An imprest account is a great way for businesses to make small purchases in a more streamlined fashion without impacting their accounting systems or other business funds. When a business creates this type of specific account, it creates a more simple process when withdrawing funds for small purchases.
In order to understand how an imprest account works and what their functions are, it is important to understand the nuances of an imprest system. A system like this is used to track withdraws of small amounts for approved expenses.
If you are a business owner who struggles with keeping your accounting in order and feel like you are regularly incurring “random” expenses, understanding what an imprest account is and implementing it into your business could be extremely beneficial to streamline your processes and get a hold on your spending.
What Is the Imprest System?
The imprest system is a procedure where small payments of cash are dispensed from the imprest account for approved expenses as well as incidental expenses. Typically with imprest accounts, they are set up to be funded back to their “standard level” using the businesses main source of funds on an weekly, monthly or annual basis.
Imprest accounts typically hold a fixed amount of funds and are allocated for small business expenses. These accounts track the menial expenses a business incurs for simple accounting purposes.
Imprest accounts are typically referred to as a “petty cash fund,” however petty cash is just one type of imprest. Imprest systems are most commonly broken down in one of two classes, “Standing Imprest” and “Special Advance Imprest.”
Standing Imprest accounts is utilized through a businesses entire fiscal year and is funded back to its standard amount when deemed necessary. This refunding happens when account users submit receipts, vouches or proof that the account was used for approved expenses and needs to be funded again.
The second type of imprest account class is called Special Advance Imprest. When a business has a special advance imprest account, they are typically using this for a specific cash payment for a singular qualified purpose.
How Does An Imprest Account Work?
To set up an imprest system, a business must first establish an imprest account and deposits an initial amount of funds to use as working capital. Depending on the size of the company, these funds could be allocated to different departments of your company, different locations, or to specific employees who will be responsible for managing and approving expenses that are approved to be paid from the imprest account.
In a standard process, imprest are funded and certain employees are given access to make spending decisions with the account. Expenses are approved by a manager or the decision making employee, and in order to replenish the funds in the account, adequate documentation must be provided to prove that the funds were spent on legitimate business expenses. This proof could be in the form of a receipt, an paid invoice, or a voucher. Petty cash can be used for expenses such as company lunches, office supplies, travel expenses, or other small outliers.
Documentation proving that purchases made from imprest accounts we’re legitimate are necessary for accounts to be replenished with funds. This documentation and proof before replenishment is a way for business to have a close eye on cash flow and be constantly auditing their business. This allows for business owners to identify differences between expected and actual balances within these accounts.
Features of the Imprest System
Control
By limiting Imprest account limits and establishing clear rules for use, implemtning an imprest system ensures funds are not misused and excessive spending does not occur. Regular reconciliation also provides oversight to verify petty cash is being properly utilized.
Flexibility
Imprest accounts give businesses access to working capital without having to incur debt or wait for reimbursements. Funds can be accessed immediately as needed to cover operational costs. At the same time, unspent Imprest balances remain under management control.
Cost-effectiveness
The Imprest system reduces administrative workload from processing numerous receipts, reimbursements, loans, and payments. It simplifies providing operational funds and small cash amounts to employees for specific purchases.
Cash management
Imprest accounts improve business accounting because money that is spent from these accounts are all regulated and have the same “purchase criteria.” These types of accounts make it easier for businesses to see where their money is being spent and track their overall finances in a more defined fashion.
What Is a Petty Cash Fund?
A petty cash fund is a specific type of imprest account, which provides business access to small amounts of cash for business expenses where using a credit card or other form of payment is not possible. Usually this cash is held on company location in a safe, lockbox or some other form of secure holding. When employees or authorized spenders need access to this cash, they are typically required to submit a receipt for reimbursement of expenses already made, or to submit a voucher that states they will provide a receipt of the purchase and any left over cash on a specific date.
Some key attributes and purposes of a petty cash fund include providing quick access to cash for important expenses where waiting for reimbursements or processing payments would take time. It simplifies making and accounting for regular low-cost business outlays, saving time and effort that would otherwise be spent on numerous small payments and reconciled receipts.
Petty Cash Expenditure Documentation With an Imprest System
Proper documentation of petty cash expenditures is essential for the effective management of an imprest system. Receipts prove that imprest funds were used appropriately for approved business purposes only and are required for reconciling and replenishing funds. Expenses should also be recorded in a ledger together with the date, amount, vendor, and reason for the cost.
