What is the purpose of a petty cash fund and how is it replenished?

• A. To handle small cash expenditures; replenished by recording expenses and crediting cash or by replenishment entry.
• B. To accumulate large travel expenses; replenished by borrowing from bank.
• C. To manage payroll; replenished automatically at month end.
• D. To prepare for tax payments; replenished by debiting tax expense.

Answer: (C)

Petty cash is a small imprest fund used to pay for minor, everyday expenses without writing a check for each item. The fund is kept at a fixed amount, so as expenses occur you use the cash and record the corresponding costs (like postage, office supplies, or small incidentals) with receipts. When it’s time to replenish, you bring the fund back up to its original balance by a replenishment entry that recognizes the actual expenditures and restores the cash in the fund. In practice, that means debiting the appropriate expense accounts for what was spent and crediting cash (or cash in the bank) for the amount needed to return the petty cash to its fixed level. Payroll is handled through the regular payroll process, not through petty cash.