Budgeting CSEC

Principles of Accounts
Grade 11
May 2021
Budgeting
We all practice budgeting, sometimes without even knowing it. For example;
some students are given lunch money at the start of the week and must ensure that
it will last until the week is finished.
Parents make a budget for how their income will be spent over the month and
governments budget how the revenue of the country will be spent over the
financial year.
A budget is a financial plan or statement which shows specific objectives or targets

that a business hopes to achieve over a given period of time. Firms may prepare
different budgets, including master budgets, production budgets, sales budgets, and
cash budgets.
Budgets are mostly prepared from previous year’s data along with that gathered
from research. It is important that information gathered is accurate and reliable or
the projections made from these data will be flawed. Data needed for budgetary
purposes can be gathered from bank accounts, previous financial reports, industry
magazines, market research and other departments in the business, among other
sources.
Advantages of Budgeting
 Acts as a guide for managers in the achievement of business objectives.

 Fosters communication and co-ordination within the organization.
 Allows for the proper employment of capital when matched against the
planned levels of activity.
 Provides control for income and expenditure, thus minimizing inefficiencies
and wastage.
Drawbacks (Disadvantges)
 Since budgets are prepared from previous data, they may be inappropriate
for current conditions.
 Budgeting can be a costly process for the firm.
 Unrealistic targets could discourage workers.
 Can cause conflicts among the different departments as they fight for scarce
resources.
 A budget may lose its creditability and usefulness if the actual results vary
greatly from budgeted figures.
Categorization of budgets.
 Fixed budgets
 Flexible budgets
 Zero-based budget
Types of budgets.
 Sales budget: this is usually the first one to be made, as the others are
dependent on the forecasted sales figures. It is a plan showing forecasted
sales for the period. The forecasted sales are often arrived at from historical
data and current and expected economic patterns.
Example: Estimated Units 20 000

x selling price per unit 50
---------
1 000 000
=====
 Cash budget: this is a statement showing the estimated cash inflows and
outflows including revenue and capital items. What is included in this
budget are as follows:
o Receipts and Payments should be recorded in the period when the

money is expected to be received or paid.
o Receipts and payments from before the budget should be brought
forward as opening cash balance.
o Receipts may include: cash sales, receipts from debtors, interest
received, sale of fixed assets. Loan, issuing of new shares or royalties.
o Payments may include: purchases, wages and salaries paid, overheads
and expenses, purchase of fixed assets, taxation, interest and dividends
paid and loan repayment.
o depreciation should NOT be included since it does not involve the
movement of cash.
Example: Thirst Quencher Limited is a small family-owned company. The

following data was taken from its books during the financial year ended 31
December 2020.
Sales ($) Purchases ($)

December 2019 35 000 20 000
January 2020 30 000 17 000
February 22 000 15 000
March 19 000 20 000
Other notes include:

sales revenue is divided as follows: Cash sales 20 per cent and one month
credit is given to the debtors. The company also receives one month’s credit
on all purchases.
Wages are paid on a monthly basis, amounting to $2 500.
Rent of $9 000 per annum is paid one month in advance, on 1 January each
year.
Miscellaneous expenses per month is $1 500.
A machine was sold on 12 February for $3 000, and a new one was
purchased in March of the same year for $4 500.
The manager draws $1 200 every month for her personal travelling
expenses.
The bank balance at 1 January 2020 was $7 000.
Prepare a Three Month Cash Budget from January – March 2020.

Question.
Quick Erect Construction Company Limited is a small privately owned company.

The following data is its plan for the first six months of its financial year starting 1
January 2020. Turnover for the first quarter is $20 000 per month and for the
second quarter is $30 000 per month. All work done by the firm is paid for on one
month’s credit. The debtors for last December totalled $12 000. Materials are
purchased on one month’s credit and the company is expected to purchase
materials totalling $8 000 per month from January to April and $11 000 for the
next three months. Outstanding payments for materials purchased in December of
the previous year is $10 000. Wages amounting to $4 000 for the first quarter and
$5 000 for the second quarter are to be paid. There will be a $16 000 investment in
machinery and equipment in June. Corporation tax payable in March amounted to
$3 000. Miscellaneous expenses of $1 500 are to be paid each month. The cash
balance from last year was $6 000.
Prepare a Cash Budget for the six months ending 30 June 2020.

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Principles of Accounts

A budget is a financial plan or statement which shows specific objectives or targets

 Acts as a guide for managers in the achievement of business objectives.

Example: Estimated Units 20 000

o Receipts and Payments should be recorded in the period when the

Example: Thirst Quencher Limited is a small family-owned company. The

Sales ($) Purchases ($)

Other notes include:

Prepare a Three Month Cash Budget from January – March 2020.

Quick Erect Construction Company Limited is a small privately owned company.

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