Budgets Grade 12 Notes Accounting Study Guide pdf. A budget is simply a spending plan that takes into account estimated current and future income and expenses for a specified future time period, usually a year. Having a budget keeps your spending in check and makes sure that your savings are on track for the future
Budgeting is an important tool for internal control in any business.
Budgets are prepared to forecast what will happen in the future.
4.1 Key concepts
Concept | Explanation | Purpose |
Cash budget | A forecast of cash receipts and cash payments. | To forecast future receipts and payments |
Projected Income Statement | A forecast of income and expenses. | To forecast future profits or losses |
Debtors’ collection schedule | A schedule (plan) of how the business will collect money from its debtors. | To forecast receipts from debtors |
Creditors’ payment schedule | A schedule (plan) of how the business will pay its creditors. | To forecast payments to creditors |
Sales
- A business’ main source of income is sales. These can be for cash or on credit.
- Cash sales are received immediately and will be entered as a receipt on the cash budget in the month of sale.
- The money from credit sales will be collected from debtors in the future.
- The cash and credit sales may need to be calculated from the given information.
4.2 Debtors’ collection schedule
Use the following steps when preparing a debtors’ collection schedule:
- Calculate and enter the credit sales.
- Take each month and insert the percentage that will be received in that month.
- Do the calculations using credit sales to work out the amount to be received from debtors.
- Total the columns for each month.
Worked example 1
Prepare the debtors’ collection schedule for July, August and September 2011 from the information below:
- 60% of total sales are for cash.
- Debtors are expected to pay as follows:
- 50% in the same month as the credit sale transactions subject to a 10% discount
- 30% in the month following the credit sales transaction month
- 17% in the second month following the credit sale transaction month
- 3% is expected to be written off
(This 3% is written off as a bad debt and will not form part of the debtors’ collection schedule as no cash will be received from bad debts.)
- Total sales:
- Actual
–– June 2011 R160 000 - Budgeted
–– July 2011 R150 000
–– August 2011 R180 000
–– September 2011 R200 000
- Actual
ACTUAL SALES:
These are sales that have taken place in the months before the budget period.
A portion of the credit sales may be collected in the budget period.
BUDGETED SALES:
These are the estimated sales for the budget period.
Answer to worked example 1 (see page 64)
Credit sales | July | August | September | ||||
June 2011 | R64 000 | 30% | 19 200 | 17% | 10 880 | ||
July 2011 | R60 000 | 50% − 10% | 27 000 | 30% | 18 000 | 17% | 10 200 |
Aug 2011 | R72 000 | 50% − 10% | 32 400 | 30% | 21 600 | ||
Sep 2011 | R80 000 | 50% − 10% | 36 000 | ||||
R46 200 | R61 280 | R67 800 |
First calculate 50% of the credit sales and then subtract the 10% discount from this figure [50% − 10% is not 40%].
Explanations
Step 1 | Step 2 | Step 3 |
Calculate and enter credit sales. Cash sales = 60% Credit sales = 40% | Insert % to be collected in each month. | Do the calculations to work out the amount of credit sales collected in each month. |
June: R160 000 × 40% = R64 000 July: R150 000 × 40% = R60 000 August: R180 000 × 40% = R72 000 Sept: R200 000 × 40% = R80 000 | See answer above. | June credit sales: No calculation as they are not part of this collection period July: R64 000 × 30% = R19 200 August: R64 000 × 17% = R10 880 July credit sales: July: R60 000 × 50% = R30 000 R30 000 − 10% = R27 000 August: R60 000 × 30% = R18 000 Sept: R60 000 × 17% = R10 200 August credit sales: August: R72 000 × 50% = R36 000 R36 000 − 10% = R32 400 Sept: R72 000 × 30% = R21 600 September credit sales: Sept: R80 000 × 50% = R40 000 R40 000 − 10% = R36 000 |
4.3 Creditors’ payment schedule (creditors’ budget)
The following must be considered when the Creditors’ budget is calculated:
- when and how much stock is purchased on credit and
- When is the payment due?
This forms part of the second step in the preparation of the main budget.
ILLUSTRATIVE ACTIVITY:
(This info has a twofold understanding:
- That the stock balance at the beginning of the month will be the same, every month, and
- That total purchases are equal to Cost of Sales when purchases are not given.)
REQUIRED:
Calculate the expected payments to creditors for credit purchases for the budged period January to March 2014.
The Opening stock balance will be maintained as the stock basis.
INFORMATION:
- Creditors are paid in full in the month following purchases
(That means that the purchasing on credit during December will be paid at the end of January.)
