What is a petty cash fund, and how is it established and replenished?

• A. A petty cash fund is a small cash float; established by debiting Petty Cash and crediting Cash; replenished by recording expenses (debit appropriate expense) and crediting Cash to restore the fund to its established amount.
• B. A petty cash fund is the main cash account.
• C. A petty cash fund is used to record payroll.
• D. A petty cash fund is a bank loan.

Answer: (A)

A petty cash fund is a small amount of cash kept on hand to pay for minor, routine expenses. It’s set up as an imprest system by moving cash from the main cash account into the petty cash account (debit Petty Cash, credit Cash). The fund remains at a fixed balance, and as purchases are made, the petty cash is reduced.

Replenishment happens when the fund runs low. You recognize the actual expenses by debiting the appropriate expense accounts for the amounts spent and crediting Cash to reflect the reimbursement from the main account, so the petty cash balance is restored to its established level. For example, if $85 was spent, you would record the expenses and then credit Cash for $85 to bring the petty cash back to its original amount. This setup keeps track of small disbursements without letting the main cash account be cluttered with every tiny purchase. It’s not the main cash account, not used for payroll, and not a bank loan.