BUDGETING

Budgeting

Budgeting is the process of estimating the availability of Resources and then allocating them to various activities of an organization according to a pre-determined priority. In most cases, approval of a budget also means the approval to various spending units to utilize the allocated resources. Budgeting plays a criucial role in the socio-Economic Development of the nation.

Budget is the annual statement of the outlays and tax revenues of the government of India together with the laws and regulations that approve and support those outlays and tax revenues . The budget has two purposes in general :
1. To finance the activities of the Union Government
2. To achieve macroeconomic objectives.

The Budget contains the financial statements of the government embodying the estimated receipts and expenditure for one financial year, ie. it is a proposal of how much Money is to be spent on what and how much of it will
be contributed by whom or raised from where during the coming year.

Different types of Budgeting

Economists throughout the globe have classified the budgets into different types based on the process and purpose of the budgets, which are as follows:-

1- The Line Item Budget

line-item budgeting was introduced in some countries in the late 19th centuary. Indeed line item budgeting which is the most common form of budgeting in a large number of countries and suffers from several drawbacks was a major reform initiative then. The line item budget is defined as “the budget in which the individual financial statement items are grouped by cost centers or departments .It shows the comparison between the financial data for the past accounting or budgeting periods and estimated figures for the current or a future period”In a line-item system, expenditures for the budgeted period are listed according to objects of expenditure, or “line-items.” These line items include detailed ceilings on the amount a unit would spend on salaries, travelling allowances, office expenses, etc. The focus is on ensuring that the agencies
or units do not exceed the ceilings prescribed. A central authority or the Ministry of Finance keeps a watch on the spending of various units to ensure that the ceilings are not violated. The line item budget approach is easy to understand and implement. It also facilitates centralized control and fixing of authority and responsibility of the spending units. Its major disadvantage is that it does not provide enough information to the top levels about the activities and achievements of individual units.

2 – Performance Budgeting

a performance budget reflects the goal/objectives of the organization and spells out performance targets. These targets are sought to be achieved through a strategy. Unit costs are associated with the strategy and allocations are accordingly made for achievement of the objectives. A Performance Budget gives an indication of how the funds spent are expected to give outputs and ultimately the outcomes. However, performance budgeting has a limitation – it is not easy to arrive at standard unit costs especially in social programmes which require a multi-pronged approach.

3- Zero-based budgeting

The concept of zero-based budgeting was introduced in the 1970s. As the name suggests, every budgeting cycle starts from scratch. Unlike the earlier systems where only incremental changes were made in the allocation, under zero-based budgeting every activity is evaluated each time a budget is made and only if it is established that the activity is necessary, are funds allocated to it. The basic purpose of Zero-based Budgeting is phasing out of programmes/ activities which do not have relevance anymore. However, because of the efforts involved in preparing a zero-based budget and institutional resistance related to personnel issues, no government ever implemented a full zero-based budget, but in modified forms the basic principles of ZBB are often used.

4- Programme Budgeting and Performance Budgeting

Programme budgeting in the shape of planning, programming and budgeting system (PPBS) was introduced in the US Federal Government in the mid-1960s. Its core themes had much in common with earlier strands of performance budgeting.
Programme budgeting aimed at a system in which expenditure would be planned and controlled by the
objective. The basic building block of the system was Classification of expenditure into programmes, which meant objective-oriented classification so that programmes with common objectives are considered together.
It aimed at an integrated expenditure management system, in which systematic policy and expenditure planning would be developed and closely integrated with the budget. Thus, it was too ambitious in scope. Neither was adequate preparation time given nor was a stage-by-stage approach adopted. Therefore, this attempt to introduce PPBS in the federal government in USA did not succeed, although the concept of performance budgeting and programme budgeting endured.

Budgetary Control

Budgetary control refers to how well managers utilize budgets to monitor and control costs and operations in a given accounting period. In other words, budgetary control is a process for managers to set financial and performance goals with budgets, compare the actual results, and adjust performance, as it is needed.

Budgetary control involves the following steps :

(a) The objects are set by preparing budgets.

