Using the Imprest System for Petty cash to help manage small expenses and reduce errors and fraud
Petty cash should be used for small value purchases such as milk and biscuits for the canteen or to repay back to an employee a small expense he incurred such as a book or a magazine he purchased on behalf of the business.
For larger and regular expenses an employee should use an expense claim form. This expenses on the expense claim form would not be paid from petty cash, but by cheque or electronic transfer.
To allow the recording of petty cash expenses a bookkeeper should have a petty cash book and petty cash dockets. The petty cash dockets are used by an employee to make a claim for the expense they have incurred.
The petty cash book is used to record the details and cost of each petty cash docket. It is usual, but not necessary, to record petty cash dockets by month to match the monthly account system running in the business.
Cash should not be handed over to an employee unless a petty cash docket is completed and an invoice or receipt describing the expense incurred is provided by the employee. Just because these are small expenses does not remove the need to prove what an expense was for.
This all seems very logical and simple, but petty cash is frequently abused and used to steal money from a business. Because the amounts used in petty cash appear small, little care is given to its management.
In many businesses, you ask for a €200 euro cheque for petty cash and you will be given it without question. No proof of what was spent previously is asked for. This puts the person in charge of the petty cash in a position that could allow then to abuse the petty cash and take it for their own use.
In many businesses a trusted person, the bookkeeper or accountant, is put in charge of the petty cash. They also have the ability to enter the payment into the accounts system. This means they can post the cheque to an expense of their choice and bury the petty cash cheque and no one will ever know.
Also in many businesses, a receptionist, secretary or a non accounting person is given the responsibility of managing the petty cash. In this role this person may discover that whenever they ask for a petty cash cheque, they are given it without question. So every month they can ask for a cheque of lets say €300 and after 6 months this comes to €1800 worth of cheques. If real petty cash expenses are only €400 for those 6 months, they can pocket the balance of €1400 and leave the business and unless someone investigates the petty cash, they have stolen €1400 from the business. It is very hard to prove they did this and even harder to get the money back.
Unfortunately the stealing of petty cash is done on a larger scales with cheques value amounts growing every month and it is not uncommon for tens of thousands of euro, yes that is 4 zero’s, to be stolen.
So how do we reduce this threat to the petty cash?
First in our accounts system we either set up the petty cash as a suppliers account in our creditors ledger where we treat the petty cash as a creditor by posting the petty cash dockets as invoices and the petty cash cheques as supplier payments.
We can set up the petty cash account as a bank account in our accounts system, and anything paid from petty cash will be paid from the petty cash bank account. It is not a bank account in the real sense, but you work it like it was a bank account
Second and the most important factor is to run your petty cash using the imprest system.
The imprest system is simply a method of replenishing your petty cash with only the amount of money you spent in that month. So if €134.95 was paid out in petty cash expenses, a petty cash cheque for €134.95 is written and cashed. No more or no less. Petty cash is only replenished for what was spent. The person issuing the cheque must see the petty cash book to ensure that the petty cash cheque being written is the amount that was spent as per the petty cash book for the month in question.
Here is an example.
We currently have no petty cash system so we want want to start one. We purchase a petty cash box, a analysis book to record the petty cash dockets and petty cash dockets.
A cheque for €200 is written and cashed and the €200 is placed in the petty cash box. The person in charge of the petty cash box completes a petty cash voucher to acknowledge receipt of the €200. The €200 is the petty cash float.
During the month a total of €173.29 is claimed and paid out of the petty cash. This leaves €26.71 in the petty cash box. The petty cash book has been totalled and the amount of €173.29 is shown as the amount spent in the month.
The person in charge of the petty cash completes a petty cash voucher for €173.29 to present to the person who will then issue them a cheque that will replenish or bring back up their petty cash float to €200. The person writing/signing the cheque will examine the petty cash book to confirm the amount requested and will write the cheque. Then the person in charge of the petty cash will get the cheque cashed and the amount of €173.29 will be then placed in the petty cash box bringing the petty cash float back up to €200.
What this system is doing is ensuring that only what is spent is paid back and it limits the amount of petty cash fraud to €200 per month. It is still possible for the person in charge of petty cash to present false petty cash claims and take money from the petty cash float. So it still requires that someone else does check every month that genuine expenses are being claimed for.
While the imprest system does not eliminate fraud, it reduces it greatly and limits the loss, if any, to €200. The level of supervision required for an imprest system is low as the imprest system has built in audit checks with limits to how much cash can be spent and can set the maximum in a month of how much is spent on petty cash. If there is a requirement for more than €200 in a month this is flagged and an investigation as to why more petty cash is required can be started. As a cheque is only issued once a month, this also controls the spend.
If there was no imprest system, cheques can be issued at any time of the month for small amounts which in turn add up to large amounts. And because it happens slowly, the stealing of the petty cash may go unnoticed.
The imprest system requires only one simple rule. You only get back in petty cash what you spent in the month. It also has the advantage of forcing the petty cash to be kept up to date, as a claim for a cheque to top up the petty cash float cannot be made unless the amount spent is known and is recorded in the petty cash book.
While the petty cash system does not have to use a petty cash book, it can be easier to train a non accountant or bookkeeper to manage the petty cash system, as the level of bookkeeping skill required is minimal. Also, as there can be many small expense claims, processing all this as individual transactions in a computerised accounts system is very time consuming.
If you use a manual bookkeeping system with an analysis book, you can have a running total in your petty cash analysis book, so that as you record a petty cash voucher in your book you change the running total. While you can also do this in a computerised accounts system, a computerised accounts system requires a person to be logged into the accounts system. And in order to keep the computer system up to date, you would need to be entering petty cash expenses as they happened and this would not be very time efficient.
Using the imprest system and a manual petty cash system is the easiest, most secure and efficient way to manage petty cash. It is your choice to decide the best method for your business.
To listen to an audio version of this article go to http://bookkeepingpodcast.ie/wordpress/2010/08/ibapp-025-petty-cash-using-the-imprest-system/
(c) Help For Bookkeepers 2010