What is Accounting? 

Accounting is the process of recording business-related financial transactions. The process of accounting involves summarizing and analyzing the transactions. The financial statements which are prepared in accounting contain a summary of the various transactions that took place within a certain accounting period. Book-keeping or accounting is one of the most important activities of any business. 

Types of accounting in business 

  •        Managerial Accounting 
  •       Cost Accounting 

Managerial accounting helps the management within the organization to take proper and effective business decisions while Cost accounting helps in determining the cost that a business needs to incur when producing a particular product.  

The basic accounting transactions that take place are generally taken care of by a person employed as a "book-keeper" while the advanced accounting transactions are recorded by professionals such as Chartered Accountants, Certified Management Accountants (CMA), or the Certified Public Accountants (CPA). 

What is a Budget?

A budget is an estimation of the revenue earned or expenses incurred over a specified period in the future by the business. It is generally prepared periodically which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. It also plays an important role in monitoring the performance of the people in the organization and helps in better decision-making and cost-cutting if required. 

What is an Income Statement? 

The income statement is one of the most important and primary financial statements which is prepared by an organization to evaluate the overall position of the company. The income statement is one of the important constituents of financial reporting in addition to the balance sheet, cash flow statement, etc. It helps to ascertain the net income of the company and provides information about flexibility, risk, and return on investments. 

Different Sections in the Income Statement 

Operating Section

It includes revenue and expenses. The revenues are generally the cash inflows that occur from the production activities and it constitutes a major portion of the company's operational activity.  

On, the other hand expenses are generally the cash outflows which include the cost of goods sold, selling and administrative expenses, and depreciation or amortization. 

The difference between the revenue and expenses indicates the profits of the company and shows the efficiency and strength of the company. 

Non-operating Section

The non-operating section of the income statement includes income and costs related to the non-core business activities like rent, patent income, income tax expenses, etc.  

The extraordinary gains and losses occur very rarely and are a result of unpredictable occurrences such as earthquakes, changes in the legislation, etc. The extra-ordinary gains or losses are generally reported after deducting the applicable tax from the gross income. 

What is a Budgeted Income Statement?

A budgeted income statement is a basic financial report which forecasts estimated profits, revenue, and expenses for the company in the coming year or months. It is helpful for the companies in planning for the future, making better decisions, and allocating available resources more effectively and efficiently.  

The budgeted financial statement is prepared based on predictions and not on historical data and takes into account the results of the company in the previous years.  

The budgeted income statement also helps to find out the strengths and weaknesses of the business which is why it is mostly prepared at the beginning of the year. In addition, the budgeted income statement is also extremely useful in testing whether the financial results as estimated by the company are reasonable or not.  

What is Budget Variance?

A budget variance is a measure used by companies, businesses, etc. to estimate the difference between the budgeted and annual proportion for a specific accounting year. A favorable budget variance refers to positive variances or gains, while unfavorable or negative variances refer to a shortfall in the budget. A budget variance is indicative of the instances where the actuals costs incurred are higher or lower than the estimated costs. 

Causes of Budget Variance 

  • The variance can take place due to the errors committed by the persons compiling it which includes wrong calculations, wrong assumptions with regards to costs to be incurred, and reliability on data that is old. 
  • The variance is also caused by the changing economic and business situations with regards to an increase in the cost of raw materials, the arrival of a new competitor in the market, or any political or regulatory pressure. 
  • The variance takes place when the management of the company overperforms or underperforms in contrast with the expectations set in the budget statements. 

Importance of a Budgeted Income Statement 

The importance of a budgeted income statement can be summarized as follows: 

  • The budgeted income statement helps to analyze the variance between the budgeted income and expenditure items and the actual items at the end of the financial period. 
  • It helps in anticipating future income and expenses which helps managers to evaluate their performance during the financial period. 
  • The budgeted income statement helps the management to make necessary adjustments as per the requirements of the market or due to any internal requirements which in turn helps the company to make decisions in a better and smoother manner. 
  • The budgeted income statement also proves to very helpful for the stakeholders and investors to keep a track of the company's financial progress and evaluate the current valuation of the company. 

How is the Budgeted Income Statement prepared? 

The steps that are involved in preparing a budgeted income statement includes: 

I. Calculating the Budgeted figures

In preparing the income statement the budgeted net sales, budgeted cost of goods sold, budgeted sales, and administrative expenses are calculated initially. 

   a.Budgeted Net sales: The sales budget is prepared by keeping the past sales trend as a basis and is estimated by multiplying the budgeted sales quantity with the future selling price. 

   b.Budgeted Cost of goods sold: After preparing the sales budget, the budgeted cost of goods sold is calculated for which the information is obtained from different departments like production, store and purchase departments. The cost of goods sold is calculated by using the formula: 

( Opening Stock + Purchases  Closing Stock)

c.Budgeted Sales Expenses: The budgeted sales expense budget is prepared by ascertaining the increasing trend of costs incurred in advertisements. 

   d. Budgeted Administrative Expenses: It includes the costs related to office expenses, salary of office employees, and other administrative costs. These expenses are estimated and thereafter a budgeted statement is prepared to show the same. 

  e.Budgeted Corporate Tax: The budgeted corporate tax is calculated by deducting the corporate tax at a certain rate from the budgeted net income before the tax. 

ii. Writing down calculated budgeted figures in the budgeted income statement

After all the budgeted figures are calculated they are entered in the income statement under the heads operating income and operating costs accordingly and the difference between the two results in the net income.  

Context and Application 

This topic is significant in the professional exams for both undergraduate and graduate courses, especially for:   

  • Bachelor of Business Administration
  • Bachelor of Commerce       
  • Master of Business Administration
  • Master of Commerce

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