(b) The business is divided into various responsibility centres for preparing various budgets.

(d) The budgeted and actual figures are compared for studying the performance of different cost centres.

(e) If actual performance is less than the budgeted norms, a remedial action is taken immediately.

The main objectives of budgetary control are the follows:

To ensure planning for future by setting up various budgets, the requirements and expected performance of the enterprise are anticipated.
To operate various cost centres and departments with efficiency and economy.
Elimination of wastes and increase in profitability.
To anticipate Capital Expenditure for future.
To centralise the control system.
Correction of deviations from the established standards.
Fixation of responsibility of various individuals in the organization.

Responsibility Accounting

Responsibility accounting is an underlying concept of accounting performance measurement systems. The basic idea is that large diversified organizations are difficult, if not impossible to manage as a single segment, thus they must be decentralized or separated into manageable parts.

These decentralized parts are divided as : 1) revenue centers, 2) cost centers, 3) profit centers and 4) Investment centers.

revenue center (a segment that mainly generates revenue with relatively little costs),
costs for a cost center (a segment that generates costs, but no revenue),
a measure of profitability for a profit center (a segment that generates both revenue and costs) and
return on investment (ROI) for an investment center (a segment such as a division of a company where the manager controls the acquisition and utilization of assets, as well as revenue and costs).

Advantages:-

It provides a way to manage an organization that would otherwise be unmanageable.
Assigning responsibility to lower level managers allows higher level managers to pursue other activities such as long term planning and policy making.
It also provides a way to motivate lower level managers and workers.
Managers and workers in an individualistic system tend to be motivated by measurements that emphasize their individual performances.

In India the budget is prepared from top to bottom approach and responsible accounting would not only improve the efficiency of Indian budgetary system but also will help in performance analysis.

Social Accounting

Social accounting is concerned with the statistical classification of the activities of human beings and human institutions in ways which help us to understand the operation of the economy as a whole.

Social accounting is the process of communicating the social and environmental effects of organizations’ economic actions to particular interest groups within Society and to society at large

The components of social accounting are production, consumption, capital accumulation, government transactions and transactions with the rest of the world.

The uses of social accounting are as follows:

(1) In Classifying Transactions

(2) In Understanding Economic Structure

(3) In Understanding Different Sectors and Flows

(4) In Clarifying Relations between Concepts

(7) In Explaining Movements in GNP

(8) Provide a Picture of the Working of Economy

(9) In Explaining Interdependence of Different Sectors of the Economy

(10) In Estimating Effects of Government Policies

(11) Helpful in Big Business Organisations

(12) Useful for International Purposes

(13) Basis of Economic Models

Budgetary Deficit

Budgetary Deficit is the difference between all receipts and expenditure of the government, both revenue and capital. This difference is met by the net addition of the Treasury Bills issued by the RBI and drawing down of cash balances kept with the RBI. The budgetary deficit was called Deficit Financing by the government of India. This deficit adds to Money Supply in the economy and, therefore, it can be a major cause of inflationary rise in prices.

Budgetary Deficit of central government of India was Rs. 2,576 crores in 1980-81, it went up to Rs. 11,347 crores in 1990-91 to Rs. 13,184 crores in 1996-97.

The concept of budgetary deficit has lost its significance after the presentation of the 1997-98 Budget. In this budget, the practice of ad hoc treasury bills as SOURCE OF FINANCE for government was discontinued. Ad hoc treasury bills are issued by the government and held only by the RBI. They carry a low rate of interest and fund monetized deficit. These bills were replaced by ways and means advance. Budgetary deficit has not figured in union budgets since 1997-98. Since 1997-98, instead of budgetary deficit, Gross Fiscal Deficit (GFD) became the key indicator.

