Cash is one of the most critical assets for companies and businesses. A proper cash management system can help companies survive in the long run. These may include various procedures that can be a part of a company’s cash management system. Usually, companies divide cash into two categories. These include cash in the bank and cash at hand.
Cash in the bank is any cash that companies hold in their bank accounts. 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. These may consist of capital expenditures. However, companies may also need cash to pay for daily operations or revenue expenditures.
Cash at hand is also a critical part of a company’s cash management. Companies need to keep cash in their offices to ensure that they can pay for small expenses. However, any cash held on premise is not as secure as cash held in bank accounts. Therefore, companies need to have a system to safeguard this cash from any unauthorized access. Similarly, they must track any payments from the reserves for bookkeeping purposes.
What is Petty Cash?
Petty cash is another name used for any cash held at company premises. Petty cash represents a small number of bills and coins that companies keep to pay for revenue expenditures. Companies may divide petty cash for several locations or departments, allowing them to handle their minor expenses. Usually, companies hire a petty cash custodian to manage petty cash.
Companies may use petty cash funds for expenses, such as postage, entertainment, food, supplies, transportation expenses. Usually, companies include policies for the expenses for which each department or manager can use the petty cash. Similarly, there are some limits that companies must always follow when paying petty cash expenses.
At the end of a specific amount of time, companies must reconcile their petty cash accounts. They can do so through a system used to manage petty cash. Usually, the management looks for authorized vouchers for any payments made through petty cash. Once they reconcile the amounts, companies will reimburse the petty cash account from their bank accounts.
What is Imprest System?
The imprest system is an accounting system that companies use to manage petty cash. Companies use the imprest system to track and document how each department or location uses its petty cash. The imprest system works by establishing a maximum amount for petty cash. It is the amount that companies replenish at the end of each period. This amount is known as the petty cash float.
Similarly, it involves paying for small expenses through authorized vouchers. These vouchers are crucial for tracking expenses and petty cash payments. Some companies may also have IOU systems, allowing employees to borrow from petty cash and repay when they can. At the end of each period, the sum of these authorized vouchers and IOUs must sum to the decrease in petty cash.
During the period, companies may also receive cash from small customers. They can add this amount to the petty cash amount. At the end of each period, any receipts will decrease the amount that companies have to replenish. The basic formula for the imprest system of petty cash is as below.
Petty cash float = Remaining petty cash balance + Receipts during the period – Authorized expense vouchers – Remaining IOUs.
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.
What are the advantages of an Imprest System?
Imprest system can have many advantages for companies. Firstly, it is necessary for the prevention and detection of fraud. Companies with an imprest system can easily track any petty cash payments, which doesn’t provide any unauthorized expenditures. Similarly, it allows companies to track their expenses better. On top of that, it results in the reduction of misstatements in cash balances.
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. Overall, an imprest system can be highly beneficial for companies.
What are the disadvantages of an Imprest System?
Despite its many advantages, the imprest system can also have many disadvantages. Firstly, the system has become outdated and is inefficient. It lacks many features that most modern-day petty cash systems have. The imprest system also lacks support for large expenses. While it may decrease the chances of fraud, it does not eliminate it.
Imprest system does not support spending over the petty cash float either. Lastly, the imprest system is of limited use if a company does not have a proper internal controls system. Overall, imprest systems can also be disadvantageous.
Conclusion
Petty cash includes small amounts of money held on the premises. Companies can manage their petty cash with an imprest system. The imprest system establishes a petty cash float, which is the maximum amount of petty cash companies may hold. At the end of each month, companies must replenish their petty cash account to the petty cash float.
