Financial Accounting: Cash Budget and Differentiation between Cash and Profit

This article covers the creation of a cash budget for Surya Trading Company and the differentiation between cash and profit. It also explains various terms related to financial accounting such as assets, liabilities, ordinary shares, preference shares, dividend, stock exchange, venture capital, budget, and capital income.

Project

Contents
TASK 1.1.........................................................................................................................................3
Create a cash budget of Surya trading company for the year ending 31st December, 2022........3
TASK 2.1.........................................................................................................................................3
A. In your opinion, are cash and profit similar? Recommend any company proceedings that do
not include an instant flow of cash?............................................................................................3
Differentiation between:..............................................................................................................4
Explain the following terms.........................................................................................................6
REFERENCES................................................................................................................................8

TASK 1.1
Create a cash budget of Surya trading company for the year ending 31st December, 2022.
TASK 2.1
A. In your opinion, are cash and profit similar? Recommend any company proceedings that do
not include an instant flow of cash?
There is no cash and profits in position of accounting are not similar, they are different
from each and every one in multiple ways:
Cash: In economics terms, it is tough cash in sensual and tangible sort of currency, for
immediate, paper money and coins. In context of auditing and financial accounting, cash depends

upon the classification of current assets involving currency or homogeneous currency that can be
merged immediately or in coming future. It can be negative and positive both movement of cash
showed that firm has high cash inflow in relation to its cash outflows. Adverse cash flow shows
that firm has highly cash outflows in relation to the inflow of cash. It classified into three main
parts named as operating, investing and financing cash flow (Aisaiti and et.al., 2019).
Profits: In terms of accounting, it is the interaction between the sales revenue received by an
enterprise from its outcomes and occurrence of cost on inputs. This is the firm profits analyses
which is proprietor's supporting interest in the procedure of income source for the production of
market. The allotment of profits among stakeholders and proprietors of company carry in a part
of payment due to dividend or reinvest in firm.
Difference between cash and profit:
1. Cash is the wealth that is easily available for use in the company whereas the profit is the
difference between revenue and expenses.
2. Companies cash denotes the liquidity to pay the financial debts and bills whereas profit shows
how effectively is organisation carrying out its operations.
3. Cash is necessary to run its businesses on daily basis whereas profit is the main tool of whole
business success.
4. Cash flow shows the inflow of cash or outflow of cash in to company whereas profit is the
money remains after deducting all expenses.
Differentiation between:
a) Capital Expenditure and revenue expenditure
Capital expenditure is the money which is spent by an entity in order to improve the
standard of the company by the acquisition of new assets. These are the expenses that take place
for the longer term and are financed and represented in the cash flow statements of the company.
This type of expenses is non-recurring in nature. The yield of these expenses is not limited to a
year and is usually long term in nature. Meanwhile, revenue expenditure is the type of money
which is spent by businesses for meeting daily operations. These expense occurs for a short span
of time and bound for an accounting year and it is not financed. It can also be termed as
statement of income and is recurring in nature (Alber, 2020).
b) Expenses and Drawings

Expense is related with costs that is needed for daily operations in the business and it can
be occurred in an enterprise in the form of rent, heat and light, insurance, wages etc. These
expenses are deducted from gross profit in the Profit and Loss account. Whereas, drawings can
be defined as an amount which can be withdrawn from the daily operations of business for
personal use of the owner. Moreover, it is very much different from the salary of an employee in
this owner of business can withdraw any amount they choose to withdraw. These withdrawals
are then debited from the capital of the owners in the balance sheet of the organisation (Bulut,
2022).
c) Gross profit and Net profit
Gross profit is the total sum of amount which a business earns in a particular financial
year. Cost of goods sold is termed as cost of purchasing materials, including expenses of labour,
etc. While taking total sales into consideration all the cash and credit sales are included. On the
other side of the coin, net profit is the total amount which is received from revenue after
excluding the cost of goods sold and other operating expenses. The expenses include operating
expenses, taxes, interest, and selling expenses. It is also referred as the bottom line because it is
recorded at the bottom of the income statement. It can be obtained after excluding all the
expenses incurred in that particular period (Donovan, 2021).
d) Cash Budget and Cash Flow Statement
Cash budget is a strategy wise plan which represents that how cash resources will be
required and used over a specific period. It shows the estimated inflow and outflow of cash. It is
easy to understand. It comprises the least amount of cash balance which a business can use to
meet its cash requirement. It is frequently prepared for a shorter time span, namely, daily,
weekly, monthly, half-yearly etc. While, on the other hand, cash Flow Statement is a complete
study presenting which shows that how cash resources will be obtained and deployed over a
particular time period. It is a primary external statement which consists of the sources of cash
and represents cash usage. It is prepared for a long period, generally yearly.
e) Accruals and Prepayments
Accrued Expense are those expenses which are linked with the current period have not
yet been charged and did not occur in the balance of expense. This expense is recognized in the