Fiscal Deficit

The difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings needed by the government and thus amounts to all the borrowings of the government . While calculating the total revenue, borrowings are not included.
The gross fiscal deficit (GFD) is the excess of total expenditure including loans net of recovery over Revenue Receipts (including external grants) and non-debt capital receipts. The net fiscal deficit is the gross fiscal deficit less net lending of the Central government.
Generally fiscal deficit takes place either due to Revenue Deficit or a major hike in capital expenditure. Capital expenditure is incurred to create long-term assets such as factories, buildings and other development.
A deficit is usually financed through borrowing from either the central bank of the country or raising money from capital markets by issuing different instruments like treasury bills and Bonds.

Revenue Deficit

Revenue deficit is concerned with the revenue expenditures and revenue receipts of the government. It refers to excess of Revenue Expenditure over revenue receipts during the given fiscal year.
Revenue Deficit = Revenue Expenditure – Revenue Receipts
Revenue deficit signifies that government’s own revenue is insufficient to meet the expenditures on normal functioning of government departments and provisions for various Services.
In India social expenditure like MNREGA is a revenue expenditure though a part of Plan expenditure.
Its targeted to be 2.9% of GPD in the year 2014-15, though the fiscal revenue and budget management act specifies it to be zero by 2008-09

Budgeting is one of the most important things you can do to take control of your finances. It can help you save money, pay off debt, and reach your financial goals.

There are a few different ways to budget. One popular method is the 50/30/20 rule. This rule suggests that you allocate 50% of your income to needs, 30% to wants, and 20% to Savings and debt repayment.

Another popular method is to track your spending. This can help you see where your money is going and identify areas where you can cut back. There are a number of different ways to track your spending, including using a budgeting app, keeping a spreadsheet, or simply writing down your expenses each day.

Once you have a budget, it’s important to stick to it. This can be difficult, but there are a few things you can do to make it easier. First, make sure your budget is realistic. Don’t try to cut back too much too soon, or you’ll be more likely to give up. Second, find ways to make your budget automatic. This could mean setting up automatic transfers from your checking account to your savings account, or signing up for a credit card that automatically rounds up your purchases to the nearest dollar and deposits the difference into your savings account.

Budgeting is an ongoing process. You’ll need to review your budget regularly and make adjustments as needed. For example, if your income changes, you’ll need to adjust your budget accordingly. Or, if you find that you’re not sticking to your budget, you may need to make some changes to make it more realistic.

Budgeting can take some time and effort, but it’s worth it. By taking control of your finances, you can reach your financial goals and achieve peace of mind.

Here are some additional tips for budgeting:

Set financial goals. What do you want to achieve with your budget? Do you want to save for a down payment on a house, pay off debt, or retire early? Having specific goals will help you stay motivated.
Automate your savings. One of the best ways to save money is to automate your savings. This means setting up a system so that a certain amount of money is automatically transferred from your checking account to your savings account each month. This way, you won’t even have to think about it, and you’ll be less likely to spend the money.
Cut back on unnecessary expenses. Take a close look at your spending and see where you can cut back. Do you really need that daily latte? Or that expensive cable package? Cancelling unnecessary expenses can free up more money to save or invest.
Increase your income. If you’re struggling to make ends meet, you may need to find ways to increase your income. This could mean getting a part-time job, starting a side hustle, or asking for a raise at work.
Get help if you need it. If you’re struggling to budget on your own, there are a number of resources available to help you. You can talk to a financial advisor, join a budgeting support group, or read books and articles on budgeting.

Budgeting is a skill that takes time and practice to master. But it’s a skill that is well worth Learning. By budgeting, you can take control of your finances and achieve your financial goals.

What is a budget?

A budget is a plan for how you will spend your money. It can help you track your income and expenses, and make sure you are not spending more than you earn.

How do I create a budget?

To create a budget, you will need to track your income and expenses for a month. Once you have this information, you can start to create a budget that fits your needs.

What are the benefits of budgeting?

There are many benefits to budgeting, including:

Reduced Stress: When you know where your money is going, you can avoid financial stress.
Improved financial security: A budget can help you save money and reach your financial goals.
Increased control over your finances: A budget gives you control over your money, so you can make choices that are right for you.

How do I stick to my budget?

