Gr 12 Accounting - Budgets - Activity 1

Summary

In this educational video, Mrs. Brimakum guides viewers through understanding budgeting, particularly the differences between a cash budget and a projected income statement. She emphasizes the importance of excluding non-cash items from a cash budget and focuses on a debtors' collection schedule for a stationery business. The script covers calculating cash sales, estimating bad debts, and predicting sales trends, offering practical advice on improving debt collection policies.

Takeaways

• 📚 The importance of understanding the theory behind budgeting, specifically the difference between a cash budget and a projected income statement, is emphasized.
• 💼 A cash budget focuses on receipts and payments, excluding non-cash items such as discounts allowed, discounts received, and bad debts.
• 🔍 Non-cash items like bad debts are instead accounted for in the projected income statement, which shows income and expenses on a monthly basis.
• 🥔 The activity revolves around creating a debtors' collection schedule for Gna Stationers, highlighting the need to predict debtor payments over time.
• 💳 Credit sales are a significant portion of total sales, and understanding the payment trends of debtors is crucial for accurate budgeting.
• 📉 The debtors' payment trend includes percentages that pay in the month of sale, the following month, and the second month, with a provision for bad debts.
• 📊 The calculation of cash sales and credit sales is detailed, showing how to determine the expected payments from debtors and the cash flow from sales.
• 📋 Completing a debtors' collection schedule involves estimating the percentage of debt collected each month and accounting for discounts and bad debts.
• 💡 The script provides a step-by-step guide on how to fill out the collection schedule and calculate cash sales, bad debts, and outstanding amounts.
• 📉 Predicting sales trends, such as an increase in January followed by a decline, is based on the nature of the business and seasonal demands.
• 🛑 The data's collection policy is critiqued, with suggestions for improvement, such as charging interest on overdue accounts and following up with debtors.
• 💬 A closing quote by an unknown author encourages maintaining enthusiasm despite facing failures, tying into the broader theme of resilience in business management.

Q & A

What is the main focus of Chapter 10 in the transcript?

The main focus of Chapter 10 is on budgeting, specifically the difference between a cash budget and a projected income statement.

What are non-cash items in the context of a cash budget?

Non-cash items are transactions that do not involve the immediate receipt or payment of cash, such as discount allowed, discount received, and bad debts.

What is the purpose of preparing a debtors' collection schedule?

The purpose of preparing a debtors' collection schedule is to estimate what the business can expect to receive from its debtors on a monthly basis, considering credit terms and payment trends.

Why is it necessary to calculate cash and credit sales separately?

It is necessary to calculate cash and credit sales separately because cash sales directly affect the cash budget, while credit sales are used to complete the debtors' collection schedule and affect the projected income statement.

How does the discount allowed affect the cash budget?

The discount allowed is an expense to the business and affects the projected income statement, not the cash budget, as it is a non-cash item.

What is the significance of calculating bad debts in the budgeting process?

Calculating bad debts is significant as it helps in estimating the amount of debt that will not be collected and should be written off, which is a non-cash item affecting the projected income statement.

How does the provided information on Gna Stationers relate to the debtors' collection schedule?

The information on Gna Stationers provides actual and budgeted sales figures and debtors' payment trends, which are used to work out the expected collections and bad debts for the debtors' collection schedule.

What is the expected percentage of credit sales to be collected in the month of sale according to the script?

According to the script, 50% of credit sales are expected to be collected in the month of sale, with a 5% discount if paid within the same month.

How does the business anticipate sales trends for stationery from January to March?

The business anticipates an increase in sales from December to January due to the back-to-school demand for stationery, followed by a decline from February to March as the demand decreases.

What advice is given regarding the debtors' collection policy in the script?

The advice given includes charging interest on overdue debts, sending out statements before the end of the month, and following up with outstanding debtors to improve the collection process.

What is the estimated percentage increase in sales from December to January according to the calculations in the script?

The estimated percentage increase in sales from December to January is 20%, based on the calculations provided in the script.

Outlines

00:00

📚 Introduction to Budgeting and Debt Collection

In the first paragraph, Mrs. Brimakum introduces the topic of budgeting, specifically focusing on the difference between a cash budget and a projected income statement. She emphasizes the importance of understanding the theory and reading the theory booklet. The cash budget is described as only including receipts and payments, excluding non-cash items such as discounts allowed, received, and bad debts. The projected income statement, on the other hand, includes income and expenses on a monthly basis. The activity revolves around creating a debt collection schedule for potatoes, using the example of Gna Stationers. The importance of preparing a data's collection schedule is discussed, especially when dealing with both cash and credit sales. The paragraph concludes with a detailed explanation of how to calculate cash and credit sales, and how to account for debtors' payment trends and discounts.

