Petty Cash and the Imprest System: Managing Small Change

Hello future Accountants! Welcome to a crucial chapter in how businesses manage their money, specifically the small, day-to-day expenses. Don't worry if 'imprest system' sounds complicated—it’s just a smart, secure way of managing cash payments for things like postage stamps or quick taxi rides.

In this section, we learn how businesses handle transactions that are too small to justify writing a cheque for every time. This process is essential for good internal control and accurate record-keeping. Let’s dive in!

1. Understanding Petty Cash

Imagine a large company. If the manager needs to buy a £5 roll of stamps, it would be inefficient to ask the bank to process a cheque for such a small amount. That's where Petty Cash comes in.

What is Petty Cash?

Petty cash is a small fund of money kept on hand by a business to pay for minor, routine expenses where payment by cheque or electronic transfer is impractical. It is usually overseen by a designated employee, often called the Petty Cashier.

Common Examples of Petty Cash Expenditures:
  • Postage and courier fees
  • Office refreshments (tea, coffee, biscuits)
  • Small stationery purchases
  • Emergency travel or taxi fares
  • Tips or small sundries
Quick Takeaway: Petty cash deals with the tiny, necessary expenses that keep the office running smoothly.

2. The Imprest System: Security and Control

If you just leave a pot of cash lying around, it’s easy for money to go missing! Businesses need a way to control this fund. This control method is called the Imprest System.

What is the Imprest System?

The Imprest System is a method of operating the petty cash fund where a fixed starting amount (the float) is established. At regular intervals, the fund is reimbursed with exactly the amount that has been spent, bringing the fund back up to the original fixed amount.

Analogy: The Student Lunch Fund

Imagine your parent gives you £20 every Monday for your week's lunch money (this is the float). By Friday, you only have £5 left. This means you spent £15. To start next week with £20 again, your parent must give you exactly £15.

The Imprest System works the exact same way!

The Imprest Cycle (Step-by-Step):

  1. Establishing the Float: The main cashier issues a cheque or transfer for a fixed amount (e.g., £100) to the Petty Cashier. This £100 is the float.
  2. Making Payments: The Petty Cashier pays expenses out of the float. For every payment, they must obtain a receipt or, if a receipt isn't available, issue a Petty Cash Voucher.
  3. Recording: All payments are immediately recorded in the Petty Cash Book.
  4. Reconciliation (Checking): When the fund is low or at the end of the month, the Petty Cashier counts the remaining cash and totals the vouchers. The cash remaining + total of vouchers MUST equal the original float. (e.g., £15 cash + £85 vouchers = £100 float).
  5. Reimbursement (Restoration): The Petty Cashier requests a reimbursement cheque for the exact amount spent (£85). Once the cheque is cashed, the fund is restored to £100. The cycle repeats.
Why is the Imprest System so Good? (The Benefits)
  • Control: The Petty Cashier is accountable for the fixed float amount. If they spend £85 but only have £10 remaining cash (meaning £5 is missing), the discrepancy is immediately obvious.
  • Efficiency: It reduces the number of cheques written by the main accounting department.
  • Proof: Reimbursement is only given when sufficient proof (vouchers) is provided for the spent amount.
Memory Trick: Think of IMPREST as I'M PRESSING the reset button. You spend money, and then you press the button (get reimbursed) to go back to the original starting amount.

3. Source Documents: Petty Cash Vouchers

In Accounting, every transaction needs a source document. For petty cash, this is often the Petty Cash Voucher (PCV).

The Role of the Petty Cash Voucher

A petty cash voucher is a receipt or internal document used to record a payment made from the petty cash fund, especially when an external receipt (like a shop receipt) is not available.

Key Information on a PCV:

  • Date
  • Voucher number (for reference)
  • Amount paid
  • Reason for the expense (e.g., "Purchase of 1st Class Stamps")
  • Signature of the person receiving the money
  • Signature of the Petty Cashier (authorisation)

The vouchers are collected and used as proof of expenditure when the fund is reimbursed.

4. Preparing the Petty Cash Book

The Petty Cash Book is the formal book of prime entry (a specialised journal) used to record all receipts into and payments out of the petty cash fund.

It is distinct because it requires multiple columns to categorise expenses immediately. This analysis saves time later when transferring totals to the main Ledger Accounts.

Structure of the Petty Cash Book (The Columns)

The Petty Cash Book typically has two main sides:

A. The Receipts Column (Dr Side)

This is where we record money coming into the petty cash fund, usually the original float and all subsequent reimbursement cheques.

  • Date
  • Details (e.g., "Cheque from main cashier")
  • Receipts/Folio (The amount received)
B. The Payments and Analysis Columns (Cr Side)

This is the core of the petty cash book, where every expenditure is recorded and categorised.

  • Voucher No.
  • Total Paid (The total money paid out for that single transaction)
  • Analysis Columns: A separate column for each major type of expense (e.g., Postage, Stationery, Travel, General Expenses).

Did You Know? By using analysis columns, the Petty Cash Book acts as both a book of prime entry AND a way to summarise data ready for the Nominal Ledger (T-accounts). This is highly efficient!

Example of Recording an Entry

Assume the Petty Cashier pays £12 for new printer ink and the voucher number is 005.

The entry would look like this:

  • Date: (Today's Date)
  • Voucher No.: 005
  • Total Paid: £12
  • Analysis Column (Stationery): £12

The amount is only recorded once in the 'Total Paid' column, but also once again in the specific expense column (Stationery).

5. Balancing and Reimbursement

The key moment in the Imprest System is balancing the book and requesting the reimbursement, which brings us back to the original float.

Step-by-Step Balancing Process

  1. Sum the Analysis Columns: Total up all the individual expense columns (e.g., total Stationery, total Postage, etc.).
  2. Sum the Total Paid Column: This total should match the combined sum of all the analysis columns. (This is a self-checking mechanism).
  3. Calculate Cash Remaining: Original Float – Total Spent = Closing Cash Balance.
  4. Find the Reimbursement Amount: The amount needed to reimburse is exactly the Total Spent figure.
  5. Close the Book:
    • Record the Balance c/d (closing balance, which is the cash remaining).
    • Record the Reimbursement Cheque amount.
    The sum of the Total Paid, the Balance c/d, and the Reimbursement Cheque must equal the original float.
  6. Bring Down the Balance: Record the Balance b/d (the cash remaining) as the starting balance for the next period.

Important Principle: The reimbursement is recorded as a payment/credit in the main Cash Book (or bank account) and a receipt/debit in the Petty Cash Book.

Quick Review: The Imprest Equation

This equation must ALWAYS hold true under the Imprest System:

\(\text{Original Float} = \text{Cash Remaining} + \text{Total Vouchers/Spent}\)

Common Mistake to Avoid

Students sometimes confuse the reimbursement amount with the original float.

Remember: You do NOT record the original float amount every period. You only record the amount that was spent to restore the fund.

  • Example: If your float is £150 and you spent £120, you receive a cheque for £120. Your next period's start balance (Balance b/d) is £30 (the cash you never spent).

Mastering the Imprest System gives you fantastic control over small expenditures and ensures accuracy in your records. Keep practicing those calculations!