Trade Receivables & Trade Payables Budgets (Cambridge (CIE) A Level Accounting): Revision Note
Exam code: 9706
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
STEP 1
Work out the opening balance for the first period by calculating how much the customers owe at the start of the periodSTEP 2
Find the sales expected on credit for that periodThis might come from a sales budget
STEP 3
Calculate the money received from customerUsually 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
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
STEP 1
Work out the opening balance for the first period by calculating how much the business owes the suppliersSTEP 2
Find the purchases expected on credit for that periodThis might come from a purchases budget
STEP 3
Calculate the money paid to suppliersUsually 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 |
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