ACTUAL CASH purchases of trading stock | November 2013 | R10 000 |
December 2014 | R12 000 | |
BUDGETED CASH purchases of trading stock | January 2014 | R10 000 |
February 2014 | R13 000 | |
March 2014 | R14 500 |
ACTUAL CREDIT purchases of trading stock | November 2013 | R14 000 |
December 2013 | R12 000 | |
BUDGETED CREDIT purchases of trading stock | January 2014 | R10 000 |
February 2014 | R12 000 | |
March 2014 | R13 000 |
The following template is the interpretation of the instruction that the
Creditors will be paid in full the following month:
1 | NOV | 14 000 | This amount will be paid at the end of December, however this amount is not part of the budget month |
2 | DEC | 12 000 | R12 000 will be paid at the end January and forms part of the budget months |
3 | JAN | 10 000 | R10 000 will be paid at the end of January and February forms part of the budget months |
4 | FEB | 12 000 | R12 000 will be paid at the end of February and March forms part of the budget months |
5 | MAR | 13 000 | This amount will be paid at the end of April and does not form part of the budget months |
SOLUTION:
CREDITORS PAYMENTS SCHEDULE: Budgeted period: Jan – Mar 2014
MONTH | CREDIT PURCHASES | BUDGETED PERIOD | ||||
NOV | DEC | JAN | FEB | MAR | ||
1 NOV | 14 000 | |||||
2 DEC | 12 000 | 12 000 | ||||
3 JAN | 10 000 | 10 000 | ||||
4 FEB | 12 000 | 12 000 | ||||
5 MAR | 13 000 | |||||
Payments to creditors | * 12 000 | * 10 000 | * 12 000 |
* Creditors are paid in full in the month following purchases
EXTRACT OF THE CASH BUDGET:
CASH PAYMENTS:
CASH PAYMENTS | JANUARY | FEBRUARY | MARCH |
Cash Purchases | 10 000 | 13 000 | 14 500 |
Payments to Creditors | 12 000 | 10 000 | 12 000 |
Example of creditor’s payment schedule:
REQUIRED:
Prepare a Purchases Payment Schedule of KIMA TRADERS for January
2014 to March 2014.
INFORMATION:
SALES FORECAST: | BALANCES AT 31 DECEMBER 2013 | ||
January February March | R126 000 R130 000 R144 000 | Trading Stock Creditors | R75 000 R60 000 |
Whenever the credit purchases are not given, calculate the cost of sales from the given total sales (R6000)
E.g. Cost of Sales = 50 % on cost
Calculation:
Sales × 100/150 = Cost of sales (Purchases)
6000 × 100/150 =
ADDITIONAL INFORMATION:
- Mark-up is equal to 100% on Cost price
- Cash purchases of trading stock amount to only 20% of all purchases
- All credit purchases are payable in the month following the month of Purchase.
- Stock replenishment will take place on a monthly basis and the opening balance will be maintained as a base stock.
PROCEDURE TO FOLLOW:
- Determine the budget months:
Answer: January to March 2014. - Does the question give you the purchases of stock?
Answer: No, therefore Cost of sales is equal to purchases of stock.
EXPLANATIONS:
1 | Mark-up is equal to 100% on Cost price. Formula: Cost price: 100% + Profit: 100% =Sales: 200% | The purchases of stock is not given therefore you have to calculate the cost of sales amount to determine the purchases of stock: |
January: Creditors’ balance will be paid in January: R60 000. (the balance was the credit purchases during December) | ||
February: Make use of the sales figure of January to calculate the cost of sales that is equal to purchases: 126 000 × 100/200 = R63 000 (Cost of sales) | ||
March: Make use of the sales figure of February to calculate the cost of sales: 130 000 × 100/200 = R 65 000 (Cost of sales) | ||
Cash purchases for March: Make use of the March sales figure to calculate the cost of sales. Need this figure to determine the cash purchases for March: 144 000 × 100/200 = R72 000(cost of sales) | ||
2 | Cash purchases of trading stock amount to only 20 % of all purchases. Therefore credit purchase is 80% of all purchases | January: 63 000 × 20%= R12 600 cash purchases in January (63 000 × 80%= R50 400 payment of account in February) February: 65 000 × 20%= R13 000 cash purchases for February 65 000 × 80% = R52 000 payment of account in March March: 72 000 × 20% = R14 000 cash purchases for March |
3 | All credit purchases are payable in the month following the month of Purchase. | This means that the creditors will be paid the next month. Anything bought during January will be paid at the end of February. |
4 | Stock replenishment will take place on a monthly basis and the opening balance will be maintained as a base stock. | This means that the opening stock will stay the same every month. See the illustration below |
You need to make use of the Sales figures to calculate the cost of sales per month
ILLUSTRATION: CALCULATION OF THE PURCHASES AMOUNT OF STOCK.
