Cost Accounting · Budget and Budgetary Control

Cash Budget and Master Budget Preparation

Updated 10 October 2026 · Fact-checked

A cash budget forecasts cash receipts and payments period by period to show the closing cash balance. A master budget combines all functional budgets into a budgeted profit and loss account and balance sheet. Solve by listing receipts, listing payments, finding the closing cash, then building the statements from it.

Understand Cash Budget and Master Budget Preparation

A cash budget is a forecast of cash coming in and going out in each period, usually each month. Its purpose is to show whether you will have a surplus or a shortage, so that you can arrange borrowing or invest the extra money in advance.

The receipts and payments method is the standard format in exams. You write opening cash, add all expected receipts, subtract all expected payments and arrive at closing cash. Closing cash of one month becomes opening cash of the next.

The key idea is that cash budgets record cash only. Depreciation, provisions and other non-cash items never appear. Credit sales appear only when the money is collected, and credit purchases appear only when the supplier is paid. Purchase of a fixed asset appears in full, even though it is not an expense.

A master budget is the summary budget approved by management. It pulls together the sales, production, purchase, cost, overhead and cash budgets. From these it produces a budgeted profit and loss account and a budgeted balance sheet at the end of the budget period. The balance sheet must balance, and its cash figure must agree with the closing cash of the cash budget.

Think of it as a chain. Sales budget leads to production budget, which leads to material, labour and overhead budgets. These lead to the cash budget, and then to the final statements.

Key rules to remember

Closing cash balance: Closing cash = Opening cash + Total receipts − Total payments; Closing cash of one period is the opening cash of the next. A negative figure means an overdraft or a shortage to be financed.
Collections from debtors: Cash collected = Opening debtors + Credit sales − Closing debtors; Use this for annual statements. For monthly budgets, apply the stated collection pattern, such as 70% next month and 30% after two months.
Payments to creditors: Cash paid = Opening creditors + Credit purchases − Closing creditors; For monthly budgets, shift the purchases by the credit period given.
Purchases: Purchases = Materials consumed + Closing stock − Opening stock; Materials consumed comes from the production budget and material usage per unit.
Production: Units to produce = Sales units + Closing finished stock − Opening finished stock; This links the sales budget to the production budget.
Non-cash items: Cash expense = Total expense − Depreciation and other non-cash charges; Always remove depreciation from overheads before entering them in the cash budget.
Budgeted reserves: Closing reserves = Opening reserves + Budgeted profit − Dividends or appropriations; This carries the budgeted profit into the balance sheet.
Balance sheet check: Total assets = Capital + Reserves + Liabilities; Cash in the balance sheet must equal closing cash from the cash budget. If it does not tally, recheck working capital items.

How to solve Cash Budget and Master Budget Preparation questions

Use this order for any cash budget or master budget question. Do the workings in neat notes so that you can earn step marks.

1Read the data once and mark the budget period, the credit terms for sales and purchases, and any one-off items such as asset purchases, tax or dividends.
2Prepare working notes for the sales collections. Apply the percentage of cash sales and the collection lag to each month, including sales from months before the budget starts.
3Prepare working notes for purchase payments, using the credit period. Then list wages, overheads and other expenses, removing depreciation and other non-cash items.
4Draw the cash budget with months in columns: opening cash, receipts, total, payments, total, closing cash. Carry each closing balance forward as the next opening balance.
5For a master budget, prepare the budgeted profit and loss account first. Use sales, cost of production, overheads including depreciation, and adjust for stock changes.
6Prepare the budgeted balance sheet. Take fixed assets less depreciation, closing stock, closing debtors, closing creditors, the cash figure from the cash budget and reserves updated for profit.
7Check that the balance sheet tallies. If it does not, find the missing item before writing the final answer.
8If asked, comment briefly: state the month of shortage or surplus and a suitable action such as short-term borrowing or investing surplus.

Quickest way: Month-wise grid and cash-only filter

When to use it: Use this when the question gives monthly sales and purchases with credit lags and you have limited time.

