Definition
An imprest is a financial reserve that a company uses to cover regular, minor expenses. Cashiers ensure a set balance is kept while regularly replenishing monies in the Imprest. The word "imprest" can also refer to a financial loan made to a person for a specific objective.
The imprest system is progressively losing favour as businesses increasingly rely on electronic transactions. Therefore, using a company credit card rather than an imprest is preferable as the former records information about electronic transactions and does not necessitate replenishing any spent money.
Characteristics
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Fixed amount of money is maintained in an Imprest account.
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The funds are used for specific purposes, such as petty cash expenses.
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Transactions made from the Imprest account are properly documented and recorded.
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The Imprest system is usually managed by one person responsible for maintaining and disbursing the funds.
How the Imprest system works
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The Imprest system works by setting aside a fixed amount of money in advance to meet recurring or unexpected expenses.
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This money is maintained in an Imprest account and is used for specific purposes such as petty cash expenses.
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Custodian is the person responsible for managing the Imprest account. They are usually given the authority to disburse funds to the employees as needed, provided that proper documentation and record-keeping are maintained.
The Imprest System's steps
The following steps make up the imprest system:
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A small cash fund is established with a predetermined quantity of cash. It is recorded in the business's ledger.
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Receipts for all charges made from the small cash reserve must be documented.
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The fund is periodically refilled with receipts from disbursements to maintain a balance.
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The fund is scrutinized for discrepancies between actual and expected cash (based on records). Inconsistencies should be reviewed if there are any.
What is the purpose of an imprest account?
The purpose of an Imprest account is to provide a fixed amount of money in advance to meet recurring or unexpected expenses. It helps in controlling expenses, tracking expenses, and ensuring efficient use of funds. The Imprest system also reduces the risk of fraud as transactions made from the advance amount are properly documented and recorded.
Advantages of the Imprest System
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Control over expenses:
The Imprest system helps in controlling expenses as the amount of money given is fixed, and it prevents overspending.
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Easy tracking of expenses:
The Imprest system makes it easier to track expenses since it records every transaction made from the advance amount.
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Efficient use of funds:
With an Imprest system, funds are allocated to specific purposes, making it easier to ensure that the money is used efficiently.
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Reduced risk of fraud:
The Imprest system reduces the risk of fraud as the transactions made from the advance amount are well-documented.
Disadvantages of the Imprest System
1. Outdated System
Petty cash books are a largely outdated and inefficient system that does not fulfill the needs and expectations of the company’s current requirements. Now there are better alternatives, such as prepaid cards, with the companies specifically designed, keeping in mind today’s needs and requirements.
2. Inconvenient for Larger Expenses
One of the major drawbacks of using an Imprest system is that it causes huge inconvenience for larger expenses. The system is highly compatible and convenient for smaller expenses while the opposite for larger expenses.
3. Overspending
Not setting the expenditure limits for every nominal transaction can even put an organization at the risk of overspending on purchases.
4. Theft
Without appropriate controls, the company’s petty cash account can be misused by employees, and it will become tough to find out who took out the cash.
5. Misappropriation
In the absence of adequate controls, there are high chances for the same to get misappropriated by the company’s employees since petty cash is a type of liquid asset.