The imprest system is one of the most highly adopted methods of financial management to manage minor, routine-type expenses in organizations. It helps control petty cash for such minor expenses and effectively assures their accountability. The setting up of a fixed fund under the imprest system simplifies financial record-keeping while minimizing the risk of errors or misuse of funds.
For that, this elaborative tutorial will explain what the imprest system is, how it works, and its advantages to companies. We also go through the important terms like- imprest account, imprest petty cash book, and imprest petty cash system by providing suitable examples to show how these are practically implemented.
What is the Imprest System?
At the bottom, the imprest system is one such method of managing funds that secures financial accountability since a fixed sum of money, more often than not for small expenditures, is kept at all times. The very term “imprest” itself is derived from the Latin word “imprestare” to lend or advance. A certain fixed amount is assigned to a fund, often referred to as the imprest account, which is periodically restored after each disbursement.
The key characteristic of the imprest system is that the fund is always started and ended at a set amount. As money is spent, it is reimbursed so the total returns to the beginning level. For example, if an imprest fund is at $500 and $100 is spent to purchase office supplies, the fund is reimbursed $100 to return the fund to $500.
The Main Components of the Imprest System
An imprest system would comprise all of the following except for the following:
Imprest Account
This is a bank account or a sum in cash where small and frequent expenses are made. It is normally maintained separately from the basic corporate account.
Imprest Petty Cash Book:
The petty cash book under the imprest system captures all the transactions that occurred with the imprest fund. All inflows are matched against outflows, stating the purpose for which each expenditure was made and the balance of the fund after every transaction. The book serves as the record for auditing and tracking all petty cash transactions.
Imprest Petty Cash System:
This is the imprest petty cash system procedure for its operation, recording, and restoring the imprest fund. It explains the steps followed in withdrawing money from the fund, recording expenses against this fund, and topping it up when need be.
Reimbursement:
When the balance of an interest is low or has been used up, replenishment is made by adding money to the fund. It can maintain the fund level as determined.
How the Imprest System Works?
The imprest system is a cyclical procedure whereby the fund is established, the expenditures recorded, and the used amount replenished. The process, as usually followed, is summarized in the following sequence of actions:
Setting up Imprest Fund:
The organization starts a petty cash fund with a specified amount of say, $ 1,000. The fund is assigned to a custodian-usually the accountant or office manager is assigned the responsibility for its maintenance.
Recording of Expenses:
Every time the imprest cash is withdrawn from the account to purchase petty expenses office stationery, postage, or lunch for a business meeting custodian records it in the imprest petty cash book. These could be recorded in a log with details like the date, the purpose of the expense, and the amount spent.
Balance check:
The holder will periodically ascertain the balance remaining in the imprest cash fund to determine if it will be sufficient for the continuing expenses.
Reimbursement:
When a specified amount of the cash is used-or at periodic intervals-at the end of the month, for example, the custodian summarizes all the expenditures made and requests reimbursement. The main company account transfers cash in an amount sufficient to restore the imprest cash fund to its original amount.
Auditing:
Since all expenses are recorded in the imprest petty cash book, auditing petty cash utilization becomes easy. The company can check out the book and confirm that all the transactions were valid and accounted for.
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Types of Imprest Systems
There are several types of imprest systems depending on the nature and specific financial needs of the organization in question. Two major types of imprest systems include:
Fixed Imprest System:
In the fixed imprest system, the petty cash fund amount is pre-determined and fixed, and any expenditure against the same has to be replenished to maintain the original balance. Say, the fixed interest is $ 500, and an expenditure of $ 200 is incurred against the same; then, the fund is reimbursed with $ 200 to restore the balance to $ 500.
Variable Imprest System:
In the variable imprest system, operations are just like in the fixed system, save that replenishment after use may not be back to the same amount but should account for expenses incurred. The amount of reimbursement may fluctuate depending on organizational needs. This system is quite flexible but requires more controls to prevent imbalances.
Benefits of the Imprest System
The imprest system offers a host of advantages, most importantly to organizations that have to deal with lots of petty and routine expenses.
Control and Accountability:
A fixed sum in the petty cash fund allows businesses easily to identify how money is spent. Each spending will be recorded in the imprest petty cash book. This gives very transparent audit trails and reduces the chances of mismanagement or fraud.
Steel-plated Administration of Finance:
In minor day-to-day expenses, imprest simplifies the process of maintaining expense records. Rather than processing each transaction through the main accounts, for minor purchases, organizations might make use of the petty cash fund to minimize administrative work.
Transparency in Bookkeeping:
The fact that every transaction is recorded within the imprest petty cash system, the imprest system encourages sound bookkeeping. This makes sure that the expenses are recorded and discrepancies can be found out as quickly as possible.
Effective Cash Flow:
The imprest system ensures cash availability for small expenses when required, without affecting the general cash flow of the business. It also provides far more control over how much cash is on hand at any given time.
Curbs Overspending:
Since the balance in the imprest fund is fixed, it does not allow over or uncalled-for spending. The custodian must justify such expenses, and reimbursement is made only when the expenses are valid.
Example of the Imprest Petty Cash System
Below is a practical example to demonstrate how the imprest petty cash system works:
Suppose that a small business opens an imprest fund with $500. The office manager spent $150 for office supplies and spent $50 for snacks in a staff meeting. The transactions are recorded in the imprest petty cash book as follows:
- Date: September 1, 2024
- Purpose: Office Supplies
- Amount: $ 150
- Date: September 5, 2024
- Purpose: Snacks for Staff Meetings
- Amount: $ 50
By the end of the month, a total of $200 is spent. The office manager will submit a reimbursement request for $200 and through the main account, the petty cash will be restored to $500.
Imprest Management System
Organizations may have an imprest management system that is more sophisticated and operates software to operate the tracking and replenishment process. These types of systems generally offer features that include:
Automating the tracking of expenses:
With digital imprest systems, recording of expenses is automated, and reports are generated on how petty cash is used.
Real-time monitoring:
The custodian and management have an up-to-the-minute look at the current balance in the imprest fund and minimize running out of cash for minor expenses.
Smoother Reimbursement:
In an automated system, requests for reimbursement are faster and their processing is expedited. This reduces delays in replenishing such funds.
Conclusion
The imprest system is a time-tested approach to managing petty cash that controls small and routine expenses within organizations. Because it is simple, accountable, and efficient, it can also be applied to businesses at any level. With the use of a fixed fund, recording all expenses in the imprest petty cash book, and replenishing the fund regularly, an organization will be assured that its petty cash will be utilized with responsibility and that financial records are always kept up to date.
Knowing how to establish, operate, and maintain an imprest system enhances one’s financial management capability and gives the business the needed instruments to minimize risk while allowing smooth operations. Whether yours is a small business with only infrequent minor expenses or a large corporation with many departments, the imprest system can work for your situation.
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