Imprest System

Imprest System is a type of financial accounting system designed to track and document how cash has been utilized. The most common example is the petty cash system that accounts for each petty cash transaction to maintain an equilibrium in the fund that equals the total of petty cash receipts and additional cash left in the fund.

The system described above can help an organization in numerous ways. The petty cash system is a straightforward and user-friendly method that enables the replenishment of all expenditures. The petty cash account is a widely used Imprest system where nominal expenditures are recorded. Organizations can use a petty cash system to reduce errors, eliminate fraud, control petty expenses, reduce the burden of the senior cashiers, and whatnot.

The imprest system accounting is a process in which the organizations manage routine, small and daily expenses incurred duting the normal business process in a systematic manner, so that the expenses are met but there is a limit to the fund outflow.

Such expenses include any purchase of stationery or small office supplies, travelling and entertainment related expense, any repair work, etc. These are such that the amount is very small but required for daily and smooth working of the organization.

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.

Petty cash accounts under the imprest system accounting usually maintain a pre-determined amount of cash that can be used for various purposes like reimbursing employees' expenditures, paying petty expenses, etc. An ltd can create a petty cash fund by recognizing and recording all the petty cash transactions with the help of the following steps-

1. A pre-determined amount of cash is allocated for creating a petty cash fund. This account is separately recorded in the general ledger of an organization.
2. In the next step, the company must identify all its nominal expenses that are paid with cash and accordingly document them in the system with receipts.
3. To maintain a pre-determined set balance, the company must top its petty cash fund occasionally.
4. The company must regularly monitor the petty cash fund so that there are no possibilities of any discrepancy between the expected cash amount and the actual cash amount.
5. The administrative department must conduct an appropriate investigation process if it finds discrepancies.

Let us understand the concept of imprest system of internal control with the help of a simple example, as given below.

A company ABC Ltd has some outstation meeting lined up with their clients, where four executives from ABC Ltd will have to visit to meet the client. Here the company will have to incur some travelling expense in the form of flight tickets for these four people.

ABC Ltd will take the money from the petty cash fund, kept aside for this purpose. After the expenses are done, the company will transfer equal amount of money from its bank account to the petty cash book. This will ensure that there is a restriction on the funds being spent by the organization on its employees and a clear and transparent system as well as record is maintained for every expense.

Let us study the important of this process of imprest system of internal control in detail.

#1 - Efficiency- It ensures there is efficiency in the fund disbursement even though there is no requirement for higher approvals. The process is quick but at the same time proper record in maintained.

#2- Accountability – Through this, there is an accountability on the department which incurs expenses, because the process is transparent and it becomes necessary to have a valid reason behind each expense incurred, which may be questioned if any discrepancy is found.

#3- Cash management – The concept also ensures that cash is well managed and expenses remain within limit because every organization must maintain good liquidity levels to ensure the smooth running of the entity.

#4 - Budgeting – This is very important for every organization. There is some budget planned for every type of expense including petty cash. If it is noticed that any department requires more cash for small expenses, either steps are taken to control it or more fund is set aside.

#5 - Less fraud – As already highlighted in the above points, the process is very transparent and controlled with proper budget. Thus there is very less chance if funds being misused and utilised for personal purpose.

Overall, the above are some points of importance that highlight the needs of the process in any business and it also ensures that there is a balance between requirement and usage of funds.

Similar to every financial concept or process, his system also comes with its own set of pros and cons. Let us identify the pros or advantages first.

#1 - Detection of Fraud 

The Imprest system eliminates the possibilities of unauthorized spending as the funds are designated for pre-determined purposes. This, in return, makes tracking of expenses and reporting of discrepancies much easier which ultimately aids in the detection and elimination of the possibilities of fraud.

#2 - Reduction in Errors

The cashier reviews the petty cash book at frequent intervals, and if there are any mistakes or errors, they can be easily traced and rectified.

#3 - Regulation of Petty Expenses

Petty expenses are managed with the set limits of the imprest system, making it almost impossible for the petty cashier to spend more than the petty cash available in the account.

#4 - Reduces the Chief Cashier’s Burden

A petty cash book relieves both the cash book and the Chief Cashier from the burden of recording petty and nominal expenses.

#5 - Simple and Quick Method

The method can be quickly used to provide funds for employees' purchases. It is one of the best methods known for making nominal purchases. Compared to other methods, this is way too quick, simple, accessible, and convenient simultaneously.

#6 - Ease in Reconciliation

The reconciliation of the petty cash book is simple and uncomplicated too.

Some disadvantages of the concept of imprest system in branch account are as given below.

#1 - Outdated System

Petty cash books are a largely outdated and inefficient system that does not fulfill the needs and expectations of the company's current requirements. Now there are better alternatives, such as prepaid cards, with the companies specifically designed, keeping in mind today's needs and requirements.

#2 - Inconvenient for Larger Expenses

One of the major drawbacks of using an Imprest system is that it causes huge inconvenience for larger expenses. The system is highly compatible and convenient for smaller expenses while the opposite for larger expenses.

#3 - Accounting Errors

Since there is no secondary documentation system in imprest system of petty cash to track nominal cash expenditures, the chances of accounting errors in the petty cash system cannot be denied.

#4 - Overspending

Not setting the expenditure limits for every nominal transaction can even put an organization at the risk of overspending on purchases.

#5 - Theft

Without appropriate controls, the company’s petty cash account can be misused by employees, and it will become tough to find out who took out the cash.

#6 - Misappropriation

In the absence of adequate controls, there are high chances for the same to get misappropriated by the company’s employees since petty cash is a type of liquid asset.

• Usually, petty cash funds are monitored by custodians who help handle the accounts and dispense cash to the company's employees. In return, the latter furnishes such receipts that are business-related.
• Petty cash funds in imprest system in branch account are established with a pre-determined amount, which is accordingly recorded in the entity's ledger.
• The administrative department of an organization is charged with the responsibility of maintaining the petty cash book.
• All the expenditures paid from the petty cash funds must be documented along with receipts.
• The Imprest system can also cover employees’ payroll, dividends, incentives, bonuses, rewards, and travel expenses too.

But the users of the Imprest system must also be aware of its multiple drawbacks like chances of theft, misappropriation, overspending, etc., and utilize the same accordingly. Therefore, organizations must design policies that dictate how cash must be handled to avoid all the associated problems.

Both the above are two different processes related to expenses and recording of those expenses in the books. Let us identify those differences.

• In case of the former, a petty cash voucher is signed to disburse funds. It is only after replenishment of funds that the disbursement is recorded in the books, which makes the balance new balance equal to the old opening amount. But in case of the latter, any disbursement is immediately recorded in the books.
• Under the imprest system of petty cash, the replenishment amount has to be equal to the amount that has been given out to meet the expense, but under the latter, this amount of replenishment and disbursement may not be equal.
• Since in case of fluctuating fund, the expense is immediately recorded, there is no adjustment required. But for the former, some adjustment of the amount unreplenished is done so that the final balance is same.
• From the above points it can also be derived that for the former, the final fund balance will always be the same, but it may vary in case of the latter.

Thus, the above are some important differences between the two concepts, even though their purpose of use is the same.

This has a guide to what is the Imprest System. We explain it with example, advantages, differences with fluctuating fund, importance & disadvantages. You can learn more about bookkeeping from the following articles –

• Accounting Statement
• Monetary Assets
• Embezzlement
• Business Transaction