Write the months across the page and the data rows down, so each cell is one simple calculation.
Fill the collections row first, then the payments row. Cross out depreciation immediately in the overheads data.
Compute total receipts and total payments for each month and the net movement. Add the net movement to opening cash to get closing cash.
For the master budget, use the cash budget total only for the cash figure. Get other balance sheet items from the data given, and let reserves absorb the budgeted profit.
Do a final check on the balance sheet total. A mismatch usually means a missed depreciation entry or a working capital change.

Common mistakes in Cash Budget and Master Budget Preparation

Including depreciation as a cash payment.
Depreciation appears in the list of overheads, so students copy the whole overhead figure.
Fix: Subtract depreciation and other non-cash charges from overheads before entering them in the cash budget. Depreciation only appears in the budgeted profit and loss account.
Showing sales and purchases in the month of the transaction instead of the month of cash movement.
Students treat the cash budget like a sales or purchase budget.
Fix: Apply the credit terms first. Show only the amount actually received or paid in each month.
Leaving out capital items such as plant purchase, tax, dividend or loan repayment.
These items are not part of normal operating cost and are easy to miss in the question text.
Fix: Underline every one-off payment or receipt while reading and tick each off when it is entered in the cash budget.
Not carrying closing cash forward as the next month's opening cash.
Students start each month's column from the original opening balance given.
Fix: Use the opening balance only for the first month. After that, link each opening figure to the previous closing figure.
A budgeted balance sheet that does not tally.
Reserves are not updated with profit, debtors or creditors are taken from the wrong date, or cash is estimated instead of taken from the cash budget.
Fix: Add budgeted profit to reserves, use closing debtors and creditors at the end of the period, and take cash from the cash budget.
Ignoring the opening debtors and creditors when preparing receipts and payments.
Students begin with the first month of the budget and forget that earlier credit sales are still to be collected.
Fix: Use the earlier months' sales and purchases given in the question to fill the first months' collections and payments.

Worked examples

Example 1

Prepare a cash budget for April to June for Shree Textiles Ltd. from the following. Sales: March ₹5,00,000; April ₹6,00,000; May ₹5,50,000; June ₹7,00,000. 20% of sales are for cash and 80% are on credit, collected in the month after sale. Purchases: March ₹3,00,000; April ₹3,50,000; May ₹3,20,000; June ₹4,00,000, paid in the month after purchase. Wages paid each month: April ₹80,000; May ₹85,000; June ₹90,000. Overheads are ₹55,000 per month including depreciation of ₹15,000. Plant costing ₹1,50,000 will be bought for cash in May. Advance tax of ₹50,000 will be paid in June. Cash balance on 1 April is ₹60,000.

Show the solution

Collections in April: cash sales 20% × ₹6,00,000 = ₹1,20,000. Credit collection 80% × ₹5,00,000 (March sales) = ₹4,00,000. Total ₹5,20,000.
Collections in May: cash sales 20% × ₹5,50,000 = ₹1,10,000. Credit collection 80% × ₹6,00,000 = ₹4,80,000. Total ₹5,90,000.
Collections in June: cash sales 20% × ₹7,00,000 = ₹1,40,000. Credit collection 80% × ₹5,50,000 = ₹4,40,000. Total ₹5,80,000.
Payments for purchases are made one month later: April ₹3,00,000 (March purchases); May ₹3,50,000; June ₹3,20,000.
Cash overheads = ₹55,000 − ₹15,000 depreciation = ₹40,000 per month.
April: opening ₹60,000 + receipts ₹5,20,000 = ₹5,80,000. Payments = ₹3,00,000 + ₹80,000 + ₹40,000 = ₹4,20,000. Closing = ₹1,60,000.
May: opening ₹1,60,000 + receipts ₹5,90,000 = ₹7,50,000. Payments = ₹3,50,000 + ₹85,000 + ₹40,000 + ₹1,50,000 plant = ₹6,25,000. Closing = ₹1,25,000.
June: opening ₹1,25,000 + receipts ₹5,80,000 = ₹7,05,000. Payments = ₹3,20,000 + ₹90,000 + ₹40,000 + ₹50,000 tax = ₹5,00,000. Closing = ₹2,05,000.

Answer: Closing cash balances: April ₹1,60,000; May ₹1,25,000; June ₹2,05,000. There is no shortage in any month, and the surplus can be invested short term.

