Preparation of cash budget – Methods :
There are three methods by which a cash budget is prepared. They are
1. Receipts and Payments Method
2. Adjusted Profit and Loss Account Method or Cash Flow Method
3. Balance Sheet Method
However, among the three methods only “Receipts and Payments Method” alone is discussed in this chapter.
Receipts and Payments Method
Under this method Cash budget projects the concern’s cash receipts and payments for a certain period (budget period). It has two basic components:
1. Estimate of cash receipts and
2. Estimate of cash payments
Cash Receipts include:
* Cash sales
* Cash receivable from customers
* Business receipts like interest, commission, dividend etc
* Sale of assets
* Proceeds from issue of shares/debentures
* Loans borrowed
Cash Payments include:
* Cash purchases
* Cash payable to suppliers
* Business expenses like wages, office expenses, selling expenses, etc.
* Payment of interest, income tax, dividend etc.
* Purchase of assets
* Redemption of shares/debentures
* Repayment of loans
Steps in the preparation of cash budget
Step 1 → Take opening cash balance
Step 2 → Add the estimated total cash receipts for the month
Step 3 → Calculate the total cash available for the month
Step 4 → Less the estimated total cash payments during the month
Step 5 → Calculate the closing cash balance
Format:
Cash Budget for the period ——————
Particulars |
Month 1 Rs. |
Month 2 Rs. |
Month 3 |
Opening Cash Balance | |||
Add: Estimated cash receipts : | |||
Cash sales | |||
Cash receivable from customers | |||
Business receipts like Interest, commission, dividend etc | |||
Sale of assets | |||
Loans borrowed | |||
Proceeds from issue of shares/debentures | |||
Total cash available during the month |
Less: Estimated cash payments : | |||
Cash purchases | |||
Payable to suppliers | |||
Business expenses – wages, office expenses, selling expenses, etc |
|||
Business Payments – Interest paid, income tax, dividend etc. |
|||
Purchase of assets | |||
Repayment of loans | |||
Redemption of shares/debentures | |||
Total cash payments during the month | |||
Closing cash balance |
The closing cash balance of the current month will be the opening cash balance of the next month.
Illustration :
From the following information, prepare cash budget for June 2005.
Particulars | Rs. |
Cash in hand 1.6.2005 | 10,000 |
Cash purchases for June, 2005 | 70,000 |
Cash sales for June, 2005 | 1,00,000 |
Interest payable in June, 2005 | 1,000 |
Purchase of Office furniture in June, 2005 | 2,500 |
Solution:
Cash Budget for the month June, 2005
Particulars | Rs. |
Opening cash balance | 10,000 |
Add: Estimated receipts: | |
Cash Sales | 1,00,000 |
Total cash available during the month | 1,10,000 |
Less: Estimated cash payments: | |
Cash purchases | 70,000 |
Interest paid | 1,000 |
Purchase of furniture | 2,500 |
Total cash payments | 73,500 |
Closing cash balance | 36,500 |
Illustration :
Prepare a cash budget for the months of June, July, August 2004 from the following information:
1) Opening cash balance in June Rs.7,000.
2) Cash sales for June Rs.20,000; July Rs.30,000 and August Rs.40,000.
3) Wages payable Rs.6,000 every month.
4) Interest receivable Rs.500 in the month of August.
5) Purchase of furniture for Rs.16,000 in July.
6) Cash Purchases for June Rs.10,000; July Rs.9,000 and August Rs.14,000.
Solution:
Cash Budget for the period June to August 2004
Particulars |
June Rs. |
July Rs. |
August |
Opening cash balance |
7,000 |
11,000 |
10,000 |
Add: Estimated cash receipts : | |||
Cash sales |
20,000 |
30,000 |
40,000 |
Interest |
— |
— |
500 |
Total cash available during the month |
27,000 |
41,000 |
50,500 |
Less: Estimated cash payments : | |||
Cash purchases |
10,000 |
9,000 |
14,000 |
Payment of wages |
6,000 |
6,000 |
6,000 |
Purchase of furniture |
— |
16,000 |
— |
Total cash payments during the month |
16,000 |
31,000 |
20,000 |
Closing cash balance |
11,000 |
10,000 |
30,500 |
Note : The closing cash balance in June will be the opening cash balance in July.
Illustration :
From the following information, prepare a budget for three months from October 2003.
1) Opening cash balance in October Rs.3000.
2) Cash Sales October: Rs.25,000; November : Rs.20,000; December : Rs.15,000.
3) Credit purchases – September Rs.10,000; October Rs.12,000; November Rs.14,000; December Rs.16,000. The period of credit allowed by suppliers is one month.
