Imprest: Definition And How It Works

Imprest: Definition And How It Works
Imprest: Definition And How It Works

Imprest is simply an accounting model used in business to keep track of how funds are being spent on expenses. The aim of every business is to be profitable.

Hence, several aspects of it need to be put in check. Every business needs to have an accounting system responsible for clearing up expenditures involved in its day to day activities so as to prevent loss and yield profitability.

Here, we will be looking at an accounting system called “Imprest” which every business is suggested to have in place.

What Is Imprest System?

In every standard business, there are usually several set up accounts that are ascribed to different payment gateways in the business. And one of them is called “Imprest”.

An Imprest is simply a cash account on which most standard businesses normally depend to pay little expenses that come with the business’s daily routine (activities). 

Such funds are kept aside from the business income to settle the business’s little bills which may either be impromptu, or incidental.

It is also good to know that there should always be a fixed account balance where the imprest funds are maintained. The purpose is to always make funds to pay up bills when it is needed urgently. 

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How Does Imprest System Work?

There are 4 steps that make up the Imprest system of every standard business and they are as follows. And these 4 steps explain how the imprest system of every standard business should work.

An Imprest is represented in form of cash

A little fund usually in the form of cash at hand is being kept aside after the usual business income is made. It is added and documented into the business personal ledger to keep track of how it is spent on the business expenses. 

It must be included in the business ledger 

Any expenses cleared by the business imprest must be included as a report in the business general ledger promptly to avoid unnecessary mistakes/errors.

It must be replenished periodically

The Imprest fund is to be replenished periodically to avoid unnecessary spending and debt. Whenever a fund is used to clear up an expense it should be added up for use next time to sort out future expenses.

And this way it makes the business much easier to rely on the imprest system since funds are always provided to sort out minor expenditures.

It must be managed effectively

The fund should also be monitored closely to ensure that it is used in fulfilling the main purpose for which it is kept.

Lack of management may cause misappropriation and theft so it is advised that funds kept aside in the imprest account are managed properly to fulfill the main aim in which they were kept. 

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Example

Most times, the imprest system is seen as a petty cash system due to its similar nature. They are both designed to carry out payments for minor expenses faced by a business.

Let’s say, for example, a business is used to providing a pizza treat worth $50 to each one of its employees every week and in total the whole cost sums up to $5000 because there are over 100 workers which means $50 to 100 workers making it $5000. 

Here, is where imprest comes in since this is a minor expense owed by the company to its workers/employees the role of the imprest system is to keep a record of the expense every week to avoid weekly loss in profit. Without a book of accounting, the business may suffer loss and theft may become inevitable. 

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What Is An Imprest Fund?

Imprest funds are usually funds kept aside to handle incidental business expenses. The main aim of keeping an imprest fund is to reduce unnecessary spending and to checkmate how funds are spent.

The imprest system of every business helps the business to keep track of its expenses and to be able to clear them up promptly.
What Is Imprest Balance?

This is simply the total amount of funds used to settle or clear up a minor fund. For example, if a business needs $2000 to maintain its offices and equipment and a sum of $2000 is pulled out to clear up the expenses that simply means the $2000 Is the business imprest balance. 

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What Is An Imprest Account?

Every legit business needs an Imprest account to be able to handle expenses that come along with the business day to day activities.

It is essential to know that an Imprest account helps a business to keep track of every expenditure to be cleared. Hence, minimizing unnecessary errors and spending.

The Imprest account is where the funds used in taking care of little expenditures of a business are being kept. Such expenditures may include; Fuel for the business activities, Office maintenance, Employee payroll, Debt owed by the business on office equipment etc.

The above-listed fall under some of the expenses every business has to pay for ranging from Fuel used in running the business routine to debt owed on office equipment. 

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Types Of Imprest System

There are two types of Imprest systems and they are: Special imprest system and standing imprest system.

Special Imprest

This is a form of Impact that is usually made for a particular business payment. It can also be a group-type payment as well. You should also know that this special Impest requires that it get replenished by the date agreed on.

Standing Imprest

This form of Imprest is usually kept on hold for financial reasons used in paying business bills and expenses and is replenished when the need arises.

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Advantages

It helps to keep track of fraud

The Imprest system enables business owners to monitor how funds are spent on expenses. Hence, minimizing excess spending and the high possibility of fraudulent activities.

This Is one of the basic benefits of the imprest system in the sense that it helps to drastically reduce fraud risks.

It helps to drastically reduce business errors

One of the benefits of the Imprest system is that it helps to eradicate errors sometimes made in business accounts.

And due to the nature of the Imprest system errors can easily be spotted once they are made. Hence, keeping the business or company experience little or no loss.

Regulation of Petty expenses

The Imprest system creates room for little expenditures to be managed efficiently and appropriately thereby, enhancing an optimum spending habit on business expenses.

It should also be known that the Imprest system of any business provides a way for expenses to be cleared up efficiently without the business facing any troubles. 

Disadvantages

It can lead to misappropriation

If not controlled or managed we’ll, funds can easily be withdrawn and used inappropriately by the employees of the business. Hence, setting the business at the wrong end.

It can also lead to theft:

In as much as the Imprest system can be used inappropriately by employees if not taken care of. So also it can lead to theft.

It is not suitable for larger expenditures

The Imprest system was created to handle and keep track of little/petty expenses for businesses. Larger expenditures will not fit in well with the Imprest system since it is not used to keep track of larger expenses but little ones.

Conclusion

Imprest simply means a financial account on which most businesses rely to settle minor expenditures. These are expenditures that are usually associated with the day-to-day running of the business. For a business to be profitable it must have an account where little expenses are handled promptly by the fund set aside for such purpose. 

There are some important reasons why a business needs to have an imprest system and this includes: It helps the business to keep track of fraud, it ensures that every minor expenditure is cleared up promptly, the system also ensures that errors are reduced drastically.

It helps the business avoid unnecessary spending and in as much as records are been provided on how funds are spent on expenses it eradicates losses

Imprest System Frequently Asked Questions

What is Imprest Retirement?

This is simply the process of giving an account or a business accountant supporting documents which could be in the form of receipts and invoices explaining how a collected fund was used or spent. It usually involves the process of explaining the whole purpose for which a fund is spent. 

What is Imprest Recoupment?

 This is simply a process whereby there is an adjustment of the expenditure and this usually occurs whenever the fund is exhausted. The expenditure is being recouped till the time the fund will be available. 

What Is A Petty Cash?

Petty Cash is a small number of funds usually in the form of cash used for business expenses. Petty Cash is often time synonymous with the Imprest system both have the same nature of keeping track of funds spent on expenditures in a business.

References

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