This provides an easy-to-review record of how imprest money is used over time and assists in analyzing spending patterns to find potential cost savings or ensure approved expenses are being incurred as intended. Expenses in ledgers should be categorized by type, such as supplies, travel, meals, postage, etc.
Receipts and expense ledgers should be submitted frequently, such as weekly, monthly or quarterly depending on the purchase amounts and consistency of spending. Frequent submission ensures imprest balances can be promptly reconciled and replenished as needed, preventing depletion and limiting liability. This type of documentation also makes it easier to detect misspending and improper use of the account faster.
How to Reconcile Your Imprest Petty Cash Fund
Regular reconciliation of an imprest petty cash fund is essential to ensure it remains properly managed. Some key steps to reconciling an imprest account include:
- Gather receipts and expense records. Collect receipts for all expenses paid from the imprest fund as well as any expense ledgers or logs. These will be verified against the remaining imprest balance during reconciliation.
- Count remaining cash on hand. If part of the imprest fund is held as cash, count it to determine the total amount of cash and receipts on hand. This will be compared to the authorized imprest amount to check for over/under-spending.
- Compare total receipts and cash to the imprest amount. Add the values of all receipts and any cash on hand to get the total amount spent/remaining from the imprest fund. Compare this total to the original imprest amount authorized to verify if over/under-spending has occurred. Any overage or shortage will need to be properly addressed.
- Review expenses in ledgers/logs. Ensure all expenses recorded in any expense ledgers or logs match the receipts on hand. Check that expenses are legitimate and within approved expense categories for the imprest fund. Question any unauthorized or suspicious expenses immediately.
- Categorize expenses for analysis. If required, categorize expenses by type to analyze spending patterns. This can help identify potential cost savings through reducing spending in high-cost categories or adjusting imprest limits accordingly for future periods.
- Replenish imprest balance as needed. If receipts/cash on hand total less than the authorized imprest amount, the balance will need to be replenished through depositing additional funds into the linked imprest account before further imprest fund use. Requesting a replenishment at this stage also helps prevent depleted imprest balances with outstanding authorized expenses.
- Submit reconciliation for review. Submit the completed reconciliation along with copies of receipts and expense support for review and approval. This provides oversight and accountability of imprest fund management and spending.
- Make adjustments as needed. If the reconciliation review identifies any needed adjustments to expense categories, limits, or controls, make the necessary changes to ensure effective and compliant management of the imprest fund going forward.
Reconciling an imprest petty cash fund regularly, such as weekly, monthly or quarterly, provides an important control mechanism. Reconciliation ensures imprest funds are used legitimately and as intended, prevents unauthorized overspending, detects fraud or misuse quickly, and allows monitoring of spending patterns to optimize cost management over time. When implemented thoroughly, reconciliation protects businesses from loss of funds and liability while still maintaining easy and flexible access to capital for necessary expenses.
Benefits of Using an Imprest Account for Petty Cash
An imprest account has significant advantages for managing petty cash and business expenses.
An imprest account provides quick access to petty cash for necessary expenses without tapping into an organizations other sources of funds. These accounts give businesses flexibility in allocating spending for different operational needs as funds may be advanced for short-term purposes, and then replenished. Unspent balances remain liquid and under management control.
Maintaining an imprest account is often more cost-effective than processing numerous small payments or reimbursements. Less administration is required, reducing the time and effort spent on managing cash and expenses. By limiting imprest amounts, businesses also retain control over allocated funds and ensure they are used appropriately for approved expenses only. Clear rules and oversight help prevent unauthorized overspending or misuse of petty cash.
Disadvantages of an Imprest Account for Petty Cash
While imprest accounts provide substantial benefits for managing petty cash, they also have some potential disadvantages. It is important for businesses to be aware of these disadvantages when determining if an imprest system will meet their needs.
Imprest accounts typically have limited amounts of cash allocated at any given time. The funds available may not be enough to cover large or unexpected expenses, requiring additional allocation or replenishment which can be an administrative hassle. Employees also require management’s approval to spend imprest funds and replenish allocations, potentially resulting in employees having less autonomy over the funds and not having them be immediately available if management isn’t present or responsive.
The flexibility and limited oversight of imprest accounts could enable abuse or fraud if not properly implemented and monitored, introducing opportunities for misuse of funds. Keeping records, reconciling expenses, and replenishing allocations require administrative time, effort, and management costs, with the workload possibly outweighing benefits for some smaller organizations or limited petty cash needs.