05:01

📈 Calculating Debt Collection and Bad Debts

The second paragraph delves into the specifics of calculating the debt collection schedule and bad debts. It explains the process of determining the percentage of debtors' payments expected in subsequent months, based on their credit terms and historical payment trends. The concept of bad debts is introduced, where a certain percentage of credit sales is expected to be uncollectible. The paragraph provides a step-by-step breakdown of how to calculate the expected collections for each month, taking into account the payment trends and discounts offered for prompt payment. It also discusses the importance of these calculations for accurately budgeting on a monthly basis.

10:01

💼 Completing the Debt Collection Schedule and Cash Sales Calculation

In the third paragraph, the focus shifts to completing the debt collection schedule for the months of January to March, using the previously calculated credit sales and payment trends. It explains how to account for discounts on debtors' payments and how to calculate the total cash sales for each month by applying the cash sales percentage to the total sales. The paragraph also addresses how to estimate bad debts for the period and provides a method to calculate the total estimated amount still owed by debtors at the end of March.

15:03

📊 Analyzing Sales Trends and Debt Collection Policy

The fourth paragraph discusses the analysis of sales trends, predicting an increase in January sales due to the back-to-school demand for stationery, followed by a decline in the subsequent months. It also addresses the debt collection policy, commenting on the payment behavior of debtors and suggesting improvements such as charging interest on overdue accounts and sending out statements to prompt payment. The paragraph concludes with advice on how to improve the debt collection process and ends with a motivational quote about maintaining enthusiasm through failures.

Keywords

💡Budget

A budget is a financial plan that outlines expected income and expenses for a defined period. In the video, the theme revolves around understanding and preparing budgets, particularly cash budgets and projected income statements, to manage finances effectively.

💡Cash Budget

A cash budget specifically records all cash receipts and payments, excluding non-cash transactions. The script emphasizes that a cash budget is crucial for tracking liquidity and ensuring that a business has sufficient cash flow.

💡Projected Income Statement

This is a forecast of a company's income and expenses over a future period, typically presented monthly. It includes both cash and non-cash items, providing a broader view of financial performance, as discussed in the script.

💡Non-Cash Items

Non-cash items refer to transactions that impact a company's balance sheet or income statement but do not involve the exchange of cash. Examples given in the script include discounts allowed, discounts received, and bad debts.

💡Debtors

Debtors are customers who owe money to a business for goods or services provided on credit. The script discusses creating a debtors' collection schedule to predict and manage the inflow of cash from these customers.

💡Collection Schedule

A collection schedule is a tool used to estimate when credit sales will be collected from debtors. The script provides an example of how to create a debtors' collection schedule based on payment trends.

💡Credit Terms

Credit terms are the conditions under which a business allows customers to purchase goods or services and pay at a later date. The script mentions that debtors are given 50 days to pay, which is part of the credit terms.

💡Discount Allowed

This is a reduction in the amount of a bill that a seller offers to a buyer for prompt payment. The script explains that while discounts allowed are non-cash items, they are recorded in the projected income statement as an expense.

💡Bad Debts

Bad debts are amounts that a business deems uncollectible from debtors. The script discusses the process of estimating and writing off bad debts in the financial planning process.

💡Sales

Sales refer to the revenue generated from selling goods or services. The script differentiates between cash sales, which are immediately received, and credit sales, which are expected to be received at a later date.

💡Percentage Increase

This term refers to the rate at which a value has increased over time. The script calculates the percentage increase in sales from December to January to understand business performance trends.

💡Data's Collection Policy

This is the strategy a business uses to manage the collection of debts from customers. The script suggests improvements to the policy, such as charging interest on overdue debts, to enhance the efficiency of debt collection.

Highlights

Introduction to Chapter 10 on budgeting with an emphasis on understanding the theory.

Explanation of the difference between a cash budget and a projected income statement.

Clarification that a cash budget only includes receipts and payments, excluding non-cash items.

Description of non-cash items such as discount allowed, discount received, and bad debts.

Projected income statement includes income and expenses on a monthly basis.

Activity one focuses on a potatoes collection schedule for GNA Stationers.

Importance of preparing a debtors' collection schedule for both cash and credit sales.

Explanation of credit terms and the reality of debtors not always adhering to them.

Method to work out debtors' expected payments based on fast trends.

Calculation of cash and credit sales from total sales figures.

Details on debtors' payment trends over 50 days including discounts and bad debts.

