Budget is a plan of operations that is predeclared for a particular period of time. It is a financial statement and quantitative and is created to obtain particular objective.
There is a formal procedure for preparing budget, called as budgeting. It involves the following steps.
- Identification of expenses
- Different sources of income are determined
- Budget preparation
- Budget period establishment
- Allocating the income for expenses
- Monitor the efficiency of the budget
Types of budget:
1.National Budget: National budgets are legal documents. Before passing budget by executive head of the nation like prime minister or president or other chief official of the nation, these are offered by legislatures. The process of national budgets includes:
a. Classifying the expenses: Expenses allocated in government budget. Expenses include investment expenditure on development and infrastructure, research and development. It can also be the transfer payments of like unemployment benefits and social security.
b. Revenue determination and preparing budget: Taxes are primary sources of revenue generation for the government. And government budget can be for a quarter, a year, five years or ten years. Government mention budget period and revenue allocation.
2.Company budget: Share holder of owner of the company prepare the company budget. Some times employees and creditors prepare the budget. The process of company budget involves:
a. Calculation of expenses and revenues: Business expenses can be revenue expenditure on routine activities like payment of rent and electricity,capital expenditure on acquisition and modification of assets. Sources of business may be borrowed funds, capital and sale of goods.
b. Budget preparation: Generally people prepare this budget for financial year. The budget’s purpose is funds allocation for different business activities like distribution and production.
3.Personal Budget: Individual and families prepare this type of budget. They prepare the budget to allocate income for various savings, expenses, investments and other financial obligations like debts.
a. Organizing expenses and revenue summation: Expenditure on future savings and present consumption and investments and savings for children education.
Revenue is earned from many sources like rent allocation, social security, salary, worker’s compensation.
b. Budget preparation: People prepare this budget on a weekly or monthly basis. The idea of budget is to assign the income for different expenses.
People monitor the budget periodically to establish results and targets obtained. Modifications are made which are necessary in future budget to avoid unnecessary expenses.