Accounting Fundamentals Certification (AFC) Practice Test

Establishing a petty cash fund involves creating a separate cash account designated for small, everyday expenses. When you set up a petty cash fund of $500, the transaction reflects a transfer of funds from the main cash account to the petty cash account. The correct journal entry involves debiting the Petty Cash account and crediting the Cash account. By debiting the Petty Cash account, you are increasing its balance, indicating that the company now has $500 allocated for petty cash expenses. Simultaneously, the Cash account is credited to reflect the decrease in available cash due to the transfer of $500 to the petty cash fund. This transaction does not involve any expense recognition at the time of the establishment of the petty cash fund; it merely reallocates cash sources. Each subsequent use of the petty cash fund will require additional journal entries to account for the expenses incurred.