There are a few things you can do to stick to your budget:

Track your spending: This will help you see where your money is going and make changes if necessary.
Set realistic goals: Don’t try to save too much money too soon. Start with small goals and gradually increase them over time.
Automate your savings: This will help you save money without even thinking about it.
Avoid impulse purchases: If you see something you want, wait 24 hours before buying it. This will give you time to think about whether you really need it.

What are some common budgeting mistakes?

Some common budgeting mistakes include:

Not tracking your spending: This is the most common budgeting mistake. If you don’t know where your money is going, you can’t make changes to improve your financial situation.
Setting unrealistic goals: If you set unrealistic goals, you are more likely to give up on your budget. Start with small goals and gradually increase them over time.
Not being flexible: Your budget should be flexible enough to accommodate unexpected expenses. If you have a large expense, you may need to adjust your budget for the month.
Not having a plan for emergencies: Emergencies can happen at any time, so it’s important to have a plan for how you will deal with them. Having an emergency fund can help you cover unexpected expenses without going into debt.

What are some tips for saving money?

There are many tips for saving money, including:

Create a budget: This will help you track your income and expenses, and make sure you are not spending more than you earn.
Cut back on unnecessary expenses: Look for ways to cut back on your expenses, such as eating out less or cancelling unused subscriptions.
Set up a savings account: Once you have a budget, you can start to set aside money in a savings account. Aim to save at least 10% of your income each month.
Invest your money: Investing your money can help you grow your savings over time. There are many different investment Options available, so it’s important to do your research and choose an option that is right for you.
Live below your means: This means spending less money than you earn. It may not be easy, but it’s important to live within your means if you want to save money.

What are some tips for getting out of debt?

There are many tips for getting out of debt, including:

Create a budget: This will help you track your income and expenses, and make sure you are not spending more than you earn.
Make a list of your debts: List all of your debts, including the amount you owe, the interest rate, and the minimum payment.
Prioritize your debts: Pay off your debts with the highest interest rates first. This will save you money in the long run.
Make more than the minimum payment: If you can, make more than the minimum payment on your debts. This will help you pay off your debt faster.
Cut back on your expenses: Look for ways to cut back on your expenses, such as eating out less or cancelling unused subscriptions.
Get help from a financial advisor: If you are struggling to get out of debt, a financial advisor can help you create a plan and stay on track.

A budget is a financial plan for a specific period of time, such as a month, quarter, or year. It helps you track your income and expenses, and make sure you’re not spending more than you earn.
There are two main types of budgets: fixed and flexible. A fixed budget is a set amount of money that you allocate to each category of spending, such as housing, food, and transportation. A flexible budget allows you to adjust your spending based on your income and expenses.
To create a budget, you need to track your income and expenses for a month or two. Once you have a good understanding of your spending habits, you can start to create a budget that works for you.
There are a few different ways to track your spending. You can use a budgeting app, a spreadsheet, or even just a notebook. The important thing is to find a method that you’re comfortable with and that you’ll stick to.
Once you have a budget, it’s important to stick to it. This can be difficult, but there are a few things you can do to make it easier. First, make sure you have a plan for how you’re going to save money. Second, try to avoid impulse purchases. And third, don’t be afraid to adjust your budget as needed.
Budgeting can be a lot of work, but it’s worth it. By creating a budget and sticking to it, you can save money, reduce stress, and reach your financial goals.

Here are some MCQs about budgeting:

What is a budget?
(A) A financial plan for a specific period of time
(B) A list of your income and expenses
(C) A way to track your spending
(D) All of the above
What are the two main types of budgets?
(A) Fixed and flexible
(B) Income and expense
(C) Monthly and yearly
(D) All of the above
How do you create a budget?
(A) Track your income and expenses for a month or two
(B) Find a budgeting method that works for you
(C) Stick to your budget
(D) All of the above
What are some tips for sticking to a budget?
(A) Have a plan for how you’re going to save money
(B) Avoid impulse purchases
(C) Adjust your budget as needed
(D) All of the above
What are the benefits of budgeting?
(A) You can save money
(B) You can reduce stress
(C) You can reach your financial goals
(D) All of the above