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Budgeting : Definition and Characteristics of Budgeting!
Definition
The word budget is derived from ‘Bougettee’ a French word meaning a leather pouch in which funds are appropriated for meeting anticipated expenses. In fact, this is the basic idea behind budgeting. A budget is a statement of expected results stated in numerical terms. It is formed in advance of the period to which it applies. It is an instrument of planning as well as control.
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It serves as a standard against which actual results can be compared. A budget can be seen as an economic plan for a given period of time. Budgeting is the process of preparing budgets.
Budgeting is essentially a managerial process concerned with planning, co-ordination and control. A business budget is a plan which covers all the phases of operation of an enterprise for a definite period of time.
It is prepared for a specific future period and it expresses everything in precise numerical terms. In a sense, a budget may be considered as a statement specifying policies and plans to be pursued during a certain period, to achieve specified goals and objectives.
In the words of G.R. Terry, “A budget is an estimate of future needs arranged according to an orderly basis, covering some or all of the activities of an enterprise for a definite period of time”.
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According to Institute of Costs and Works Accountants, England, “Budget is a financial and/or quantitative statement prepared prior to a definite period of time, of the policy, to be pursued during that period for the purpose of attaining a given objective.”
Koontz and O’ Donnell define, “Budgets are statements of anticipated results, in Financial terms as in revenue and expense and capital budgets or in non- financial terms as in budgets of direct labour-hours, materials, physical sales volume, on units of production. ”
The analysis of these definitions shows that budget is: (i) a statement of estimated or expected results; (ii) stated in quantitative (physical or financial) terms; (iii) always framed for a well-defined future period of time; and (iv) prepared to achieve certain objectives.
Characteristics:
(a) It is framed in advance keeping an eye on a future plan of action.
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(b) It is for a future period and is based on objectives to be achieved.
(c) It is a financial and/or quantitative statement prepared for the execution of policy formulated by the top management.
Budget is used as a technique both for planning as well as for control. As a tool of planning, a budget expresses plan to numerical figures and informs people what is expected of them. Budgets explain programmes and determine the steps to be taken to attain the estimated results.
As a device of controlling, a budget serves as a standard for the measurement and evaluation of actual performance. It assists in the delegation of authority and fixation of responsibility. Budgeting also encourages co-ordination enabling all the sub-divisions to work towards the common objectives.
