Managing Petty Cash with the Imprest System

Welcome back. In our last lesson, we focused on bringing your company's formal accounting records in line with reality by recording the adjusting and correcting entries discovered during the bank reconciliation. This was a crucial step in ensuring the accuracy of your main cash account, which handles the significant flow of money in and out of the business.

However, businesses constantly face small, everyday expenses where writing a check or making a bank transfer is impractical. How does a company control these minor cash payments? That is our topic for today.

This lesson addresses the learning outcome: Establish and manage a petty cash fund using the imprest system. We will explore this common and effective method for controlling small cash disbursements, a vital skill for maintaining financial discipline in any organization, especially in the SME environment you'll be working in.

1. The "Why" and "What" of Petty Cash

Imagine needing to pay a courier 50 DH to deliver an urgent document, buy a few stamps for 20 DH, or purchase coffee for a client meeting. Writing a company check for such small amounts is inefficient and slow. A petty cash fund (petite caisse) is the solution. It's a small amount of cash kept on hand to pay for minor expenditures.

To control this fund, most businesses use the imprest system (système de la caisse à montant fixe). This system is built on a simple and powerful idea: the fund is established with a fixed amount of cash, and it is periodically replenished back to that exact same fixed amount.

Let's start with a short video that introduces the concept of petty cash and why it's a useful tool.

The core principle of the imprest system provides a constant control mechanism. At any point in time, the following equation must be true:

Cash in the petty cash box + Total of all paid expense vouchers = The initial fixed amount

This simple check allows for easy verification of the fund at any time.

2. The Petty Cash Cycle: A Three-Step Process

Managing a petty cash fund involves a clear, repeating cycle. We will break it down into three distinct steps, covering the accounting entries required for each.

Step 1: Establishing the Fund

First, the company decides on a fixed amount for the fund, known as the float or imprest amount (fonds de caisse or avance fixe). This amount should be large enough to cover anticipated small expenses for a certain period (e.g., a month). Let's say a Moroccan SME, "Casa Services SARL," decides to establish a petty cash fund of 2,000 DH.

A check is drawn for 2,000 DH, cashed, and the money is given to a designated employee, the petty cash custodian (responsable de la petite caisse).

The journal entry for this is simple. It's not an expense; it's a transfer between two asset accounts: from the bank account to the petty cash account.

• Journal Entry to Establish the Fund:
  • Debit: Petty Cash (Account 5161, Caisses) ....... 2,000 DH
  • Credit: Bank (Account 5141, Banques) ................. 2,000 DH
  • To establish the petty cash fund.

This is the only time you will typically debit the Petty Cash account itself, unless you are permanently increasing the size of the fund.

Step 2: Making Payments from the Fund

As expenses are paid from the fund, the custodian does not make a formal journal entry for each small payment. Instead, for every disbursement, the custodian must:

1. Fill out a petty cash voucher (pièce de caisse or bon de caisse).
2. Have the recipient sign the voucher.
3. Attach the original receipt or invoice for the expense to the voucher.
4. Place the completed voucher in the petty cash box.

The cash in the box decreases, while the value of vouchers in the box increases. The sum of the two always equals the initial 2,000 DH float.

Step 3: Replenishing the Fund

When the cash in the fund runs low, or at the end of an accounting period (e.g., end of the month), the fund must be replenished (reconstitué). This is the step where the expenses are formally recorded in the accounting system.

As you just read, the process to replenish is as follows:

1. The custodian gathers all the vouchers from the box and summarizes them by expense category.
2. A check is written for the total amount of the expenses paid, which should bring the cash in the box back up to the original float.

Let's assume the custodian for "Casa Services SARL" has 250 DH remaining in the box. This means 1,750 DH has been spent (2,000 - 250). The vouchers total 1,750 DH and are summarized as:

• Office Supplies (Fournitures de bureau - 6122): 800 DH
• Transportation (Frais de transport - 6142): 550 DH
• Postage (Frais postaux - 6145): 400 DH
• Total Vouchers: 1,750 DH

A check is written for 1,750 DH. The journal entry to record this replenishment is:

• Journal Entry to Replenish the Fund:
  • Debit: Office Supplies Expense (6122) ........... 800 DH
  • Debit: Transportation Expense (6142) .............. 550 DH
  • Debit: Postage Expense (6145) ...................... 400 DH
  • Credit: Bank (5141) ............................................. 1,750 DH
  • To replenish the petty cash fund.

