Definition of Budget

A budget is a detailed plan of operations for some specific future period. It is an estimate of costs and benefits of programs to be undertaken and policies thereto prepared in advance of the period to which it is applied. Budget acts as a business barometer as it is a complete program of activities of the business for the period covered.

According to Gordon and Shilling law, ‘budget is a predetermined detailed plan of action developed and distributed as a guide to current operations and as a partial basis for the subsequent evaluation of performance’.

The Institute of Cost and Management Accountants,England, defines a budget as ‘a financial and/or quantitative statement, prepared prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective’.

Thus, the following are the essentials of a budget:

  • It is prepared in advance and it is a plan of actions for the feature.
  • It is related to a future period and is based on objectives to be attained.
  • It is a statement expressed in monetary and/or physical units prepared for the implementation of policy formulated by the management.

Different types of budgets are prepared by concerns for different purposes. A sales budget is prepared for the purpose of forecasting sales for a future period and on its basis other budgets are prepared. An operating cost budget is prepared for forecasting the operating costs.

The Master Budget embodies plans – for the revenues and gains and other incomes, for operating, marketing and other expenses, for cash and capital requirements besides forecasting the profit or loss.