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?

In Ireland at the moment, the main VAT rates in use are 21% and 13.5%. As a rule of thumb, goods are charged at 21% and services are charged at 13.5%. There is a list of services that can be charged at 13.5% which can be found on the Revenue Commissioners website at www.revenue.ie

To correct some incorrect assumptions, the two thirds rule does not refer to labour being two thirds of the sale. If refers to cost of the goods or materials being used in the sale not being more than two thirds of the full selling price in order to be able to apply the two thirds rule.

Why should we be interested in the Two Thirds Rule, can't businesses claim back the VAT anyway.