Imprest system definition

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What is the Imprest System?

The imprest system is an accounting system for paying out and subsequently replenishing petty cash. Petty cash is a small reserve of cash kept on-site at a business location for incidental cash needs. The imprest system is designed to provide a rudimentary manual method for tracking petty cash balances and how cash is being used.

Features of the Imprest System

The essential features of an imprest system are noted in the following bullet points:

  • A fixed amount of cash is allocated to a petty cash fund, which is stated in a separate account in the general ledger.

  • All cash distributions from the petty cash fund are documented with receipts.

  • Petty cash disbursement receipts are used as the basis for periodic replenishments of the petty cash fund.

  • Variances between expected and actual fund balances are regularly reviewed and investigated.

In essence, expenses are recognized when new cash replenishments are made to the petty cash fund from the company checking account. When cash is paid from the checking account, the entry is a debit to the various expenses for which receipts are being supplied by the petty cash custodian, and a credit to the cash account.

Unless the amount of cash assigned to the petty cash fund is deliberately altered, there is no reason why there should ever be another entry into the account used to document the petty cash balance, since all petty cash replenishments are coming from the company checking account.

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Expenditure Documentation in the Imprest System

The main feature of this system is the need to document all expenditures. Doing so is an excellent way to maintain a high level of control over cash disbursements. However, the downside is a high level of documentation in comparison to the amount of funds expended, which is inefficient.

Problems with the Imprest System

There are several problems with the imprest system, which are as follows:

  • Loss of cash. The imprest system can cause cash leakage from a business, either through theft of the cash or because the petty cash custodian does not do a proper job of recording disbursements.

  • Labor intensive. It requires a significant amount of time to train petty cash custodians, have them document cash transactions, and then have the accounting staff audit the various petty cash boxes. The ratio of labor cost incurred to cash issued is very high.

For these reasons, the imprest system is declining in popularity, with many businesses preferring to use company credit cards for incidental purchases, or have employees pay cash and then apply for reimbursement through the corporate expense reimbursement system.