Future Business Leaders of America (FBLA) Accounting Practice Test

How is petty cash typically managed?

1. Through electronic transfers only

2. As a physical cash reserve for minor expenses

3. As a line of credit from the bank

4. By using credit cards exclusively

The correct answer is: As a physical cash reserve for minor expenses

Petty cash is typically managed as a physical cash reserve for minor expenses. This method allows a business to handle small, day-to-day transactions without the need for formal checks or electronic payments, which can be cumbersome for low-value purchases. With petty cash, a designated custodian oversees the cash, ensuring that it is available when needed for incidental expenses such as office supplies, coffee for staff, or employee reimbursements for minor dishes. Regular reconciliations are performed to verify the cash on hand against the receipts provided, maintaining accountability and preventing misuse. Unlike electronic transfers or credit lines, petty cash is not reliant on banking infrastructure; it is a tangible asset within the organization, facilitating immediate access to funds for small expenses. Additionally, using petty cash can simplify bookkeeping for minor transactions, as these expenses can be documented and coded into the accounting system without significant administrative overhead.