Final answer:
Establishing a petty cash fund provides a firm with more readily accessible cash on hand, affecting the firm's balance sheet by reallocating a portion of funds to be immediately available, rather than solely in bank deposits.
Step-by-step explanation:
Once a firm establishes a petty cash fund, it has more readily accessible cash on hand than it did before. This fund is comprised of a small amount of cash that a company keeps for the purpose of small, everyday expenses. The establishment of a petty cash fund means that a firm will have a portion of its money outside of banks, which can be likened to the idea of having money in one's wallet or pocket, as opposed to money in a bank account, which is not physically in circulation. This cash on hand facilitates small transactions without the need for writing checks or making bank withdrawals, which can streamline operations for minor expenditures.
By setting up a petty cash fund, the firm's balance sheet will be affected accordingly. The cash that was once stored entirely as bank deposits will now be divided, with a small amount registered under petty cash, while the remainder stays as bank deposits. The key point here is that the firm still retains the same total amount of money, but its form and location are adjusted to meet immediate transactional needs. This setup can provide better flexibility and efficiency in managing day-to-day financial transactions.