The petty cash fund is a liability with a normal debit balance.

• A. True
• B. False
• C. It is a current asset.
• D. It is an equity account.

Answer: (B)

Petty cash represents cash on hand, which is a current asset. Assets increase with a debit, so the normal balance for petty cash is a debit. It isn’t a liability or equity account, and it’s not recorded as a current asset that carries a credit balance. When you establish the fund, you move cash from the main account into petty cash (both are assets, just shifting within the asset category). As you spend from the fund, you don’t increase liabilities; instead you decrease the petty cash balance by crediting petty cash and you record the corresponding expenses (debiting the appropriate expense accounts). Because of this, the statement describing petty cash as a liability with a normal debit balance is not correct.