profit and loss account and is shown in the balance sheet of the company on the liabilities side.
While paying up are that expenses which occurred during the current period but related to the
next accounting year. Meanwhile, these expenses are deducted from the expenses balance shown
in the Income statement. It is shown in the balance sheet as an asset of the Company (Ejiogu,
2018).
Explain the following terms.
a) Asset: It is used to quantify and measure, which shows economic value that of sole
trader, business firm, or nation owns or rule with the and expecting that it will provide a
for anticipated advantage. These are noted down in an organisation's balance sheet and
are required to produce to uplift a concerns worth or benefit the functioning of the firm. It
can generate cash flow, cut down expenses, or upgrade sales. Assets are ranked into five
categories wiz., tangible, intangible, financial, fixed and current assets (Emerson and
et.al., 2019).
b) Liabilities: It is that amount which a persons or company has to repay. These are charged
over time through the diversification of economic welfare which consists of funds,
commodities, or services. These are recorded on the credit side of the balance sheet. It
includes debt, creditors, security interest, deferred revenues, bonds, warranties, and
outstanding expenses. These are written down or recorded in an opposition to assets. It
also means a lawful or authoritative risk. It is non declining in nature. It is accountable
for outflows of cash from the organisation. Bank overdrafts, lease and short term loans
are some examples of liabilities.
a) Ordinary Shares: These shares are also known as common shares and are considered as
a stock which is sold on public exchange. Every shareholder has who purchases the stock
of a company has right to take participate in the shareholder meeting. Moreover, the
holders of these shares are not guaranteed a dividend just like holders of preference
shares. Shareholders of ordinary shares will receive dividend after payment of dividend
to preference shareholders.
b) Preference Shares: These are generally known as preferred stock. These are those shares
of an entity on which dividends are paid before paying dividend on ordinary shares. In
case of liquidation of a company, stakeholders of preference shares are entitled to receive

dividends before shareholders of equity shares. In most cases preference shares have a
fixed dividend in comparison to ordinary shares. Their shareholders do not exercise
voting rights in shareholders meeting of the organisation (Fombang and Adjasi, 2018).
c) Dividend: It is diversification of profits of an organisation to its superior shareholders of
equity. When a business earns in excess, it becomes capable of paying a part of its profit
as dividend to stockholder of the company. It is generally distributed quarterly and can be
paid out in the form of cash. Shareholders of companies which regularly pay off its
dividend, are entitled to receive their part of profits till the date they hold their investment
in the company but before date of the declaration of ex-dividend.
d) Stock Exchange: It is an exchange where a stock trader can buy and sell securities. It is
also termed as securities exchange. It indulges shares of stocks, bonds and other financial
instruments. It also gives facilities for issuing and redemption of securities. Initial public
offering or IPO of stocks and bonds is furnished in primary market and afterwards trading
is done in the secondary market (Pan, 2019). There are many kinds of equities in which
an individual can invests like blue chips, penny stocks, hedging stocks, dividend stocks
and many more.
e) Venture Capital: It is a kind of personal equity of an individual or funds that is supplied
by investors for starting companies and mid cap or small cap businesses that are
estimated to have a potential to survive in the long term.
f) Budget: An evaluation of incomes to be earned and expenses to be incurred in a
particular future time period is referred to as budget.
g) Capital Income: An income which is derived from the capital or wealth instead of
production process of an organisation is referred to as capital income. It consists of stock
dividends and capital gains. It arises from passage of time of an asset not from utilisation
of an asset (Rugman, 2019).
h) Company: A legal entity which represents an association of people irrespective of fact
that they are natural, legal or combination of both.

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