Notice that the Petty Cash account (5161) is not part of this entry. We are simply recording the expenses and reducing the bank balance. The cash from the 1,750 DH check is placed back in the petty cash box, restoring the cash balance to the original 2,000 DH float, and the cycle begins again.

Handling Shortages and Overages

Sometimes, due to human error, the cash in the box plus the vouchers do not equal the float.

• If the cash is less than expected, there is a cash shortage. This is recorded as a debit to an account like "Cash Over and Short" (Déficits de caisse, often part of account 6195).
• If the cash is more than expected, there is a cash overage. This is recorded as a credit to "Cash Over and Short" (Excédents de caisse, often part of account 7195).

The amount of the replenishment check is always the amount needed to bring the cash on hand back to the original float.

Test your understanding!

"Marrakech Artisans SARL" maintains a petty cash fund of 1,500 DH. At the end of the month, the custodian counts 180 DH cash remaining in the box. The expense vouchers total 1,300 DH.

1. Is the fund in balance? If not, is there a shortage or an overage, and how much is it?
2. What is the amount of the check that should be written to replenish the fund?
3. Prepare the compound journal entry to replenish the fund, assuming the 1,300 DH in vouchers consists of 900 DH for minor repairs (Entretien et réparations - 6133) and 400 DH for travel expenses (Frais de déplacements - 6143).

Show answer

1. Balance Check:

   • Cash on hand (180 DH) + Total Vouchers (1,300 DH) = 1,480 DH.
   • The expected total is the imprest amount of 1,500 DH.
   • There is a shortage of 20 DH (1,500 DH - 1,480 DH).

2. Replenishment Amount:

   • The check should be for the amount needed to restore the cash to 1,500 DH.
   • Amount = Imprest Amount - Cash on Hand = 1,500 DH - 180 DH = 1,320 DH.

3. Journal Entry:

   • Debit: Minor Repairs Expense (6133) ................... 900 DH
   • Debit: Travel Expenses (6143) ............................ 400 DH
   • Debit: Cash Shortage Expense (e.g., 6195) ........ 20 DH
   • Credit: Bank (5141) ................................................ 1,320 DH
   • To replenish the petty cash fund and record cash shortage.

3. The Petty Cash Book: A Practical Tool

While journal entries record the replenishment in the general ledger, the day-to-day management of the fund happens in a subsidiary record called the petty cash book (registre de petite caisse). This is a columnar book that helps the custodian track every transaction and analyze where the money is going.

The image below shows a great example of a petty cash register, presented in French, similar to what you might use in a Moroccan company. Notice the receipt column on the left and the multiple "analysis columns" on the right to categorize expenses.

To see how this book is maintained in practice, from receiving the float to balancing at the end of the period, the following video provides a comprehensive walkthrough.

Conclusion

You have now learned the complete process for managing small cash expenditures using the imprest system. This is a fundamental internal control procedure that you will be expected to know and apply in any accounting role. It ensures that even the smallest payments are tracked, authorized, and properly recorded, preventing misuse and providing valuable data on miscellaneous spending.

Key Takeaways:

• The imprest system maintains a petty cash fund at a fixed amount, called the float.
• The control formula is: Cash on Hand + Vouchers = Float.
• Establishing the fund involves debiting Petty Cash (asset) and crediting Bank (asset).
• Replenishing the fund is the key step where expenses are recorded. The entry involves debiting various expense accounts and crediting the Bank. The Petty Cash account is not used in this entry.
• A petty cash book is the subsidiary record used for day-to-day management and analysis of expenditures.

Preview of the Next Lesson:
Throughout this module, we have covered the key period-end adjustments: bank reconciliation entries, depreciation, accruals, prepayments, and now the expenses from the petty cash fund. You are now equipped with all the necessary tools to finalize the books before creating the financial statements. In our next and final lesson for this module, you will learn how to prepare a complete adjusted trial balance after posting all adjusting entries, bringing together everything you've learned to ensure the books are accurate and ready for reporting.