Management Accounting · Forecasting, Budgeting and Budgetary Control

Cash Budget and Master Budget for CMA Intermediate

Updated 10 October 2026 · Fact-checked

A cash budget forecasts cash receipts and payments period by period to show the closing cash balance and any shortfall. The master budget consolidates all functional and cash budgets into a budgeted profit and loss account and balance sheet. Solve by timing each item to the month cash actually moves.

Understand Cash Budget and Master Budget

A cash budget is a forecast of cash inflows and outflows for each period, usually each month. Its job is to show whether you will have enough cash, when you will need to borrow, and when you will have surplus to invest. Profit and cash are different things, so a business can be profitable and still run out of cash.

The receipts and payments method is the most common format. You list all expected cash receipts (cash sales, collections from debtors, asset sales, loans, share capital). Then you list all expected cash payments (purchases, wages, overheads, capital expenditure, tax, dividends, loan repayments). Opening cash plus receipts minus payments gives closing cash.

The key skill is timing. Credit sales made in January are collected in February or March, depending on the credit period. Non-cash items such as depreciation never appear. Bad debts written off are not a cash outflow either. Expenses are paid in the month specified, not the month they are incurred.

The master budget is the summary budget that pulls together all functional budgets (sales, production, materials, labour, overheads, capital expenditure) and the cash budget. It is presented as a budgeted profit and loss account and a budgeted balance sheet for the budget period. It is approved by top management and becomes the overall plan.

The budgeted balance sheet is built from the opening balance sheet, adjusted for the budgeted transactions. Each item is the opening balance plus or minus the movement in the period. The cash figure comes from the cash budget, and the balance sheet must balance.

Key rules to remember

Closing cash balance: Closing cash = Opening cash + Total receipts − Total payments; The closing balance of one period becomes the opening balance of the next.
Cash collected from credit sales: Collection in a month = Credit sales of earlier month(s) × % collected as per the credit policy; Reduce the collection by any cash discount allowed if the discount is taken.
Cash paid for purchases: Payment in a month = Purchases of the month(s) per the credit period; A one-month credit period means January purchases are paid in February.
Budgeted debtors: Closing debtors = Credit sales of the uncollected months; Use the collection pattern to find which months are still outstanding.
Budgeted retained profit: Closing reserves = Opening reserves + Budgeted net profit − Dividends; Dividends are deducted when appropriated or paid, as the question states.
Budgeted fixed asset balance: Closing net block = Opening net block + Additions − Depreciation − Book value of disposals; Depreciation reduces the asset but is not a cash item.

How to solve Cash Budget and Master Budget questions

Use this sequence for any cash budget or master budget question. Work in a clean table with months as columns.

1Read the question and note the credit terms for sales and purchases, the payment lags for wages and expenses, and the opening balances.
2Prepare working notes for collections from debtors, payments to creditors and any other items that need a time lag. Show these separately.
3Draw the cash budget with receipts at the top and payments below. Include opening cash, receipts, payments and closing cash for each month.
4Exclude non-cash items such as depreciation, provisions, and bad debts written off. Include capital expenditure, tax, dividends and loan instalments when paid.
5Carry each month's closing balance to the next month's opening. Mark any negative balance and state the financing need if asked.
6For a master budget, prepare the budgeted profit and loss account first from the sales, production and cost budgets.
7Then build the budgeted balance sheet: take each opening balance, apply the movement, and use closing cash from the cash budget.
8Check that assets equal liabilities. If not, recheck debtors, creditors, stock and reserves.

Quickest way: Month-by-month grid with lag columns

When to use it: Use this when the question has many months and different credit patterns and you have limited time.

Write sales and purchases in a row across the months first, so you can see the lags at a glance.
Shift each row by the credit period to get collections and payments. Write them directly under the month of cash movement.
Strike out depreciation and other non-cash items at once, before adding anything.
Total receipts, total payments and compute the closing balance in one pass.
For the balance sheet, compute only the items that changed: debtors, creditors, stock, cash, fixed assets and reserves. Carry the rest unchanged.

Common mistakes in Cash Budget and Master Budget

Including depreciation as a cash payment.
Depreciation appears in the list of expenses and looks like a cost to be paid.
Fix: Remove depreciation, provisions and write-offs from the cash budget. Only items that move cash belong there.
Showing sales and purchases in the month they are made rather than the month cash moves.
Students copy the sales budget directly into receipts.
Fix: Apply the credit period first. Prepare a collections and payments working note before the main table.
Not carrying the closing balance forward as the next opening balance.
Each month is treated as a separate calculation.
Fix: Link the months. Closing cash of one month is the opening cash of the next.
Forgetting the opening debtors and creditors collected or paid in the early months.
Students focus on budgeted sales and ignore the opening balance sheet.
Fix: Check the opening balance sheet and add the collections and payments from opening debtors and creditors in the first months.
Making the budgeted balance sheet not balance and forcing the difference into cash.
A small error in debtors, stock or reserves is hidden by plugging cash.
Fix: Take cash from the cash budget only. If the sheet does not balance, recheck the other movements.
Deducting cash discount from sales even when customers are not expected to take it.
The discount percentage is applied without reading who takes it.
Fix: Apply the discount only to the proportion of customers who take it, as the question states.

