Effect on Cash Balance:

The incorrect recording of an imprest received as interest paid will have a significant effect on the cash balance. Let's examine the impact in detail:

1. Incorrect Recording:
When the imprest is received, it should be recorded as an increase in cash balance. However, due to the error, it was mistakenly recorded as interest paid. This misclassification leads to an incorrect representation of the transaction.

2. Overstatement of Interest Paid:
By mistakenly recording the imprest received as interest paid, the interest expense account is overstated. This gives the impression that more interest has been paid than what has actually been incurred. This overstatement affects the accuracy of the financial statements.

3. Understatement of Cash Balance:
Since the imprest received was not recorded as an increase in cash balance, the actual cash balance will be understated in the books. This means that the reported cash balance will be lower than the actual amount of cash held by the organization.

4. Double Impact:
The incorrect recording of the imprest received not only affects the cash balance but also distorts the interest expense account. As a result, the error has a double impact on the financial statements, leading to inaccurate reporting.

5. Effect on Financial Statements:
The misclassification of the imprest received as interest paid will influence various financial statements:
- Income Statement: The overstatement of interest paid will inflate the expenses, resulting in a reduced net income.
- Balance Sheet: The cash balance will be understated, affecting the overall liquidity position of the organization.
- Cash Flow Statement: The error will impact the cash from operating activities section, as the imprest received is incorrectly recorded.

6. Correcting the Error:
To rectify the error, the incorrect entry for interest paid must be reversed, and the imprest received should be recorded appropriately as an increase in cash balance. By making the necessary adjustments, the financial statements can be corrected and reflect the accurate financial position of the organization.

In conclusion, the incorrect recording of the imprest received as interest paid has a significant effect on the cash balance, leading to an understatement of cash and an overstatement of interest paid. Rectifying the error is crucial to ensure the accuracy of the financial statements.