- This increased visibility makes it easier to identify any discrepancies between expected and actual spending, enabling timely corrective action.
- By maintaining a fixed balance within the petty cash fund and keeping careful records, businesses can more easily track their expenses, detect discrepancies, and prevent fraud.
- The amount of cash allocated for petty expenditures for a specific period is entered on the credit side of the general cash book and on the debit side of the petty cash book.
An imprest account is a valuable tool in the financial management of a business. It offers several benefits that make it an effective solution for managing small, routine expenses. By understanding the advantages of using imprest accounts, businesses can save time, reduce fraud risk, and increase overall efficiency. In summary, an imprest account provides businesses with a pre-approved source of funds for handling smaller, regular expenses. Petty cash is a specific type of imprest account that deals with minor transactions in an efficient and practical manner. While the terms may seem similar, their differences lie primarily in their applications and scope within financial management systems.
The balance in the petty cash account should now be the same as the amount at which it started. When the cash balance in the petty cash fund drops to a sufficiently minimal level, the petty cash custodian applies for more cash from the cashier. This takes the form of a summarization of all the receipts that the custodian has accumulated. The cashier creates a new check in the amount of the receipts, and swaps the check for the receipts. The petty cash journal entry is a debit to the petty cash account and a credit to the cash account. They also enhance cash flow management by segregating funds for specific purposes, avoiding cash shortages, and aligning with best practices in financial management.
The petty cash Imprest system is one of the most common types of an imprest system that is used to record petty transactions when it is inconvenient or impractical for the users to cut cheques. An Ltd seeks to create a reserve to maintain all its petty cash 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.
A purchasing card (p-card) is another form of a corporate card specifically designed to handle recurring purchases such as office supplies and utilities. It eliminates the need for employees to seek reimbursement through petty cash funds, which can save time and improve overall efficiency. Moreover, p-cards offer greater control over expenditures by setting up predefined spending limits, thereby reducing potential misuse of funds. Because funds are regularly replenished and closely monitored, the risk of unauthorized access or theft is significantly reduced compared to maintaining large cash reserves. This added layer of protection helps ensure that businesses remain financially secure and can focus on their core operations without worrying about the potential for loss due to fraudulent activity. A petty cash imprest system is a method of managing small cash expenses in a business or organization.