Example 2

Anand Industries Ltd. budgets for the year: sales 10,000 units at ₹100 per unit; production equals sales, with no change in stock. Variable cost per unit: material ₹40, labour ₹20, variable overhead ₹10. Fixed factory overhead ₹1,50,000 including depreciation ₹40,000. Administration and selling expenses ₹80,000 (all cash). Opening balance sheet: Share capital ₹5,00,000; Reserves ₹1,00,000; Creditors ₹60,000; Plant (net) ₹4,00,000; Stock ₹50,000; Debtors ₹1,00,000; Cash ₹1,10,000. Closing debtors will be ₹1,20,000 and closing creditors ₹70,000 (creditors relate to the cash costs of the year). No dividend or tax. Prepare the budgeted profit and loss account and balance sheet.

Show the solution

Sales = 10,000 × ₹100 = ₹10,00,000.
Variable cost = 10,000 × (₹40 + ₹20 + ₹10) = ₹7,00,000. Contribution = ₹3,00,000.
Fixed factory overhead ₹1,50,000 and administration and selling ₹80,000 are deducted. Budgeted profit = ₹3,00,000 − ₹1,50,000 − ₹80,000 = ₹70,000.
Plant after depreciation = ₹4,00,000 − ₹40,000 = ₹3,60,000. Stock remains ₹50,000 because there is no change.
Cash receipts = sales ₹10,00,000 + opening debtors ₹1,00,000 − closing debtors ₹1,20,000 = ₹9,80,000.
Cash costs = variable ₹7,00,000 + fixed factory cash ₹1,10,000 (₹1,50,000 − ₹40,000) + administration and selling ₹80,000 = ₹8,90,000. Creditors rise by ₹10,000, so cash paid = ₹8,80,000.
Net cash flow = ₹9,80,000 − ₹8,80,000 = ₹1,00,000. Closing cash = ₹1,10,000 + ₹1,00,000 = ₹2,10,000.
Reserves = ₹1,00,000 + ₹70,000 = ₹1,70,000.
Assets: plant ₹3,60,000 + stock ₹50,000 + debtors ₹1,20,000 + cash ₹2,10,000 = ₹7,40,000. Liabilities: share capital ₹5,00,000 + reserves ₹1,70,000 + creditors ₹70,000 = ₹7,40,000. The balance sheet tallies.

Answer: Budgeted profit = ₹70,000. Budgeted balance sheet total = ₹7,40,000, with closing cash ₹2,10,000 and reserves ₹1,70,000.

Exam tips

Show separate working notes for collections, payments and cash overheads. Examiners award step marks even if one figure goes wrong.
Read for non-cash items and one-off payments first. Depreciation, provisions, plant purchases, tax and dividends cause most lost marks.
In a master budget question, take cash only from the cash budget and let reserves absorb the profit. This makes the balance sheet tally.
For MCQs, test the closing cash quickly: opening cash plus receipts minus payments. Watch whether depreciation or a non-cash item is included in the options.
If the question asks for comments, give one line on the month of shortage or surplus and the suitable financing or investment action.

Practice questions from Budget and Budgetary Control

Cash Budget and Master 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.

CA IntermediateCash Budget Preparation

Cash Budget and Master Budget Preparation: frequently asked questions

What is the difference between a cash budget and a master budget?

A cash budget forecasts cash receipts, payments and closing cash for each period. A master budget is the overall budget that combines all functional budgets and ends in a budgeted profit and loss account and balance sheet. The cash budget is one input into the master budget.

Should depreciation be shown in a cash budget?

No. Depreciation is a non-cash expense, so it is excluded from the cash budget. It does appear in the budgeted profit and loss account and reduces the value of fixed assets in the budgeted balance sheet.

How do I find cash collected from debtors in a budget?

Apply the credit terms to each month's credit sales. For an annual budget you can use opening debtors plus credit sales minus closing debtors. Remember to include cash sales separately.

What if the closing cash in a month is negative?

A negative balance shows a shortage, so the firm needs short-term borrowing or an overdraft. Mention it in your comment and, if interest is given, include it in the later month's payments.

Why does my budgeted balance sheet not tally?

The usual causes are leaving out the profit in reserves, using wrong closing debtors or creditors, forgetting depreciation on fixed assets or estimating cash instead of taking it from the cash budget. Check these items one by one.