May 20, 2022

SB-Accounting

Accounting + Finance Blog

How does the imprest system work?

How does the imprest system work?
Shares

The imprest system is used to manage petty cash transactions of a business. In large firms, the system is used to disburse money to the petty cashier. As well as replenishing the staff when he runs out of cash.

Definition of Imprest System

Imprest system is an accounting system used by the main cashier to disburse and replenish cash to the petty cashier. The system ensures that the maximum amount of cash, to be held by the junior cashier, is complied with.

How does the Imprest System work?

The company will have a policy on the maximum amount the petty cashier can hold at any point in time. Next, the principle guiding imprest is applied. The principle is that the staff must not hold more than the maximum cash at any point in time.

READ ON  Using MS Excel to input sales transactions

At the start of business hours, the main cashier will give the junior staff the maximum amount allowed. Then he or she will monitor the junior staff at intervals to ensure that he holds only the maximum amount.

If the junior staff holds more than the minimum, the excess is “retired” to the vault by the main cashier. Also, if the fund is lower than the maximum, the petty cashier is reimbursed.

At the close of the business, the petty cashier balances the petty cash book in the computer system. He will check if the amount in the computer system equals that in his hands or shelf. If it is okay, he retires the remaining cash with him or her to the main cashier.

An Example

For example, assume that Hard to die company limited has a maximum cash limit of 300,000 Naira for petty cash. On the first day of work, the main cashier floated 300,000 Naira to the petty cashier. During business hours, the cash in the junior cashier’s shelf was 550,000 Naira. This was as a result of the receipt made by two debtors who owe the company a sum of 400,000 Naira. And small expenses disbursement of 150,000 Naira.

READ ON  Source Documents: Meaning and Explanation

The main cashier will retire 250,000 Naira to the main vault. To leave the maximum sum of 300,000 Naira with the petty cashier. However, on that day, four disbursements of 120,000 Naira were made by the junior staff. The main cashier will have to replenish the petty cash fund with the total expenditure incurred. That’s 120,000 Naira to make the amount with the petty cashier equals 300,000 Naira.

At the end of the day, the petty cashier balances his work for the day and retires the balance of 210,000 Naira. He retired the sum of 210,000 Naira because there was another disbursement of 90,000 Naira before the end of the business.

Will the Petty Cash Imprest System die?

The truth is that with time, the petty cash import system will die. The reason is the recent use of technology to transfer money from one person to another. This new method is safer and more accountable than the imprest system. In more developed countries where the use of cash is reduced to a minimum, the Imprest system is rarely used.

READ ON  How to identify the accounts in a business transaction

Conclusion

The imprest system of accounting ensures that the petty cashier has only the maximum amount allowed by the entity at any point in time. This system can be used not only by a petty cashier but also by each department if they are allowed to hold cash.

Shares