Budgeting

Introduction to Budgeting

What is Cash Budgeting?

A cash budget is a future plan that lists all the cash receipts (money you will receive) and the cash payments (money you will pay) in a future period of time, such as an upcoming month, quarter, half year or year.

Elements of a Cash Budget
- Cash Receipts: Money you'll receive in the period
- Cash Payments: Money you'll pay in the period
- Cash at Bank Balance: Cash Balance at the start and end of the period
- Cash Surplus/Deficit: Difference in Cash at Bank Balance for the period. Surplus means more money at the end of the period while deficit means less money at the end of the period.

When is the Cash Received?

Under accrual accounting, transactions occur, even if there is no cash movement taking place.

A cash budget records when cash transactions take place, that is whenever there is cash movement. A change in the cash at bank balance will spark a transaction under cash accounting.

This is important to distinguish between accrual and cash accounting as the cash budget only measures cash transactions, that is when cash is received or paid.

Some transactions to consider include:
- Accounts Receivable
- Accounts Payable
- Capital Expenditures paid is instalments
- Wages paid on certain periods of the month

When is Cash Received? - Accounts Receivable and Payables

A common difficulty between accrual and cash accounting is with the treatment of Accounts Receivable and Accounts Payables. It is important to know the difference of when an asset or liability is incurred and when a cash is received or paid.

Accounts Receivable
Money promised but received at a later date.
When is Cash Recorded? - When cash is received from the customer.

Example: The sale of bananas is incurred on a credit card for $10. The transaction occurred on 1 July 2020, but the payment from the credit card is not received until 7 days after on the 8 July 2020.

Under accrual accounting, the $10 is recorded under sales revenue on the 1 July 2020. But the cash transaction does not occur until the 8 July 2020, when the payment of $10 from the credit card is received.

Accounts Payable
Money promised to be paid at a later date.
When is Cash Recorded? - When cash leaves the bank account to the vendor.

Example: On 1 September 2020, a cleaner provides cleaning services to an office for $400. The terms are 30 days. The payment is made in full on 31 September 2020.

Under accrual accounting, the $400 is recorded as an expense on the 1 September 2020. But the cash transaction does not occur until the 31 September 2020, when the payment of $400 is made to the cleaner.

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