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

• A. Replenishing by transferring funds from the main cash account without a journal entry.
• B. Replenishing by writing a check to bring cash back to fixed amount, debiting appropriate expense accounts and crediting Cash.
• C. Replenish using a credit to Cash.
• D. Replenish by increasing petty cash and debiting petty cash; crediting Cash.

Answer: (B)

Petty cash is a small cash fund kept on hand to pay minor, routine expenses. As those expenditures occur, you record them by debiting the appropriate expense accounts and crediting the petty cash account for the amount spent, which reduces the petty cash balance. When the fund runs low, you replenish it by transferring funds from the main cash account to restore the petty cash to its fixed original amount. The replenishment entry should debit Petty Cash (to increase its balance) and credit Cash (to decrease the main cash account) for the amount needed. The actual expenses were already recognized when the disbursements happened, so replenishment simply restores the fund.

Why the other approach isn’t correct: replenishment isn’t done by just recording a credit to Cash or by using a journal entry that debits expenses to fund the replenishment. The expenses are already recorded from the petty cash disbursements; replenishment should restore the petty cash balance by increasing Petty Cash and decreasing Cash.