• Key concepts
• Debtors’ collection schedule
• Creditors’ payment schedule (creditors’ budget)
• Analysis of cash budget

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

Sales

1. A business’ main source of income is sales. These can be for cash or on credit.
2. Cash sales are received immediately and will be entered as a receipt on the cash budget in the month of sale.
3. The money from credit sales will be collected from debtors in the future.
4. 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:

1. Calculate and enter the credit sales.
2. Take each month and insert the percentage that will be received in that month.
3. Do the calculations using credit sales to work out the amount to be received from debtors.
4. Total the columns for each month.

Worked example 1
Prepare the debtors’ collection schedule for July, August and September 2011 from the information below:

1. 60% of total sales are for cash.
2. 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.)
3. Total sales:
   
   • Actual
     –– June 2011 R160 000
   • Budgeted
     –– July 2011 R150 000
     –– August 2011 R180 000
     –– September 2011 R200 000

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)

First calculate 50% of the credit sales and then subtract the 10% discount from this figure [50% − 10% is not 40%].   
Explanations

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.)

The following template is the interpretation of the instruction that the
Creditors will be paid in full the following month:

SOLUTION:
CREDITORS PAYMENTS SCHEDULE: Budgeted period: Jan – Mar 2014

* Creditors are paid in full in the month following purchases
EXTRACT OF THE CASH BUDGET:
CASH PAYMENTS:

Example of creditor’s payment schedule:
REQUIRED:
Prepare a Purchases Payment Schedule of KIMA TRADERS for January
2014 to March 2014.
INFORMATION:

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:

1. Mark-up is equal to 100% on Cost price
2. Cash purchases of trading stock amount to only 20% of all purchases
3. All credit purchases are payable in the month following the month of Purchase.
4. Stock replenishment will take place on a monthly basis and the opening balance will be maintained as a base stock.

PROCEDURE TO FOLLOW:

1. Determine the budget months:
   Answer: January to March 2014.
2. Does the question give you the purchases of stock?
   Answer: No, therefore Cost of sales is equal to purchases of stock.

EXPLANATIONS:

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.

GENERAL LEDGER OF KIMA TRADERS

SOLUTION:
CREDITORS PAYMENTS SCHEDULE: Budgeted period: January to March 2014

EXTRACT OF THE CASH BUDGET:
CASH PAYMENTS:

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

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

1. 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.
2. 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.
3. 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.
4. 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:

1. The monthly salary paid to each hair stylist. (2)
2. The % increase in wages that the cleaner will receive during the projected period. (2)
3. The % interest rate on the fixed deposit. (4)
4. The rental per square metre, and the number of additional square metres she will rent from 1 May 2010. (4)
5. 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)

1. 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)
2. 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%)
3. 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%
4. 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.)
5. Provide four comments that you would include in your internal auditor’s report in respect of scenarios A, B and C above. [8]
   
   1. Comment on telephone:
      The telephone costs are higher than the expected amount by R1 950. 
   2. Comment on water & electricity:
      The water & electricity costs are R1 100 less than the expected amount. 
   3. 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.

When commenting on actual figures use the following steps:

1. Compare actual with budgeted figures and state whether the actual figure is more or less than the budgeted figure.
2. 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: