A Budgeted Balance Sheet is a report that tells the financial position of an entity for a future period. It is just like a normal balance sheet statement and contains the same line items. However, the Budgeted balance sheet is prepared for a future period. In simpler words, a budgeted balance sheet is the projection of a balance sheet for some future period under consideration.
A Budgeted statement of financial position is used to predict the levels of assets, equity, and liabilities based on the budget for the current period. Further, it forms part of the master budget.
The master budget plan consists of a larger number of smaller individual budgets such as sales, purchases, cash, production, and direct material budgets, etc. The master budget is also referred to as a corporate budget. It is in the form of Projected Financial statements that allows management to plan financials to achieve a company’s goals.
It is a normal practice of businesses to plan the performance of upcoming periods in the form of a master budget. This helps management focus the efforts of a team and assists in concentrating on key areas. The comparison of actual vs. budgeted financial statements gives a deep understanding of which balance sheet area is critical and helps decision-makers divert their attention towards those areas.
The master budget contains different statements, and the budgeted balance sheet is one of them. Let’s discuss that how the budgeted balance sheet is prepared.
Also read, Five elements of financial statement.
Preparation of Budgeted Balance Sheet
It is prepared by adjusting the opening balances of assets, liabilities, and equities for expected activities during a budgeted period and calculating balances of these accounts at the end of a period. However, the accuracy of these figures depends on the realism of budgeted input. The budgeted balance sheet is used to test whether the projected financial position of an entity is reasonable or not. Let’s discuss the steps used in the preparation of the budgeted balance sheet.
1-Obtain Opening Balances
To prepare a budgeted statement of financial position, obtain data of actual balance sheet at the beginning of the financial period. That’s actual data collected from the accounting record of the business, and these balances are normally audited.
2-Obtain bdugeted movements of account balance
To make a budgeted balance sheet, collect data of all relevant budgets such as cash budget, raw material budget, finished good budget, purchase budget, and cash budget, etc.
3-Make adjustments during a period to arrive at the budgeted balance sheet
Market dynamics and internal factors need to be considered while making adjustments to the budget. For instance, if the price of the product decreases, demand is expected to increase. Hence, positive adjustments can be made to the revenue.
However, the business needs to ensure they have all the logical and plausible reasons and explanations for passing adjustments in the budgets. Let’s discuss the major adjustments usually made in the budgeted balance sheet.
Major Adjustments for preparation of Budgeted Balance Sheet
Cash and bank balance
To estimate cash and bank balance, obtain an opening balance from last year’s audited financial statement, pass adjusting entry related to cash movement in the estimated balance. This closing balance is reported in the budgeted balance sheet.
To reach budgeted accounts receivable figures, sales data and cash budget are necessary items. Obtain data of cash budget and sales revenue to calculate the balance of Debtors for the budgeted period. To get the closing balance, use this formula:
|Opening accounts receivable balance
|Add: Credits sale
|Less: Cash received
|Closing Balance Accounts Receivable
To calculate the budgeted balance of finished goods, use the closing balance of the last accounting period, adjust relevant values from the sales and production budget and get the values of the finished goods.
|Opening Finished Good
|Add: Production for the period
|Less: Total sales (credit and cash sales)
|Finished goods closing balance
Cash and purchase budgets are useful for reaching the figure of creditors (Accounts Payable). The closing balance of accounts payable for the last period is also important for this purpose. The formula for calculating Accounts Payables is as follows:
|Accounts Payables Opening balance
|Add: Credit purchase
|Less: Cash paid
|Accounts Payable Closing Balance
To calculate the figure of non-current assets, use plant utilization budget, projected plan report, and cash budget. The adjustment is made as follows:
|Opening Non-current assets balance
|The closing balance of non-current assets
Obtain closing figures of last year’s loan and add relevant inputs from the current period’s cash budget. In addition to that, add new loans raised during the period and adjust repayments of the principal amount of loan to be paid during the current accounting period. The resultant balance will be presented in the liability section of the budgeted balance sheet.
For calculating accumulated depreciation, use last year’s closing balance of accumulated depreciation accounts along with the overhead budget for the current period. Here is the formula for its calculation:
|Accumulated Depreciation Opening balance
|Add: Depreciation for the current period
|Less: Depreciation write off for disposals
|Accumulated Depreciation Closing Balance
To calculate its figure, use last year’s closing balance along with relevant figures from the cash budget. Consider any changes in taxation rates to reach appropriate figures of tax payable for the budgeted period.
Paid In capital
To calculate the budgeted figure of paid-in capital, use the cash budget and figures of last year’s closing capital balance. The adjustment is made in the opening balance by adding additional paid-in capital to reach the current period’s closing balance of capital.
Use the closing of retained earnings from last year and add/subtract budgeted net profit/loss from the income statement of the budgeted period. The adjustment is made as follows:
|Retained Earnings Opening balance
|Add: Budgeted net profit
|Retained Earnings Closing Balance
We have discussed the major adjustments which will be useful for a business to reach the closing figures of the items to be reported in the budgeted Balance Sheet. Creating budgeted financial statements is useful if the values are estimated using actual data rather than unrealistic financial targets. However, projected values need to be adjusted.