State BPA Fundamental Accounting Practice Exam

What is the classification of petty cash?

1. Liability

2. Asset

3. Equity

4. Expense

The correct answer is: Asset

Petty cash is classified as an asset because it represents a small amount of cash that a business has on hand to pay for minor expenses. This cash is readily accessible, allowing for quick transactions without the need to write checks or use credit cards for small purchases. As an asset, petty cash is recorded in the company's balance sheet under current assets because it is expected to be consumed or depleted within a short period of time. In accounting terms, assets are resources owned by a company that have economic value and can provide future benefits. Petty cash specifically facilitates everyday operational needs, helping the business manage minor expenditures efficiently. Thus, recognizing petty cash as an asset reflects its role in the overall financial management of the company.