“STOCK REPLENISHMENT WILL TAKE PLACE ON A MONTHLY BASIS AND THE OPENING BALANCE WILL BE MAINTAINED AS A BASE STOCK.” Here is an illustration what it means:
|
GENERAL LEDGER OF KIMA TRADERS
DR TRADING STOCK ACCOUNT N CR | |||||||||
Jan | 1 | Balance | B/d | 75 000 | Jan | 31 | (126 000 × 100/200) Cost of sales | 63 000 | |
Bank (63 000 × 20%) | 12 600 | Balance | C/d | 75 000 | |||||
63 000 × 80% Creditors control | 50 400 | ||||||||
138 000 | 138 000 | ||||||||
Feb | 1 | Balance | B/d | 75 000 | Feb | 28 | (130 000 × 100/200) Cost of sales | 65 000 | |
Bank (65 000 × 20%) | 13 000 | Balance | C/d | 75 000 | |||||
Creditors control (80%) | 52 000 | ||||||||
Mar | 1 | Balance | B/d | 75 000 | Mar | 31 | (144 000 × 100/200) Cost of sales | 72 000 | |
Bank (72 000 × 20%) | 14 400 | Balance | C/d | 75 000 | |||||
Creditors control (80%) | 57 600 | ||||||||
Apr | 1 | Balance | B/d | 75 000 |
SOLUTION:
CREDITORS PAYMENTS SCHEDULE: Budgeted period: January to March 2014
MONTH | PURCHASES | CREDIT PURCHASES | BUDGETED PERIOD | ||||
NOV | DEC | JAN | FEB | MARCH | |||
Balance of creditors | 60 000 | ||||||
JAN | 63 000 | 50 400 | 50 400 | ||||
FEB | 65 000 | 52 000 | 52 000 | ||||
MAR | 72 000 | 57 600 | |||||
Payments to creditors | 60 000 | 50 400 | 52 000 |
EXTRACT OF THE CASH BUDGET:
CASH PAYMENTS:
CASH PAYMENTS | JANUARY | FEBRUARY | MARCH |
Cash Purchases | 12 600 | 13 000 | 14 400 |
Payments to Creditors | 60 000 | 50 400 | 52 000 |
4.4 Analysis of cash budget
Worked example 2
Example adapted from March 2010 NSC question paper – see FEB/MARCH 2010 Paper 1 at:
http://www.education.gov.za/Examinations/PastExamPapers/AccountingPapers2010/tabid/507/Default.aspx
You are provided with the Projected Income Statement and additional information relating to Helen’s Hair Stylists for the period April to June 2010. The business is owned by Helen Davids. Helen has also prepared a cash budget for the same time period. The financial year-end is 31 March.
Required
Answer the questions that follow.
Information
Helen’s hair stylists
Projected Income Statement for April to June 2010
APRIL | MAY | JUNE | |
R | R | R | |
Sales of hair products | 8 7500 | 105 000 | 122 500 |
Cost of sales | 50 000 | 60 000 | 70 000 |
Gross profit | 37 500 | 45 000 | 52 500 |
Other operating income | 122 000 | 122 000 | 162 000 |
Fee income from customers | 120 000 | 120 000 | 160 000 |
Sundry income | 2 000 | 2 000 | 2 000 |
OPERATING EXPENSES | 95 350 | 120 072 | 127 372 |
Salary of hairdressing assistants | 25 500 | 25 500 | 34 000 |
Wages of cleaner | 3 400 | 3 672 | 3 672 |
Rent of premises | 24 600 | 30 750 | 30 750 |
Consumable stores | 14 400 | 14 400 | 19 200 |
Water & electricity | 6 000 | 6 000 | 7 000 |
Telephone | 2 200 | 2 200 | 2 200 |
Advertising | 8 000 | 15 000 | 8 000 |
Motor vehicle expenses | 1 400 | 5 600 | 5 600 |
Repairs & maintenance of equipment | 3 500 | 3 500 | 3 500 |
Sundry expenses | 2 300 | 2 300 | 2 300 |
Depreciation on vehicle | 2 000 | 9 100 | 9 100 |
Depreciation on equipment | 2 050 | 2 050 | 2 050 |
OPERATING PROFIT | 64 150 | 46 928 | 87 128 |
Interest income | 3 315 | 0 | 0 |
67 465 | 46 928 | 87 128 | |
Interest on loan | 750 | 625 | 500 |
NET PROFIT | 66 715 | 46 303 | 86 628 |
Depreciation and bad debts will be included in the projected income statement but NOT on the cash budget because they are non-cash items (i.e. they do not affect the cash flow of the business).
