CASH BUDGET - Accounts and Finance for Managers

Cash Budget Sums

Cash budget is nothing but an estimation of cash receipts and cash payments for specified period. It is prepared by the head of the accounts department i.e., chief accounts officer.

The utility of the cash budget is as follows:

  • To meet the revenue and capital expenditures with adequate funds
  • It should highlight the additional requirement cash whenever the need arises
  • Keeping of excessive funds available in the business firm wont fetch any return to the enterprise but this estimate of future cash needs and resources will guide the firm to plan for an effective investment out of the surplus funds estimated ; enhances the wealth of the investors through proper investment planning out of the future funds available.

Cash budget can be prepared in three different ways:

  1. Receipts and payments method
  2. Adjusted profit and loss account
  3. Balance Sheet Method

Cash receipts can be classified into various categories

Cash receipts

Cash payments are as follows:

Cash payments


From the following information prepare a cash budget for the months of June and July

cash budget for the months of June and July

Additional Information:

  1. Advance tax of Rs 4,000 payable in June and in December 1994
  2. Credit period allowed to debtors is two months
  3. Credit period allowed by the vendors or suppliers
  4. Delay in the payment of other expenses one month
  5. Opening balance of cash on 1st June is estimated as Rs.20,000/-


First step is in the preparation of a cash budget is to open the statement with the opening cash balance available.

Secondly, if any cash receipts are available that should be added one after another. In this problem, Sales can be bifurcated into two classifications, the first one is cash sales. If the cash sales is given, the amount of cash receipt due to cash sales should have to be immediately brought under the respective period i-e during the same month or week.

The next is the credit sales of the firm, the volume of sales should only be effected only at the amount of realization of sales or collection of credit sales from the consumers and customers. If cash sales is not given instead credit sales only the component given, that should be added in the list of cash receipts; by registering the credit period involved for the customers and consumers. Being as credit sales, the amount of sales realization should only relevantly be considered during the specified period.

Third step is to list out the various items of cash expenses expected to incur during the specified period. The text of the problem deals with the delay of making the payment of expenses is one month in all cases; It means the expenses like Manufacturing overheads, selling overheads are expected to pay one month later i-e these expenses will be paid one month after. It means that the May month of other expenses are paid only in the month of June and during the month of June month expenses are met out.

The purchases requires same kind of treatment in the case of sales. Normally, the purchases are classified into two divisions viz cash purchases and credit purchases.

The cash purchases should be given effect only at the moment of cash payment is paid on the volume of purchase, but, if the credit purchases are made by the firm, the credit allowed by the vendor/supplier to make the payments should be relatively considered for the expected outflow of cash i-e payment of purchase one month later or two months later.

The expected time period occurrence of a either cash receipt or cash payment should be considered for the preparation of the cash budget.

The cash budget should be prepared separately in the statement to derive the closing balance of the specified year/month. The closing balance of the yester period or previous period has to be carried forward to the next period as opening balance of the preparation of a budget. The closing balance of the month June will be the opening balance of the month July. Once the statement has been completed in the preparation of budget of respective periods should be consolidated for the specified periods.

preparation of budget of respective periods


From the estimates of income and expenditure, prepare cash budget for the months from April to June.

cash budget for the months from April to June.

  1. Plant worth Rs. 20,000 purchase in June 25% payable immediately and the remaining in two equal installments in the subsequent months
  2. Advance payment of tax payable in Jan and April Rs 6,000
  3. Period of credit allowed
    • By suppliers 2 months
    • To customers 1 month
  4. Dividend payable Rs.10,000 in the month of June
  5. Delay in payment of wages and office expenses 1 month and selling expenses ½ month. Expected cash balance on 1st April is Rs. 40,000.


  • Plant worth Rs 20,000/ purchased, payable immediately is 25% i-e Rs.5,000 should be paid in the month of June. The remaining cost of the machine has to be paid in the subsequent months, after June. The payments whatever are expected to make after June is not relevant as far as the budget preparation concerned.
  • Delay in the payment of wages and office expenses is only one month. It means wages and office expenses of Feb month are paid in the next month, March.
    Selling expense From the above coloured boxes, it is obviously understood that during the months of April, May and June; the following will be stream of payment of selling expenses.
    April= Rs.2,000 of Mar (Previous Month) and Rs. 2,200 of April (Current month)= Rs.4,200/
    May= Rs. 2,200 of April (Previous Month) and Rs.2,100 of May (Current month)=Rs.4,300/
    June= Rs. 2,100 of May (Previous Month) and Rs.1,900 of June (Current month)=Rs.4,000/
  • Selling expenses is having the delay of ½ month, which means 50% of the selling expenses is paid only in the current month and the remaining 50% is paid in the next

current month

Every month 50% of the selling expenses of the current month and 50% of the previous month selling expenses are paid together; the above coloured boxes depict the payment of 50% of the current selling expenses along with 50% expenses of previous month.

selling expenses

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