Cost and Management Accounting · Budgets and Budgetary Control

Cash Budget Preparation (Receipts and Payments Method)

Updated 4 October 2026 · Fact-checked

A cash budget forecasts cash receipts and cash payments month by month to show the closing cash balance. Build it by listing opening cash, adding receipts (using collection patterns), deducting payments (using credit periods), leaving out non-cash items like depreciation, and carrying each closing balance forward.

Understand Cash Budget Preparation

A cash budget is a forecast of cash inflows and outflows over a period, usually split by month. It tells management when cash will run short or pile up, so they can arrange a loan or invest the surplus in time.

The receipts and payments method is the one asked most often. You list every expected cash receipt, list every expected cash payment, and find the net cash for the month. Add the opening balance to get the closing balance. That closing balance becomes next month's opening balance.

The key idea: only cash moves through this budget. Sales on credit are not receipts until the debtor pays. Purchases on credit are not payments until you pay the creditor. Depreciation, provisions and other write-offs never appear because no cash leaves.

Most of the work is timing. If sales are collected 30% in the month of sale, 50% in the next month and 20% in the month after, you must pick the right month's sales for each collection. The same applies to creditors, wages and expenses paid with a lag.

Also watch capital items. Purchase of machinery, tax paid, dividend and loan repayment are cash payments even though they are not in the profit statement. Sale of an asset or fresh share capital are cash receipts.

Key rules to remember

Closing cash balance: Closing balance = Opening balance + Total receipts − Total payments; Closing balance of one month is the opening balance of the next month.
Cash collected from credit sales: Collection in a month = Σ (Credit sales of each earlier month × % collected with that lag); Apply the percentage to the sales of the month that is lagging, not the current month's sales.
Cash paid to creditors: Payment in a month = Purchases of the month that is one credit period earlier; With a one-month credit period, January purchases are paid in February.
Cash discount adjustment: Cash received = Sales × (1 − discount %) for the portion collected within the discount period; Discount allowed reduces the receipt. Discount received reduces the payment.
Non-cash items: Depreciation, amortisation, provisions, bad debts written off = excluded; Never show them in the cash budget.
Borrowing need: Shortfall = Minimum cash balance required − Closing balance before financing; Use when the question asks for the amount to be borrowed to maintain a minimum balance.

How to solve Cash Budget Preparation questions

Follow the same layout for any cash budget question. Neat columns by month earn step marks even if one figure is wrong.

1Read the question once and note the months, opening cash, collection pattern, credit periods and any extra cash items.
2Prepare working notes first: schedule of collections from debtors and schedule of payments to creditors, month by month.
3Work out other payments with their lag, such as wages, rent and overheads. Exclude depreciation and other non-cash items.
4Draw the format with months as columns. Under receipts list opening balance, collections, cash sales and other receipts. Total them.
5Under payments list purchases, wages, expenses, capital items, tax, dividend and others. Total them.
6Calculate the closing balance as total receipts less total payments. Carry it to the next month as the opening balance.
7If a minimum balance or overdraft is given, show the surplus or shortfall and the financing needed.
8Re-check lagged items and that no non-cash item crept in.

Quickest way: Working-note first, then one-page format

When to use it: Use in the exam for any cash budget numerical, especially when sales and purchases are given for several months with credit lags.

Write the months across the top of your answer sheet once and use them for all working notes.
For each month, mark which earlier sales month feeds each collection percentage. Compute the collection row in one line.
Convert purchases to payments by shifting the row by the credit period. Do not recompute.
Strike out non-cash items in the question with a pencil as you read.
Write the final budget in the standard receipts-and-payments format. Show working notes below it and refer to them by number.
For MCQs, find only the specific month asked. Compute that month's net cash and skip other months unless the opening balance depends on them.

Common mistakes in Cash Budget Preparation

Including depreciation or bad debts as a cash payment
Students copy every expense from the question into the payments side.
Fix: Ask of each item: does cash leave this month? Depreciation, provisions and write-offs do not, so leave them out.
Applying collection percentages to the wrong month's sales
Confusing 'collected in the month after sale' with 'sales of the current month'.
Fix: Write a small table of sales months against collection months. Then read off each month's collection.
Showing credit sales as receipts in the month of sale
Mixing up a sales budget with a cash budget.
Fix: Only cash sales and amounts actually collected are receipts. Debtors at the start are collected in the early months.
Ignoring opening debtors and creditors
The opening balance sheet figures are given separately and get missed.
Fix: Add opening debtors to early collections and pay opening creditors in the first month or months as per the credit period.
Forgetting to apply cash discount
Students collect the full invoice value even when a discount is availed.
Fix: Multiply the discounted portion by (1 − discount %) before putting it in receipts. Treat discount received on payments the same way.
Not carrying the closing balance forward
Each month is worked as a separate sum.
Fix: Write the previous month's closing balance as the next opening balance before adding anything else.

