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How does petty cash affect expenses?

Petty Cash is a current asset account; it is part of a company's cash. A petty cash fund is established by cashing a check drawn on the company's regular checking account and giving the currency and coins to the petty cash custodian. No expense is involved in this transaction since the company is simply creating the asset account Petty Cash by reducing another asset account.

An expense occurs when the company pays the postal carrier for the postage that is due on the incoming mail. Another expense occurs when the company sends an employee to pick up some needed supplies. If these expenses are paid with money in the petty cash fund, the currency and coins held by the petty cash custodian will decrease and in place of that money the custodian will have petty cash receipts or petty cash vouchers. The expenses will be recorded in the general ledger when the petty cash fund is replenished.

In order to get the expenses entered in the proper accounting period, it is necessary to replenish the petty cash fund at the end of each accounting period. (This is done in addition to replenishing the fund whenever the currency and coins are low.)