Understanding the concept of Budgeting and its importance in accounting

Understanding the concept of Budgeting and its importance in accounting

Image Description
General
Image Description
Created By Admin Last Updated Tue, 08-Dec-2020

Before jumping to the topic let’s first understand what simple the word ‘budget’ means. A budget is simply a financial document used to project future expenses and income. It plans the future savings and spending as well as outlining projected income and expenses.

Budgeting On the other hand refers to the process of creating a plan to spend the money, this plan is budget. Budgeting helps in determining in advance whether you have enough money to imply the plan that you are thinking of to put in your business. It simply refers to balancing the expenses with income. The purpose behind budgeting is to plan, organize, track and after that, you can improve your financial situation. The objective is to control the spending and saving or invest a portion of the income that will helps in achieving the long term goals.

The income, fixed expenses, variable expenses, discretionary expenses and personal financial goals are the five elements of budgeting. By combining these one can create a simple monthly budget. This was all the basic concept behind budgeting now moves to understand its importance in accounting.

Importance of Budgeting in Accounting

Accounting is the process of financial recording of transactions in a business. These transactions need to be recorded so that it can be analyzed and management can be done in it. Now the budget plays an important role here as an essential management tool in accounting. It tells you how much money you need to carry out for your business activities. The budget forces you to be rigorous in thinking through the implications of your activity planning. There are times when the realities of the budgeting process force you to rethink your action plans. Used properly, the budget tells you when you will need certain amounts of money to carry out your activities. The budget enables you to monitor your income and expenditure and identify any problems. You can say that the budget is a basis for financial accountability and transparency.

 

The budgeting process forces management to think about why the company is in business, as well as its key assumptions about its business environment. A periodic re-evaluation of these issues may result in altered assumptions, which may, in turn, alter the way in which management decides to operate the business.

 

The budgeting process forces management to think about why the company is in business, as well as its key assumptions about its business environment. A periodic re-evaluation of these issues may result in altered assumptions, which may, in turn, alter the way in which management decides to operate the business.

Thus from the above, we can conclude that budgeting is an important management tool in the accounting field. Once developed it provides management with a means of controlling activities and monitoring the actual performance in any business. Thus is an important tool related to business management.