4.2 Petty Cash and the Imprest System

Petty Cash and the Imprest System

In a business, numerous minor cash transactions occur daily, such as buying postage stamps, purchasing milk for the office kitchen, or paying for emergency cleaning services. Writing bank cheques or initiating electronic bank transfers for these trivial amounts is administratively inefficient and financially costly due to bank transaction fees. To manage these small expenditures without cluttering the main cash book, businesses employ a petty cash system regulated by the imprest system.

The Imprest System Logic

The imprest system is a structured method of controlling petty cash. Under this system:

1. The Imprest Float: The business establishes a fixed amount of cash, known as the imprest float or imprest limit (e.g., £150), which is kept in a physical lockable cash box managed by a designated petty cashier.
2. Petty Cash Vouchers (PCVs): For every payment made from the box, the petty cashier must fill out a numbered petty cash voucher. The claimant must sign the voucher, and a receipt (such as a VAT invoice or till receipt) must be attached.
3. The Control Formula: At any given moment, the total value of the cash remaining in the petty cash box plus the sum of all paid petty cash vouchers must equal the established imprest float. This is represented by the equation: $\text{Cash in Box} + \text{Total Vouchers} = \text{Imprest Float}$
4. Restoration of the Float: At the end of the month or when cash runs low, the petty cash book is balanced, and a restoration payment is made from the main bank account to the petty cash box. This payment is equal to the total of the vouchers spent, bringing the cash in the box back up to the imprest float level.

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Structure of the Petty Cash Book

The Petty Cash Book (PCB) serves a dual purpose: it is a book of prime entry for recording minor cash payments and is the ledger account for petty cash. The layout is designed to categorize expenses using analysis columns to streamline posting to the general ledger.

• Debit (Receipts) Column: Records the cash received to open or restore the float.
• Credit (Payments) Side: Contains columns for:
  • Date: The date of the payment.
  • Voucher Number: The sequential number of the PCV.
  • Details: Brief description (e.g., "Stamps" or "Milk").
  • Total Paid (£): The total cash handed out (gross amount).
  • VAT (£): The VAT portion extracted from standard-rated transactions.
  • Analysis Columns: Separate columns for common expense categories (e.g., Postage, Travel, Stationery, Office Expenses). This allows the business to total each category at the end of the period and post a single summary figure to the respective general ledger expense account.

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VAT Extraction from Petty Cash Receipts

When standard-rated goods or services are purchased using petty cash, the input VAT must be extracted so that the business can reclaim it. In the UK, standard-rated VAT is 20%.

Because petty cash receipts show the final VAT-inclusive price, bookkeepers must use the tax fraction method to calculate the VAT portion. Since the gross price is 120% (100% net cost + 20% VAT), the VAT is calculated as: $\text{VAT} = \text{Gross Amount} \times \frac{20}{120} = \text{Gross Amount} \times \frac{1}{6}$

Rules for Extracting VAT:

• Standard-Rated Items (20%): Stationery, office cleaning, computer accessories, coffee/tea for staff. Extract VAT using the 1/6 fraction.
• Zero-Rated Items (0%): Public transport (trains, buses, taxis), books, newspapers, and most basic foods. The VAT is £0, and the entire gross amount goes into the analysis column.
• Exempt Items: Postage stamps. The VAT is £0, and the entire gross amount goes into the postage analysis column.
• No Valid VAT Receipt: If the seller did not provide a valid VAT invoice, the business cannot reclaim VAT. The entire gross amount must be treated as a net expense with zero VAT.

Example: A petty cash receipt shows £30.00 spent on printer paper (standard rate). $\text{VAT} = £30.00 \times \frac{1}{6} = £5.00$ $\text{Net Stationery Expense} = £30.00 - £5.00 = £25.00$

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Balancing the PCB and Calculating the Restoration

At the end of a period, the petty cash book is balanced in a similar manner to the main cash book:

1. Sum the Total Paid column and each Analysis Column.
2. Verify that the sum of the analysis column totals plus the VAT column total equals the sum of the Total Paid column.
3. Calculate the remaining cash: $\text{Cash in Box} = \text{Imprest Float} - \text{Total Paid}$
4. Enter the remaining cash as Balance c/d on the credit side.
5. Write the equal totals, bring down the balance (Balance b/d) on the debit side.
6. The restoration payment is then made by drawing a cheque or bank transfer from the main bank account equal to the Total Paid column.

Worked Example

• 1 June: Imprest float established at £100.
• 4 June: PCV 01 - Postage stamps: £15 (Exempt).
• 10 June: PCV 02 - Taxi fare: £24 (Zero-rated).
• 15 June: PCV 03 - Window cleaning: £36 inclusive of 20% VAT. (VAT = £36 * 1/6 = £6; Net = £30).
• 22 June: PCV 04 - Stationery: £12 inclusive of 20% VAT. (VAT = £12 * 1/6 = £2; Net = £10).

Restoration Analysis:

• Total payments made = £87.00.
• Cash left in box = £13.00.
• Restoration payment = £87.00 (restores float to £100).
• General Ledger Postings: Debit Postage account £15.00, Debit Travel account £24.00, Debit Office Expenses account £40.00, Debit VAT Control Account £8.00, and Credit Petty Cash £87.00 (the net effect of payments). The restoration entry debits Petty Cash £87.00 and credits Bank £87.00.

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Security and Control of Petty Cash

Because petty cash involves physical notes and coins, it is highly vulnerable to theft, loss, and misappropriation. Therefore, robust internal controls are critical:

• Authorized Access Only: Only the designated petty cashier should have keys to the petty cash box. Other staff members must not access the cash directly.
• Pre-authorization: No cash should be handed over without a completed and signed Petty Cash Voucher. Staff must obtain manager approval before making a purchase.
• Independent Checks: Periodically, a senior staff member who is not the petty cashier should perform a surprise cash count. They will count the physical cash in the box and reconcile it with the vouchers and the petty cash book balance to ensure there are no discrepancies. Any cash shortage or surplus must be investigated immediately.