Worked examples

Example 1

Mehta Traders expects credit sales of ₹2,00,000 in January, ₹2,40,000 in February and ₹3,00,000 in March. Opening cash on 1 March is ₹40,000. Ignore collections from sales before January. Customers pay 50% in the month after sale and 50% two months after sale. Payments in March are ₹1,90,000. Prepare the March cash position.

Show the solution

Collections in March: 50% of February sales (one month after) plus 50% of January sales (two months after).
50% of ₹2,40,000 = ₹1,20,000.
50% of ₹2,00,000 = ₹1,00,000.
Total receipts in March = ₹1,20,000 + ₹1,00,000 = ₹2,20,000.
March sales of ₹3,00,000 are not collected in March, so they are excluded.
Closing cash = ₹40,000 + ₹2,20,000 − ₹1,90,000 = ₹70,000.

Answer: Closing cash at the end of March is ₹70,000.

Example 2

Sharma Ltd has these opening balances on 1 April: Fixed assets (net) ₹6,00,000; Stock ₹1,00,000; Debtors ₹1,50,000; Cash ₹50,000; Share capital ₹6,00,000; Reserves ₹2,00,000; Creditors ₹1,00,000. Budget for the quarter: Net profit ₹80,000 (after depreciation of ₹30,000); fixed asset purchases for cash ₹70,000; closing stock ₹1,20,000; closing debtors ₹1,80,000; closing creditors ₹90,000. Prepare the budgeted balance sheet at the end of the quarter, taking cash as the balancing figure from the cash flow.

Show the solution

Check the opening sheet: assets = ₹6,00,000 + ₹1,00,000 + ₹1,50,000 + ₹50,000 = ₹9,00,000. Liabilities = ₹6,00,000 + ₹2,00,000 + ₹1,00,000 = ₹9,00,000. It balances.
Fixed assets: ₹6,00,000 + ₹70,000 − ₹30,000 = ₹6,40,000.
Stock = ₹1,20,000. Debtors = ₹1,80,000.
Reserves: ₹2,00,000 + ₹80,000 = ₹2,80,000. Share capital stays ₹6,00,000. Creditors = ₹90,000.
Cash flow: Profit ₹80,000 + depreciation ₹30,000 = ₹1,10,000.
Increase in stock ₹20,000 and increase in debtors ₹30,000 reduce cash by ₹50,000.
Decrease in creditors ₹10,000 reduces cash by ₹10,000.
Operating cash flow = ₹1,10,000 − ₹50,000 − ₹10,000 = ₹50,000.
Fixed asset purchase = −₹70,000. Net change in cash = −₹20,000.
Closing cash = ₹50,000 − ₹20,000 = ₹30,000.
Total assets = ₹6,40,000 + ₹1,20,000 + ₹1,80,000 + ₹30,000 = ₹9,70,000.
Total liabilities = ₹6,00,000 + ₹2,80,000 + ₹90,000 = ₹9,70,000, which equals total assets.

Answer: The budgeted balance sheet shows fixed assets ₹6,40,000, stock ₹1,20,000, debtors ₹1,80,000 and cash ₹30,000, total ₹9,70,000. Liabilities are share capital ₹6,00,000, reserves ₹2,80,000 and creditors ₹90,000, also ₹9,70,000.

Exam tips

Always check that the opening balance sheet balances before you start. If it does not, state your assumption in the answer.
Show working notes for collections, payments and any lagged item. Step marks are given for these even when the final figure is wrong.
In the MCQ section, questions often ask for closing cash of one month or total collections. Apply the credit lag carefully and ignore depreciation.
For master budget questions, present the budgeted profit and loss account and balance sheet in a clean format with clear headings.
State the financing need or surplus at the end of the cash budget, since the interpretation is often asked.

Practice questions from Forecasting, Budgeting and Budgetary Control

Cash Budget and Master Budget 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 and Master Budget: frequently asked questions

What is the receipts and payments method of cash budget?

It lists all expected cash receipts and cash payments for each period. Opening cash plus receipts minus payments gives the closing cash balance. It is the most common format in exams.

Why is depreciation not shown in a cash budget?

Depreciation is a non-cash expense. It reduces profit but no cash leaves the business. Only the cash paid for buying the asset appears in the cash budget.

What is a master budget?

A master budget is the consolidated budget that summarises all functional budgets and the cash budget. It is presented as a budgeted profit and loss account and a budgeted balance sheet for the period.

How do I prepare the budgeted balance sheet?

Start with the opening balance sheet and adjust each item for the budgeted movement. Take cash from the cash budget and reserves from the budgeted profit. Check that assets equal liabilities.