Petty cash transactions – The imprest system

Although businesses adopt a system of banking all receipts and payments by cheque, there are some expenses like postage, fares, stationery, tea and coffee which are so small in amount that is impractical to pay by cheque. They are expenditure items of petty nature. Therefore a petty cash fund is established to pay for such expenses.

The most common method of operating such fund is called imprest system. Under this system, a cheque is drawn and cashed to establish the patty cash fund.

At intervals, on production of adequate supporting evidence, the amount paid out is reimbursed by a further cheque drawn for the amount spent. For example, if a petty cash fund is established with $100 in it and over a period of, say, 15 days, $90 of that $100 has been spent on petty cash items, then a cheque for $90 will be drawn and cashed to reimburse the petty cash fund to $100. The original $100 to set up the petty cash advance is an asset. Reimbursement of petty cash expenditure is debited to the various expense account. The petty cash advance account is only altered when the float for the fund is found to be inadequate (for example, increased to $150), or too much (for example, reduced to $50).

Even though, by its very nature, petty cash deals with small amounts, it is very important that all the cash is accounted for. When money is to be drawn from the petty cash fund, a petty cash voucher is prepared for the amount of funds needed. The details of the petty cash vouchers are entered into a petty cash book by the petty cashier. When the fund is nearly expended, the cashier totals the book and draws a cheque for the total of the vouchers, cashes the cheque and restores the fund to its original amount. Any cancelled petty cash vouchers must be recorded in the petty cash book. However, the amount will be omitted.

Petty cash book (Ledger)

Date	Voucher no	Details	Amount received (Debit)$	Amount paid (Credit)$	Travel $	Postage $	Stationery $	Sundries $
OO	Initial Cheque	Petty cash advace	100
**	Voucher no	Voucher information		Total of expenses
**	Voucher no	Voucher information		Total of expenses
AA				Grand total
BB		Balance c/f		Initial cheque – Grand total
			OO	AA+BB
		Balance b/f	BB
ZZ	Cheque	Reimbursement	OO-BB = AA

Source: Accounting to Trial Balance TF/205/GEN/366/LP Learner’s Resource