How to complete a debtors' collection schedule for January to March.

Instructions on calculating total cash sales for January, February, and March.

Estimation of bad debts to be written off for the period January to March 2022.

Calculation of the total estimated amount still owed by debtors at the end of March 2022.

Analysis of the percentage increase in sales from December to January.

Prediction and explanation of sales trends from January to March.

Commentary on the debtors' collection policy and suggestions for improvement.

Closing with a motivational quote about success and enthusiasm.

Announcement of the next activity focusing on the creditors payment schedule.

Transcripts

good day junior techies i'm mrs brimakum

we are going to look now at chapter 10

budget now before you start with this

activity

it's important to understand the theory

so make sure that you go through your

theory booklet

know what is the difference between a

cash budget and a projected income

statement

note that when we look at a cash budget

we're looking at receipt and payment

only

which means that all non-cash items

should be excluded from a cash budget

so when we're talking about non-cash

items we're talking about things like

discount allowed discount received

bad dates

that will never appear in a cash budget

but

discount allowed

discount received

bad debts

on income or expenses which means that

will go to your projected income

statement because a projected income

statement shows our income

and expenses it's basically your income

statement but on a monthly basis

so looking at activity one our focus in

this activity will be on potatoes

collection schedule

you are provided with the information

related to gna stationers

so if we look at question 1.1

why is it necessary to prepare a data's

collection schedule

goods are sold for cash and on credit if

you look at the example below

your sales your total sales consists out

of cash and credit sales

so when we're looking at debtors

collection schedule we're looking at

what do we expect our debtors to pay us

on a monthly basis

yes we do have our credit terms

which could be for example 30 days and

in a perfect well well

all debtors adhere to those credit terms

but unfortunately it doesn't happen

so we are going to now

work out based on fast trends what do we

expect our debtors to pay us

so that we can budget accurately

on a monthly basis

your total sales will always appear in

your projected income statement

your cash sales will go to your cash

budget and the credit sales will be used

to complete the data's collection

schedule

so if we now look at what is the

information which was given to us we're

going to first look at this

and this is our workings before we start

with the questions

they provided us with the actual and the

budgeted sales

and debtors are allowed 50 days they pay

according to the following trend

so when we start we are going to start

with the total sales which is given to

us

they said credit sales amount to 65

of total sales which means then

35 percent is cash

and 65 is on credit now how do we get

that total sales equals 100

100 minus 65

equals 55.

