Imprest Petty Cash

The imprest petty cash system is a method of accounting for petty cash expenses. Under the system, the petty cash fund balance is always maintained at a fixed amount decided on when the fund is first established.

During an accounting period petty cash is used to pay cash expenses which are supported by petty cash vouchers. At the end of the period a petty cash reconciliation is carried out, and the cash spent is reimbursed to restore the imprest petty cash fund balance back to its original fixed amount.

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 petty cash amount.

Cash held + Petty cash vouchers = Fixed imprest amount

The process to establish, use, and reimburse an imprest petty cash system is outlined below.

The Imprest Petty Cash Fund is Established

Suppose a business wants to implement an imprest petty cash system and establish a fixed petty cash fund of 100 at the start of an accounting period. The cash would normally be drawn from the cash (checking) account, and the journal to post the imprest petty cash would be as follows:

This journal effectively transfers the amount of 100 from the cash account (checking account) to the petty cash account. It is important to note that having established the imprest fund of 100, providing the amount of the imprest fund is not altered, no further postings are made to the petty cash account in the general ledger.

Expenses are Paid From the Petty Cash Fund

The imprest petty cash fund is now used to pay cash expenses as they arise during the accounting period. Suppose as an example, there are two expenses during the period as follows:

1. Postage 25
2. Stationery 40

For each expense a petty cash voucher is completed, proof (invoice or other document) is attached, and a signature is obtained to indicate that cash has been received from the petty cash fund.

The petty cash fund, which originally contained the imprest fund of 100 in cash, now contains two petty cash vouchers for a total of 65, and the remaining cash held of 35.

It is important to understand that at all times the total of the cash held plus the petty cash vouchers should equal the original imprest fund.

Cash held + Petty cash vouchers = Fixed imprest amount
35 + 65 = 100

This unique feature of the imprest petty cash system is one of its most important advantages as it allows spot checks to be made on the petty cash fund at any point in time, as demonstrated in the table below.

For simplicity and to maintain proper control over cash, it is best to only use the imprest petty cash fund to deal with cash expense payments. If small amounts of cash are received by the business during an accounting period, they should not be included in the imprest petty cash system, but banked separately into the cash (checking) account.

Amounts are Entered in the Petty Cash Book

The petty cash book is not part of the double entry bookkeeping system, and is used simply to record movements on the petty cash imprest fund. The petty cash book usually consists of a columnar book with one side used to record the original receipt of cash to establish the fund, and the other to analyse payments by expense categories, such as postage and stationery used in the above example.

The Imprest Petty Cash Fund is Replenished

At the end of the accounting period the petty cash book is totalled and reconciled, and the petty cash fund is replenished.

It the above example, the cash held at the end of the accounting period is 35, and therefore the amount of 65 is needed to restore the fund back to its original fixed amount of 100.

Cash to replenish = Fixed imprest amount - Cash held
Cash to replenish = 100 - 35
Cash to replenish = 65

Unless there are any discrepancies in the fund, the cash needed to replenish the fund is also equal to the value of the expenses paid, which in turn, is equal to the value of the supporting petty cash vouchers.

The cash to replenish the petty cash fund is obtained from the cash (checking) account and the following bookkeeping journal is made:

Cash is withdrawn from the cash account (to replenish the petty cash fund), and at the same time the expenses are recorded in the correct expense account. Again, it is important to understand that no entry has been made to the petty cash account, this remains fixed at the original imprest amount of 100.

In the petty cash book (not part of the double entry bookkeeping system), the cash received to replenish the fund of 65 is recorded and the imprest fund is now back to its original cash amount of 100.

Errors in the Imprest Petty Cash Fund

If at any time the total of the remaining cash held plus the petty cash vouchers is not equal to the original fixed imprest fund amount, then an error must have occurred in the recording of petty cash which needs to be investigated and either corrected or written off.

In the event that the error cannot be identified and corrected, in order for the imprest petty cash system to work correctly, the cash replenishment must still be for the difference between the fixed imprest amount and the remaining cash held.

Suppose in the example above, the remaining cash held had been 25 and not the 35 expected, and the investigations cannot establish the reason, then the replenishment about would be calculated as before:

Cash to replenish = Fixed imprest amount - Cash held
Cash to replenish = 100 - 25
Cash to replenish = 75

The imprest petty cash journal entry would then be as follows:

The difference in this example of 10, has been written off to sundry expenses. The cash replenishment of 75 is now added to the current cash held of 25 thereby restoring the petty cash fund back to the original fixed amount of 100.

Changing the Imprest Petty Cash Fund

The only occasions in which a posting is made to the petty cash account in the general ledger is when the amount of the imprest (petty cash fund) is permanently altered.

For example, if the business wanted to increase the fixed imprest amount to 150 from its original 100, then additional cash of 50 would be withdrawn from the checking account and deposited in the petty cash account using the following journal:

This amount would now be recorded in the petty cash book on the receipt side and the imprest fund would be fixed at 100 + 50 = 150 until altered gain.

Imprest Petty Cash Fund in the Financial Statements

The imprest petty cash fund forms part of the cash of the business and the fixed amount should be included under the heading of cash and cash equivalents in the balance sheet.

November 6, 2016