Trade Receivables & Trade Payables Budgets (Cambridge International A-Level Accounting)

Trade receivables budget

Spec point — how to prepare the following budgets: – trade receivables

Trade receivables budget

How to prepare a trade receivables budget?

• The trade receivable budget shows activities relating to credit customers

• Activities include:

  • Credit sales
  • Sales return
  • Discount allowed
  • Receipts of money received from customers

• Here is an example of what a trade receivables budget would look like

Example of a trade receivables budget

• STEP 1 Work out the opening balance for the first period by calculating how much the customers owe at the start of the period

• STEP 2 Find the sales expected on credit for that period

  • This might come from a sales budget

• STEP 3 Calculate the money received from customer

  • Usually a percentage of customers pay in that month or the next month

    • These normally get a cash discount

  • The rest usually pay in the following month

• STEP 4 Find any other transactions relating to credit customer, such as:

  • Sales return
  • Discount allowed

Worked Example Furniture Limited makes and sells a range of furniture. The following information is provided:

Sales budget for Furniture Limited:

	November	December	January	February	March
Units	55 000	62 000	70 000	80 000	75 000

Additional information

• All sales are made on credit basis
• The selling price is fixed at $5
• 30% of customers pay a month after the sale and get a 5% discount
• The remainder of customers will pay two months after the sale

Prepare the trade receivables budget for January, February and March

Answer

• Calculate the opening balance for the first month

January opening balance

November = (55 000 × $5) × 70% = $192 500

December = (62 000 × $5) × 30% = $93 000

$192 500 + $93 000 = $285 500

• Calculate the sales for each month

January sales = 70 000 × $5 = $350 000

February sales = 80 000 × $5 = $400 000

March sales = 75 000 × $5 = $375 000

• Calculate the discount allowed for each month

January = (62 000 × $5 × 30%) × 5% = $4 650

February = (70 000 × $5 × 30%) × 5% = $5 250

March = (80 000 × $5 × 30%) × 5% = $6 000

• Calculate the money received each month

January = (55 000 × $5 × 70%) + (62 000 × $5 × 30% × 95%) = $280 850

February = (62 000 × $5 × 70%) + (70 000 × $5 × 30% × 95%) = $316 750

March = (70 000 × $5 × 70%) + (80 000 × $5 × 30% × 95%) = $359 000

• The answer will be shown as the trade receivable budget:

	January $	February $	March $
Balance b/d	285 500	350 000	428 000
Add: Sales	350 000	400 000	375 000
Less: Money received from customer	(280 850)	(316 750)	(359 000)
Less: Discount allowed	(4 650)	(5 250)	(6 000)
Balance c/d	350 000	428 000	438 000

Trade payables budget

Spec point — how to prepare the following budgets: – trade payables

Trade payables budget

How to prepare a trade payable budget?

• The trade payable budget shows activities relating to credit supplier

• Activities include:

  • Credit purchases
  • Purchase returns
  • Discount received
  • Payments to credit suppliers

• Here is an example of what a trade payables budget would look like

Example of a trade payables budget

• STEP 1 Work out the opening balance for the first period by calculating how much the business owes the suppliers

• STEP 2 Find the purchases expected on credit for that period

  • This might come from a purchases budget

• STEP 3 Calculate the money paid to suppliers

  • Usually a percentage of suppliers are paid in that month or the next month

    • These normally give a cash discount

  • The rest usually are paid in the following month

• STEP 4 Find any other transactions relating to credit suppliers, such as:

  • Purchase return
  • Discount received

Worked Example Bottles Limited makes and sells a range of bottles. The following information is provided:

Extract from the production budget for Bottles Limited:

	November	December	January	February	March
Units of production	5 000	6 000	6 400	8 000	7 000

Additional information

• Each unit needs 0.25 kg of material at $8 per kg
• 40% of the suppliers are paid in the month after the purchase and a 5% discount will be received
• The remainder of suppliers will be paid two months after the purchase
• All materials are used up in the same month and no inventory is kept

Prepare the trade payables budget for January, February and March

Answer

• Calculate the cost per unit

0.25 kg × $8 = $2

• Calculate the opening balance for the first month

January opening balance

(5 000 ×$2) × 60% = $6 000

(6 000 × $2) × 40% = $4 800

$6 000 + $4 800 = $10 800

• Calculate the purchases for each month

January purchases = 6 400 × $2 = $12 800

February purchases = 8 000 × $2 = $16 000

March purchases = 7 000 × $2 = $14 000

• Calculate the discount received for each month

January = (6 000 × $2 × 40%) × 5% = $240

February = (6 400 × $2 × 40%) × 5% = $256

March = (8 000 × $2 × 40%) × 5% = $320

• Calculate the money paid each month

January = (5 000 × $2 × 60%) + (6 000 × $2 × 40% × 95%) = $10 560

February = (6 000 × $2 × 60%) + (6 400 × $2 × 40% × 95%) = $12 064

March = (6 400 × $2 × 60%) + (8 000 × $2 × 40% × 95%) = $13 760

• The answer will be shown as the trade payable budget:

	January $	February $	March $
Balance b/d	10 800	12 800	16 480
Add: Purchases	12 800	16 000	14 000
Less: Money paid to suppliers	(10 560)	(12 064)	(13 760)
Less: Discount received	(240)	(256)	(320)
Balance c/d	12 800	16 480	16 400