Additional information
- Line of business:
Helen gave up her job to start this business in 2004. She invested her life savings of R800 000 in this business. The business styles hair for its customers. They also sell hair products to the public. - Employees:
Helen employs three hair stylists. She has planned to expand the business by employing a fourth stylist from 1 June 2010. She also employs a cleaner. - Business premises rented:
The rent is calculated on a fixed amount per square metre. She currently rents 60 square metres, but will increase this floor space as from 1 May 2010 due to expansion. - Fixed deposit:
The fixed deposit of R468 000 is for 12 months and will mature on the 30 April 2010.
Questions
Refer to the Projected Income Statement to identify/calculate the following:
- The monthly salary paid to each hair stylist. (2)
- The % increase in wages that the cleaner will receive during the projected period. (2)
- The % interest rate on the fixed deposit. (4)
- The rental per square metre, and the number of additional square metres she will rent from 1 May 2010. (4)
- As the internal auditor you compare the following projected figures to the actual figures at the end of April. Provide four comments that you would include in your internal auditor’s report in respect of scenarios A, B and C below.
Projected April 2010 Actual April 2010 A Telephone 2 200 4 150 B Water & electricity 6 000 4 900 C Fee income 120 000 136 800
Answers to worked example 2 (see page 78)
- Calculation of monthly salary paid to each hair stylist: [2]
R25 500 ÷ 3 = R8 50033 or R34 000 ÷ 4 = R8 500
Explanation to help you understand how to get to the answer above:- There are 3 hairstylists in April and May and 4 hairstylists in June.
- Therefore divide salary (April or May) by 3 hairstylists (R25 500 ÷ 3 = R8 500)
- OR Divide salary (June) by 4 hairstylists (R34 000 ÷ 4 = R8 500)
- Calculation of the % increase in wages that the cleaner will receive during the projected period: [2]
272 ÷ 3 400 × 100 = 8%
Explanation to help you understand how to get to the answer above:- Calculate the increase in wages by deducting the wage of May from wage
of April (R3 672 – R3 400 = R272) - Calculate the % increase (R272 ÷ R3 400 × 100 = 8%)
- Calculate the increase in wages by deducting the wage of May from wage
- Calculation of % interest rate on the fixed deposit: [4]
3 315 ÷ 468 000 × 12 months × 100 = 8,5% OR
3 315 × 12 months = R39 780
39 780 × 100 = 8,5%
468 000
Explanation to help you understand how to get to the answer above:
Interest on fixed deposit = R3 315 (interest income in Projected Income Statement)
Fixed deposit = R468 000 (see information no. 4)
3 315 × 100 × 12 (months)
468 000 1
= 8,5% - Calculation of rental per square metre: [2]
24 600 ÷ 60 = R410
Explanation to help you understand how to get to the answer above:
Rent expense for April = R24 600 (see Projected Income Statement)
R24 600 is the amount paid for 60 square metres.
To calculate rental per square metre you have to divide the total rent by 60
R24 600 ÷ 60 = R410
Calculation of the number of additional square metres she will rent from 1 May 2010: [2]
30 750 ÷ 410 = 75 sq metres or 60 × 30 750 ÷ 24 600 = 75 sq metres
Increase = 75 – 60 = 15 sq metres 33
Explanation to help you understand how to get to the answer above:
Rent expense for May = R30 750 (see Projected Income Statement)
R30 750 ÷ R410 = 75 square metres
75 – 60 (original square metres) = 15 additional square metres
(For internal control purposes it is important to compare actual with budgeted figures. In this way possible problems relating to expenses or income can be corrected.) - Provide four comments that you would include in your internal auditor’s report in respect of scenarios A, B and C above. [8]
- Comment on telephone:
The telephone costs are higher than the expected amount by R1 950. - Comment on water & electricity:
The water & electricity costs are R1 100 less than the expected amount. - Comment on fee income & consumable stores:
There was a good increase in fee income of R16 800
(R136 800 – R120 000) which shows that the business is popular with its customers.
The consumable stores (e.g. shampoos, conditioners) increased slightly by R720 (R15 120 – R14 400) because the business had more customers.
- Comment on telephone:
When commenting on actual figures use the following steps:
- Compare actual with budgeted figures and state whether the actual figure is more or less than the budgeted figure.
- Decide and state whether the expense or income item has been well controlled or not (within budget or not).
Below is a list of suggested past examination questions for extra practice:
Topic | Paper | Question |
Projected Income Statement | February/March 2009 | 3 |
Projected Income Statement | February/March 2010 | 6 |
Cash Budget | February/March 2011 | 1 |
Cash Budget | February/March 2012 | 5 |
Cash Budget | November 2013 | 5.2 |