How is a change fund established?

How is a change fund established?

• A. Debit Change Fund and credit Cash.
• B. Debit Cash and credit Change Fund.
• C. Debit Petty Cash and credit Cash.
• D. Credit Change Fund and debit Cash.

Answer: (A)

A change fund is a dedicated amount of cash set aside to provide change for customers. To establish it, you move cash from the main cash balance into the Change Fund, so the journal entry debits the Change Fund and credits Cash for the amount being placed into the fund. This creates a separate asset (Change Fund) that will be used to make change, while reducing the general Cash balance accordingly. Debit Change Fund increases the new fund; credit Cash decreases the regular cash on hand. It wouldn’t be the other way around, since that would add cash back into the main balance instead of creating the separate fund. It also isn’t appropriate to debit Petty Cash for this purpose, as petty cash serves a different, broader small-cash needs.

A change fund is a dedicated amount of cash set aside to provide change for customers. To establish it, you move cash from the main cash balance into the Change Fund, so the journal entry debits the Change Fund and credits Cash for the amount being placed into the fund. This creates a separate asset (Change Fund) that will be used to make change, while reducing the general Cash balance accordingly. Debit Change Fund increases the new fund; credit Cash decreases the regular cash on hand. It wouldn’t be the other way around, since that would add cash back into the main balance instead of creating the separate fund. It also isn’t appropriate to debit Petty Cash for this purpose, as petty cash serves a different, broader small-cash needs.