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The imprest system explained
The imprest system is the standard method for managing a petty cash float. A fixed amount — the imprest balance — is held in the petty cash box. Each time a payment is made, a receipt is collected and placed in the box. The cash balance plus the value of receipts in the box should always equal the imprest amount. When the cash is running low, the custodian totals the receipts, codes them to the correct accounts, and requests a cheque or bank transfer to replenish the float to the original imprest amount.
The imprest system makes discrepancies immediately visible: if cash plus receipts does not equal the float, something is missing. This is the primary reason it is preferred over ad hoc top-ups, which obscure the running balance and make fraud easier to conceal.
What the log must record
- Date of payment
- Payee (or description if no named payee)
- Purpose of expenditure
- Amount paid out
- VAT amount (if receipt shows a VAT number and VAT was charged)
- Account code / category (for posting to the nominal ledger)
- Name of person who authorised the payment
- Receipt reference number (number receipts sequentially)
- Running balance after each transaction
Do not accept self-approved petty cash payments — a different person should authorise each payment from the custodian who holds the box. For very small teams where this is impractical, the owner or a director should review and sign the log at each reconciliation.
Reconciliation procedure
Reconcile the petty cash box at least monthly, and always before replenishment. Count the physical cash in the box. Total all receipts. Confirm that cash plus receipts equals the imprest float. If there is a shortfall, investigate before replenishing — do not simply top up a discrepancy without understanding its cause.
Record the reconciliation on the log with the date, the cash count, the receipt total, and the signature of the person who performed the count and of the person who witnessed it. Two people should always be present for a petty cash count. Post the receipts to the nominal ledger at the same time as replenishment so that the accounting records are kept current.
VAT recovery from petty cash
VAT-registered businesses can reclaim input VAT on petty cash purchases provided the receipt shows the supplier's VAT number and the amount of VAT charged. Simplified VAT invoices (receipts under £250 including VAT) do not need to show the customer's name, but they must show the supplier's VAT registration number. Train whoever manages petty cash to check for VAT numbers on receipts before approving payments, and to record VAT amounts separately in the log.
Petty cash purchases for employee meals or entertainment are generally not reclaimable — refer to your expense policy for the treatment of subsistence and entertainment VAT.
Frequently asked questions
Should petty cash be recorded in our accounting software separately from bank transactions?
Yes. Petty cash is a separate balance sheet asset (a cash account). Payments from petty cash are posted to the relevant expense accounts, and replenishments are posted as a transfer from the bank account to the petty cash account. Treating petty cash as an extension of the bank account creates reconciliation problems and obscures the float balance.
What is the maximum amount that should be paid from petty cash?
Most companies set a limit of between £25 and £100 per transaction. Larger amounts should be processed through the normal purchase ledger and paid by bank transfer, where there is a proper approval and payment audit trail. Setting a per-transaction limit in your petty cash policy prevents the fund from being used to circumvent purchasing controls.
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