Future Business Leaders of America (FBLA) Accounting Practice Test

How do companies typically handle small cash transactions?

1. By writing checks for every transaction

2. By using a petty cash fund

3. By logging them in a financial spreadsheet

4. By issuing credit cards to employees

The correct answer is: By using a petty cash fund

Companies typically handle small cash transactions using a petty cash fund because it is an efficient and practical method for managing minor expenses without the need for extensive paperwork or banking transactions. A petty cash fund is a small amount of cash kept on hand to pay for everyday minor costs that might arise, such as office supplies, postage, or employee reimbursements for small purchases. The use of a petty cash fund streamlines the process of handling these small transactions, allowing for quick payments without the need for a formal check or electronic transaction. It is maintained by designating a custodian responsible for the fund, who ensures that all receipts are kept and accounted for, allowing for easy tracking of expenses. The other methods, such as writing checks for every transaction or logging them in a financial spreadsheet, are less efficient for small cash transactions because they involve more administrative overhead. Additionally, issuing credit cards to employees for small purchases can also lead to complications and is not always appropriate for very minor expenses. Therefore, the petty cash fund balances the need for accessible cash with proper accountability and control over small-scale expenditures.