Before attempting any question on Cash Budget, make sure you read through the question in order to stick to the exam instruction. Apply these steps in solving questions on a cash budget.
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How to Prepare a Cash Budget
Prepare Schedule Collections.
- “Cash sales schedule collection” and
- “Cash purchases schedule collection”
NOTE: Be conscious of the dates, Show your workings, Cash sales deals with transactions that add up into your account (inflow), while Cash purchases deal with transactions that reduce the cash at hand (outflow).
Preparation of the Cash Budget itself.
The cash budget has two segments, Segments A and Segment B.
- Segment A – Deals with revenue/sales/receipts (inflow).
- Segment B – Deals with payments/expenses/expenditure (outflow).
Take note of the month of significance i.e. the number of months that you’re asked to solve for from the question.
The main solution.
After reading through the question, you should be able to differentiate the income from the expenses from the data given. Then,
Treat segment “A” first and when you’re done, you can proceed to the next segment. Meanwhile, treat each question accordingly.
NOTE: Segment “A” is titled, SALES REVENUE or RECEIPTS while Segment “B” is titled PAYMENTS.
Calculate/determine the Net Profit.
To determine the net profit, you’ll subtract the total payment from the total sales based on their different months.
Treat the Opening Balance.
- Add the opening balance with the net profit to give you the value of the closing balance of the cash budget.
(1) The closing balance for the first month will serve as the opening balance for the next month which also determines the closing balance for that month and opening balance for the next month etc… until you get to the final month.
(2) You must not transfer the closing balance to the grand total for final treatment, the value to make use of is the opening balance that is given in the question. See this question. but first, click on the image below to download these steps and format.