4) Dividend to be received in December Rs.4,000.
5) Advance tax Rs.3,000 payable in October.
6) Sale of an old asset for Rs.12,000 during November.
Solution:
Cash Budget for the period October to December 2003
Particulars |
October Rs. |
November
Rs. |
Decembe Rs. |
Opening cash balance | 3,000 | 15,000 | 35,000 |
Add: Estimated cash receipts : | |||
Cash sales | 25,000 | 20,000 | 15,000 |
Dividend | — | — | 4,000 |
Sale of asset | — | 12,000 | — |
Total cash available during the month | 28,000 | 47,000 | 54,000 |
Less: Estimated cash payments : | |||
Payment to suppliers | 10,000 | 12,000 | 14,000 |
Advance income tax payable | 3,000 | — | — |
Total cash payments during themonth | 13,000 | 12,000 | 14,000 |
Closing cash balance | 15,000 | 35,000 | 40,000 |
Note: The suppliers of goods have given one month credit, so the purchases made in September will be paid in October and those
purchases in October will be paid in November, those purchases in November will be paid in December.
Illustration :
From the following information, prepare a cash budget for April, May and June 2005.
Month | Credit Sales
Rs. |
Credit Purchases
Rs. |
Office Expenses Rs. |
February | 45,000 | 30,000 | 8,000 |
March | 55,000 | 25,000 | 7,000 |
April | 60,000 | 20,000 | 7,000 |
May | 60,000 | 40,000 | 9,000 |
June | 65,000 | 40,000 | 9,000 |
1) Opening cash balance Rs.5000.
2) Credit allowed by suppliers is two months.
3) Credit allowed to customers is one month.
4) Office expenses are payable in the same month
5) Dividend Rs.1000 is receivable in April.
6) Interest payable in May Rs.1,800.
Solution:
Cash Budget for the period April to June, 2005
Particulars | April
Rs. |
May
Rs. |
June
Rs. |
Opening cash balance | 24,000 | 48,200 | |
Add: Estimated cash receipts : | |||
Cash receivable from customers | 55,000 | 60,000 | 60,000 |
Dividend | 1,000 | — | — |
Total cash available during the month | 61000 | 84,000 | 1,08,200 |
Less: Estimated cash payments : | |||
Payments to suppliers | 30,000 | 25,000 | 20,000 |
Office expenses | 7,000 | 9,000 | 9,000 |
Interest payable | — | 1,800 | — |
Total cash payments during the month | 37,000 | 35,800 | 29,000 |
Closing cash balance | 24,000 | 48,200 | 79,200 |
Illustration :
Prepare a cash budget for the months – March, April and May 2005 from the following information
Month |
Credit Sales Rs. |
Credit Purchase Rs. |
Wages Rs. |
Misc. Expenses Rs. |
Office |
January |
60,000 | 36,000 | 9,000 | 4,000 | 2,000 |
February | 82,000 | 38,000 | 8,000 | 3,000 |
1,500 |
March |
84,000 | 33,000 | 10,000 | 4,500 | 2,500 |
April | 78,000 | 35,000 | 8,500 | 3,500 |
2,000 |
May |
56,000 | 39,000 | 9,500 | 4,000 |
1,000 |
Additional information :
1) Opening cash balance Rs.8,000.
2) Period of credit allowed to customers one month
3) Period of credit allowed by suppliers two months.
4) Wages and miscellaneous expenses are payable in the same month.
5) Lag in payment of office expenses is one month
Solution:
Cash Budget for the period March, April & May 2005
Particulars |
March Rs. |
April Rs. |
May |
Opening cash balance |
8,000 |
38,000 |
69,500 |
Add: Estimated cash receipts : | |||
Cash receivable from customers |
82,000 |
84,000 |
78,000 |
Total cash available during the month |
90,000 |
1,22,000 |
1,47,500 |
Less: Estimated cash payments : | |||
Payments to suppliers |
36,000 |
38,000 |
33,000 |
Wages |
10,000 |
8,500 |
9,500 |
Office expenses |
1,500 |
2,500 |
2,000 |
Miscellaneous expenses |
4,500 |
3,500 |
4,000 |
Total cash payments during the month |
52,000 |
52,500 |
48,500 |
Closing cash balance |
38,000 |
69,500 |
99,000 |
Notes:
1. The closing cash balance in March will be the opening balance in April and so on.
2. Since credit allowed to customers is one month, the amount of credit sales in February is collected in March and so on.
3. Since credit allowed by suppliers is two months credit purchases of January is paid in March and so on.
4. Office expenses are paid in the next month, so office expenses for February will be paid in March and so on.