Question

Management accounting how to prepare a cash budget

Answer 1

Answer :

Cash budget is also known as finance budget .The cash budget helps the management to make an arrangement of cash if sufficient amout of cash not availabe at the end of each month.

In other words it is a summary of expected cash inflows and outflows for a certain time span.

There are three method of preparing cash Budget . They are explained below :

(1) Receipt and payment method :

Under this method all receipts and disbursement for the company for a budget period are estimated.Cash budget is prepared columnar basis.There are two parts. First part is receipt and Second part is payment.The total receipts are added with opening balance of cash and dedected the payments to get closing balance of cash.

(2) Adjusted Profit and Loss method

This method of preparing cash budget is similar to ' cash flow statement ' The main difference is cash budget takes into account the estimated figures for the future period, while the cash flow statement consders the actual transactions.

The profit is considered to be equivalent to cash. The profit is adjusted by adding back Depreciation, WIP , Decrease in debtor , increase in creditor and by deducting Dividend , capital payment , Increase in debtors. The adjusted profit is the closing balance of cash.

(3) Balance sheet method

Under this method a Budgeted Balance sheet at the end of next period is prepared and two side of budgeted balance sheet than balanced .

If the amount of budgeted liability exceeds the budgeted assets , The difference will be the estimated cash balance.

On the contrary if the amount of budgeted assets exceeds budgeted liability , The difference will be considered as shortage of cash balance or bank overdraft.