A budget is a detailed plan of personal or business spending over a period of time. Budgets are quantitative or financial statements prepared for the purpose of attaining a particular financial goal such as reduce expenditure, increase savings or make the most of your resources for investments.
Budgeting is the formal procedure of preparing budgets. It involves the following basic steps:
- Identifying expenses
- Determining different sources of income
- Preparing the budget
- Establishing the budget period
- Laying down the budget procedure
- Allocating income for expenses
- Monitoring the efficiency of the budget
- Reassessing the budget
A personal budget is prepared by individuals and families to allocate income for various expenses, savings, investments and other financial obligations, such as debts. A personal budget is prepared by:
- Organizing expenses: Personal expenses include expenditure on present consumption or future savings and investments. This includes incorporation of travel and leisure expenses and savings for the education fund of children.
- Revenue summation: An individual earns an income from a number of sources, including salary, social security, worker’s compensation and rent collection.
- Budget preparation: This is generally prepared on a weekly or monthly basis. The idea of a personal budget is to allocate income for various expenses, while setting aside a portion for savings.
The budgeting process of governments, companies and individuals involves re-evaluation and revision of the budget. The budget is periodically monitored with respect to established targets and results obtained. Shortcomings in the outcome are evaluated and necessary modifications are made in the future budget to avoid unnecessary expenses.
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Other types of budgets include:
National budgets are legal documents, which are provided by legislatures before being passed by the executive head of the nation, such as the president, prime minister or other chief official of a nation. The budgeting process of a nation involves:
- Classifying expenses: The expenses allocated in a government budget include consumption and investment expenditure on infrastructure development and research and development. It also includes transfer payments, such as social security and unemployment benefits.
- Revenue determination: The primary source of revenue generation for a government budget is taxes.
- Preparing budgets: A government budget may be for a quarter, a year, five years or ten years. The period of the budget and the procedure of revenue allocation are exclusively mentioned by the government.
Examples of specific country budgeting processes, such as those in US, Canada, UK, Germany, Australia, New Zealand, Japan, India and Brazil, are detailed at the end of this article.
A company budget is prepared by the owner and shareholders of the company. It may also be prepared with the inputs of other stakeholders, such as employees and creditors. The budgeting process of a company involves:
- Categorizing Expenses: Business expenses include capital expenditure on acquisition and modification of assets and revenue expenditure on routine activities such as payment of electricity and rent.
- Revenue calculation: Sources of business revenue include capital, borrowed funds and sale of goods.
- Budget preparation: This is generally prepared for a financial year. The purpose of the budget is to allocate funds for various business activities, such as production and distribution.