Question

A junior accountant new to the job has asked you (the accounting guru) what budgeting is all about. Why is it important, where do we start, what are the steps, is one area more important than the other, how does budgeting help us? What do you answer?

Answer 1

Budget : The word budget has been derived from a french word "BOUGETTE", meaning a leather wallet, to store money for anticipated expenses. A budget is an estimate of expenses to be incurred for a specific purpose (i.e for certain events) in a near future.

Budgeting : The process of preparation of budget on a continous basis. It involves prepation of estimate of future sales, estimate of future cash collections and payments, estimate of day to day activites of an organisation.

Importance of Budgeting

1. It helps in tracking expenses.

2. Acts as a measure to prevent over expenditures.

3. Planning future course of actions.

4. Helps in identifying problem areas.

5.Helps in establishing financial accountability and transperancy.

6.It acts as a tool for evaluating success of a project.

How we start budgeting and steps involved

1. Calculate Expenses : Finding out the expenditure to incurred during a period. For this check bank statements,receipts and financial files to determine the expenditure.

2. Determine Income: Know how much income you have to work with. Add all sources of income to arrive at the correct position of income.

3.Compare Income & Expenses: If your income is less than your expenses then you need to decide, either to reduce expenses or increase income

4. Create a budget: This has to be done to allocate your resources for each category properly.

5.Monitor the budget: Once the budget has been created continously review the budget to ensure that all expenditures are within limits as set by the budget.

All areas of budgeting are equally impotortant

How does budgeting help us

1. It forces the managers to plan.

2. Provides information that helps in decision making.

3. Provides a standard for performance evaluation.

4. Improves communication within the organisation.

5. Promote efficent allocation of organisational resources.