It require that a pro-forma income statement should be prepared for each desired interim period of the budget period. The net income figures for each period are then adjusted to a cash basis by deleting the transactions that are affecting  the income statement but not the cash balance or the items which affect then one without affecting the other. This adjusted figure is taken as  cash profit (or loss) during that period. This is taken as net increase or decrease in cash balance during that period.

It require the preparation of as many as pro-forma sheets as there are interim periods in the cash budget. Each item of the balance except cash is projected for each period . and the cash balance is ascertained in accordance with the accounting equation i.e., Total Assets = Total Liabilities + Capital. The balancing figure of the pro-forma balance sheets is taken as the cash balance. A negative cash balance or a cash balance falling below minimum desirable balance would , of course , indicate a need for borrowing funds or otherwise adjusting the flow to make up the anticipated shortage of cash.

Cash budget , under this method , is a statement projecting  the cash inflows & outflows (receipt & disbursements) of the firm over various interim period  of the budget period . For each period , the expected inflows are put against the expected outflows to find out  if there is going to be any surplus or deficiency in a particular period. Surplus , if any , during a particular period may be carried forward to the next period or steps may taken to make short term investments of this surplus. Deficiencies , if any, must be arranged for within the same period from some short term sources of finance such as bank credit etc.

While preparing the cash budget , the desired minimum cash balance is considered at the end of the cash budget period. I f a firm is preparing  monthly cash budget , then the cash balance at the end of each month must be equal to the desired cash balance. If not ,then arranged must be made /planned  to increase  the cash balance at that time by procuring funds from some or other source.       

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