Question

Please provide a 2 to 3 paragraphs response to the following questions.

What is the purpose of a capital budget? How is capital budgeting the same or different for government and non-profit agencies?  

Answer 1

Capital Budgeting

Meaning - Capital budgeting is the planning process which is used to determine that which one of the organisation's long term investment are worth to purse and will generate return in the long term. It is the budget for the major capital investment or the expenditure.

Purpose of the capital budget

The capital budgeting is to be done to provide a forecast of revenue and expenditure. It measured the actual financial operations of the business against the forecast and it also establishes the cost constraints for a project or operation. Budgeting helps in the planning of actual operations by forcing the managers to consider the conditions that might change and also plan for the steps to be taken in that condition. At the same time, it also encourages the managers to take into account the problems before they arise so that they will be prepared for the upcoming situation or issues. It also helps to coordinate the activities of the organisation where it compels the managers to examine the relationship between their own operations and operations of the department.

Capital budgeting help the organisations in ranking the projects. Most of the organisations have many projects that are potentially or financially rewarding and managers have to choose one of them that will give return in long run.

It also help in raising the funds . When any projects predicts the high returns then it will be easy to raise the money from the investors. budgeting is done as the large amount of the money is involved that can influence the profitability of the firm.

There are some major difference between budgeting in government and non profit agencies.

1. There are differences in the standards - Both follows the different standards. Government follows GASB whereas non profit organisation follow FASB .

2. Differences in the statement - Government agencies statement of Net assets whereas non profit use Statement of financial Position. The two statements i.e. Statement of Activities and Statement of Cash flows are same.

3. Difference in the reporting - The reporting pattern of both, government and non profit agencies are different. Government report are more complex as compared to non profit agencies.