so if we're calculating our cash sales

we will take our total sales

times 55

now i've got two options to calculate

the credit sales i can either take my

total sales minus the cash

or we can say

total sales times 65 percent

looking at

debtors are about 50 days they pay

according to the following trend

50

settle the accounts in the month of sale

and receive a 5

discount so this means in the same month

45

settles their accounts in the following

month which means if we sold goods on

credit in october

we expect 45 percent to be collected in

november

of the outstanding debt

then 18

settle accounts in the second month

following the month of sale

so this means if we sold goods on credit

in october we expect 18

of that to be collected in december

now

provision is made for bad dates in the

third month following the month of sale

this means

50

plus 45

plus 18

if i add that together and i minus that

from a hundred because my total debt

equals a hundred percent it means that

seven percent will be written off as bad

debt and this is what we expect to

happen

so from the october credit sales we

expect

seven percent to be written off in

january remember this is now my workings

because from here

if i'm asked to complete the data's

collection schedule

i've worked out now

for each month what do we expect what

percentage to be collected if i'm asked

to calculate the bad debts

i know exactly from the october credit

sales seven percent will be

written off as bad dates in january this

is an example

so question 1.2 asks us to complete the

data's collection schedule

for the period january until march

now we start with the credit sales we've

calculated our credit sales 65

of the total sales is on credit

so starting now

with the month in january

i'm not gonna use october why because

seven percent

is written off as bad dates in january

bad debts

is a non-cash item

it goes into the projected income

statement it's not money that we are

going to collect so it will not be

included in the teta's collection

schedule

this is why we start now with november

from the november credit sales we expect

18

to be collected in january

the 7

i'm not going to do anything with that

in the data's collection schedule

why it's a non-cash item it goes into

the projected income statement

from the december credit sales we expect

45

to be collected in january

18

to be collected in february

again we do nothing with the seven

percent

from the january credit sales

we expect 50

to be collected in the same month but

now you need to be very careful

of that fifty percent that we are going

to collect

that we expect

we are going to allow them five percent

discount which means that

we actually going to collect less money

this means that you need to calculate

first

50 percent of the total credit sales and

then we expect 95 percent of that to be

collected

why ninety-five percent five percent

discount will be allowed to those

debtors and discount allowed is an

expense to the business that will appear

in your projected income statement

if we look from the january credit sales

we expect 45

to be collected in february

and 18

in march

now we can go on to february and the

same applies as before

from the february credit sales in the

same month we expect fifty percent

of the debtors to pay us but

because five percent

discount is allowed only 95 percent of

that will be collected

in march from the february credit sales

we expect 45

to be collected in march

and then if we look now at march in the

same month thirty percent will be

collected but because five percent

discount is allowed to those debtors

we're going to collect 95

of that outstanding date

so now we've completed the data's

collection schedule

so the last step is to total each month

and this is what will appear in your

cash budget

now

the next question 1.3 calculate the

total cash sales from january february

and march so if you look at our workings

that we've done we've basically already

calculated this now

if we look at january february march

that is our total sales

65 of it is on credit which means 35

percent of that will be

cash so to calculate the cash sales just

just to go through it again to calculate

the cash sales take the total sales

times 35

and that will be for cash sales for each

month

question 1.4 calculate the following the

estimated bad debts to be written off

for the period january to march 2022

so this is one of the reasons again why

i do this workings before the time might

seem like a waste of time but when you

look at the questions that is required

of you to complete

use this

in the beginning complete it and then it

becomes much easier to complete the

questions because now we've already done

all the hard work by filling in what do

we expect to collect when and what do we

expect to write off when

so the question says

estimated bad dates to be written off

for the period january to march

this january until march so what are we

looking for we're looking for the seven

percent

so in my calculation it will be from the

october credit sales

we expect seven percent to be written

off in january

from the november credit sales seven

percent in february from the december

credit sales 7

in march so that will be my estimated

bad debts to be written off

question number b the total estimated

out amount still owed by debtors at the

end of march 2022

so we can look at our workings again now

and what do we look for now

what is still outstanding

by debtors at the end of march

starting with october

there's nothing because if i add all of

that it equals a hundred

november

there's nothing

december

nothing but when we look at january

in january the budget period we expect

to collect 93

of the total outstanding debt

february

75

march

only 50

so to find out what will be the

outstanding

take a hundred minus the percentage that

we expect to receive

so this is why our calculation will be

in january

the total credit sales times seven

percent

february the total credit sales times 25

100 minus 75 equals 25

and march 100 minus 50

equals 70

and that equals the total estimated

amount still owed by debtors at the end

of march

question 1.5 refer to the january sales

calculate the percentage increase in

sales so if we look at what's been

happening what do we expect to happen

this is our actual figures

now from december

to january we can see that there's an

increase

in our sales but then we expect it to

slowly decline

so now we need to calculate what is that

percentage increase that we

expect to happen from december to

january to calculate that

take 452

000

minus 360 000

divided by 360 000 times 100 and that

equals 20 percent

question b

why are the january sales predicted to

increase and then slowly decline from

february

now when we look at right in the

beginning the name of the business what

is it that we are selling

we are selling stationery

now from january until february

there's a decline or decrease that we

expect of 32 000 which is seven comma

four percent and then from february to

march 32 000 which is equal to eight

percent now the business is selling

stationery so we expect

january is the beginning of the year

before school starts and they anticipate

that the demand for stationery will then

increase

because everybody needs to buy

stationery for back to school

looking at the last question

comment on the data's collection policy

and give advice

so if we look at

letters are allowed 50 days to pay

but

according to

a specific trend that we've picked up

50

settled their account in the month of

sale and 45

settle account in the following month

that means 75

is actually

does adhere to our credit terms

which means 25

is after 50 days

18

of that we expect to settle in the

second month following the month of sale

and then in the third month we expect

bad dates to be written off

so

to comment on this now

75 of debtors does settle the account in

50 days

which means 15

of debtors settle their account after 60

days

and 10

of debtors is written off after 90 days

just a correction 18 of debtors settle

their account after 60 days and 7

of debtors is written off after 90 days

so although most debtors are settling

their accounts in 50 days more can be

done with that 18

and with that 7 which is written off

after 90 days so when we now give advice

what is our options how can we improve

this

charge interest on overdue data's

account

send out statements before the end of

the month

follow up

with outstanding debtors with

outstanding amount so these are just

some of the things that we can do to try

to ensure that that

25 percent which does not adhere to our

credit terms does pay us

thank you very much i want to leave you

with this quote success consists of

going from failure to failure without

loss of enthusiasm

next we're going to look at activity 2

and in activity 2

focus will be on the creditors payment

schedule

have a wonderful day