(a) Explain the Operation of Petty Cash Book using imprest system. (b) Outline two disadvantages of the imprest system of bookkeeping in petty cash book. (c...

Answer Details

a) The imprest system of petty cash bookkeeping is a method where a fixed amount of cash is kept in a petty cash fund and is used to make small, routine payments. The petty cashier is responsible for managing the petty cash fund and keeping track of all cash disbursements.

Under the imprest system, the petty cashier is given an initial sum of money, called the "imprest amount," to cover expected expenses. As the petty cashier makes payments, they record the transactions in the petty cash book, indicating the date, the recipient, the purpose of the payment, and the amount. The petty cashier should also keep receipts to support the payments.

At regular intervals, the petty cashier reconciles the petty cash book with the actual cash on hand. If the cash on hand is less than the imprest amount, the petty cashier makes up the difference by requesting a reimbursement. If the cash on hand is more than the imprest amount, the petty cashier returns the excess to the company.

b) Two disadvantages of the imprest system of bookkeeping in petty cash book are:

1. Limited Funds: The petty cash fund is limited to the imprest amount, so it may not be enough to cover unexpected expenses or larger payments.
2. Lack of Oversight: The petty cashier has complete control over the petty cash fund and may not be subject to the same level of scrutiny as other forms of expenditures. This can lead to mismanagement or fraudulent activity if the petty cashier is not trustworthy.

c) Five uses of petty cash vouchers are:

1. Reimbursements: Petty cash vouchers can be used to reimburse employees for small, out-of-pocket expenses they incurred while performing their job duties.
2. Purchases: Petty cash vouchers can be used to make small purchases, such as office supplies or refreshments for meetings.
3. Cash Advances: Petty cash vouchers can be used to provide employees with a cash advance for business-related expenses.
4. Payments to Vendors: Petty cash vouchers can be used to make payments to vendors for goods or services received.
5. Refunds: Petty cash vouchers can be used to provide refunds to customers or clients for overpayments or returns.