Budgeting Basics

Study Notes

A budget is a formal written statement of management's plans for a specified future time period, expressed in financial terms.
It provides a comprehensive financial overview of planned company operations.
Budgeting promotes efficiency and serves as a control device for performance evaluation.
A budget is an aid to management, not a substitute for management.

Historical accounting data on revenues, costs, and expenses helps in formulating future budgets.
Accountants are responsible for presenting management's budgeting goals in financial terms.
The budget and its administration are entirely management's responsibility.

Budgeting helps to communicate agreed-upon objectives to all parts of the company.

Budgets can be prepared for any period of time, but typically cover one year.
Monthly and quarterly budgets may be used to supplement the annual budget.
The budget period should be long enough to provide an attainable goal and minimize seasonal or cyclical fluctuations, but short enough for reliable estimates.
A continuous twelve-month budget can be used to keep management planning a full year ahead.

The three basic differences between budgeting and long-range planning are time period, emphasis, and detail presented.
Budgeting involves a short-term time period (usually one year), whereas long-range planning involves a longer time period (usually at least five years).
Budgeting focuses on achieving specific short-term goals, whereas long-range planning identifies long-term goals, selects strategies, and develops policies to implement them.
Budgets contain very detailed information, whereas long-range plans contain less detail and focus on reviewing progress toward long-term goals.

The master budget is a set of interrelated budgets that constitute a plan of action for a specified time period.
It contains two classes of budgets: operating budgets and financial budgets.
Operating budgets include individual budgets that result in the preparation of the budgeted income statement, establishing goals for sales and production personnel.
Financial budgets include the capital expenditures budget, the cash budget, and the budgeted balance sheet, focusing on cash needs to fund operations and capital expenditures.