Worked examples

Example 1

A firm expects credit sales of ₹2,00,000 in January, ₹2,40,000 in February and ₹3,00,000 in March. Debtors pay 40% in the month of sale, 40% in the next month and 20% in the month after that. Opening cash on 1 March is ₹20,000. Cash payments in March are ₹2,10,000. Ignore sales before January. Find the cash balance at the end of March.

Show the solution

March collections from March sales: 40% × ₹3,00,000 = ₹1,20,000.
March collections from February sales: 40% × ₹2,40,000 = ₹96,000.
March collections from January sales: 20% × ₹2,00,000 = ₹40,000.
Total collections = ₹1,20,000 + ₹96,000 + ₹40,000 = ₹2,56,000.
Total receipts including opening cash = ₹20,000 + ₹2,56,000 = ₹2,76,000.
Closing balance = ₹2,76,000 − ₹2,10,000 = ₹66,000.

Answer: Closing cash balance at the end of March is ₹66,000.

Example 2

From the following, prepare a cash budget for April and May. Opening cash on 1 April: ₹50,000. Credit sales: March ₹1,00,000, April ₹1,20,000, May ₹1,40,000. Customers pay 50% in the month of sale and 50% in the next month. Purchases (on credit): March ₹60,000, April ₹70,000, May ₹80,000, paid in the month after purchase. Wages paid in the same month: April ₹20,000, May ₹22,000. Other expenses paid in the month: April ₹10,000, May ₹12,000. Depreciation is ₹5,000 per month. A machine costing ₹40,000 is bought and paid for in May.

Show the solution

April collections: 50% of April sales = ₹60,000, plus 50% of March sales = ₹50,000. Total = ₹1,10,000.
May collections: 50% of May sales = ₹70,000, plus 50% of April sales = ₹60,000. Total = ₹1,30,000.
April payments: creditors for March purchases ₹60,000, wages ₹20,000, expenses ₹10,000. Total = ₹90,000. Depreciation excluded.
May payments: creditors for April purchases ₹70,000, wages ₹22,000, expenses ₹12,000, machine ₹40,000. Total = ₹1,44,000.
April: opening ₹50,000 + receipts ₹1,10,000 = ₹1,60,000. Less payments ₹90,000. Closing = ₹70,000.
May: opening ₹70,000 + receipts ₹1,30,000 = ₹2,00,000. Less payments ₹1,44,000. Closing = ₹56,000.

Answer: Closing cash balance is ₹70,000 for April and ₹56,000 for May. Depreciation is excluded and the machine purchase is included in May.

Exam tips

Show working notes for collections and payments separately. ICAI answers award marks for each schedule.
In MCQs, the trap is usually a non-cash item or a one-month shift. Check both before choosing.
Read for words like 'cash sales', 'paid in the following month' and 'minimum balance' because each changes one line of the budget.
Where the question gives sales for months before the budget period, those figures feed the early collections. Do not ignore them.
State any assumption you make, for example the month in which a tax payment falls, in one line below the budget.

Practice questions from Budgets and Budgetary Control

Cash Budget Preparation in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Cash Budget Preparation: frequently asked questions

What is the format of a cash budget in the receipts and payments method?

Show months as columns. List opening balance and receipts at the top, then payments below. Subtract total payments from total receipts to get the closing balance, which becomes the next month's opening balance.

Why is depreciation not shown in a cash budget?

Depreciation is a book entry. No cash leaves the business when it is charged. A cash budget records only actual cash receipts and payments, so you leave depreciation out.

How do I calculate cash collected from debtors with a collection pattern?

Apply each percentage to the sales of the month it relates to. For example, a collection of 30% in the next month uses last month's sales. Add all parts to get the month's total collection.

Does a cash budget show profit?

No. It shows only cash flow and the closing cash position. Profit is found in a budgeted profit and loss account, which includes credit transactions and non-cash items.