What Is Budgeted Balance Sheet and How to Create It

A budgeted balance sheet is a financial report that projects the future balance sheet of the company, created using a budget.

It tells the company how it will perform in the future and whether it will face any financial issues or experience robust growth.

In this article, we will delve into what a budgeted balance sheet is, its format, how to create it, and provide an example for a deeper understanding.

What is a Budgeted Balance Sheet

A budgeted balance sheet is a projected view of the company’s balance sheet, indicating how it will look in the future at the end of the accounting period.

What is budgeted balance sheet

To grasp this concept, let’s establish a basic understanding of the budget and balance sheet.

Balance Sheet: The balance sheet is one of the main financial statements that companies publish to provide financial data about the organisation.

Three financial reports: Income statement, cash flow statement and balance sheet

It generally consists of three main parts: assets, liabilities, and shareholders’ equity. These elements include all accounts, both long term and short term.

The balance sheet is created at the end of the accounting cycle, informing investors and other shareholders about how the company manages its assets and liabilities to foster business growth.

One of its central rules is that assets should be equal to liabilities and shareholders’ equity, meaning Assets = Liabilities + Shareholders’ Equity.

Balance sheet rule, Assets = Liabilities + Shareholders' Equity

Budget: A budget allocates cash for various expenses, indicating how much the company will spend on these items.

Professionals create budgets after the end of the accounting period, projecting the future expenses such as raw materials, GS, and A expenses.

Master budgets consist of many small budgets developed by the company to allocate every expense, including cash budget, production budget, and capital spending budget.

Professionals use both the data from the balance sheet and master budget to create budgeted balance sheets, showing the future view of the company’s balance sheet and how the firm will perform if they adhere to their master budget.

Understand the Budgeted Balance Sheet

It’s obvious to ask the question: why should you create a budgeted balance sheet?

It gives the management team a view of how their company will perform in the future, allowing them to make changes for higher growth.

It can also serve as a warning about any potential financial issues the company may face in the future due to internal or external factors. By using this data, the company can adjust budget allocations for safety.

Many unfavourable things can happen in the future that leadership might want to keep hidden.

The management team also discovers future financial ratios using the sheet, such as the inventory ratio or assets turnover ratio.

It provides a view of how the company will manage its assets and liabilities to achieve optimal growth.

How Budgeted Balance Sheet Format Looks

The budgeted balance sheet format is akin to the regular balance sheet, also known as the statement of financial position, as it reflects the financial position of the company.

This sheet comprises three main sections—assets, liabilities, and equity. At the end of the accounting period, the balance sheet showcases the actual amounts of these items that the company possesses. In contrast, the budgeted balance sheet projects how these quantities will evolve in the future. Let’s explore this briefly:

Assets: Assets represent what the company owns and are divided into short-term and long-term assets. Long-term assets, also known as fixed assets, remain unchanged for an extended period.

For instance, land and equipment fall under long-term assets, while cash and accounts receivable are categorised as short-term assets.

Liabilities: Liabilities encompass what the company owes and are further divided into short-term and long-term categories. Short-term liabilities include accounts payable and short-term debt, while long-term liabilities comprise bank loans and long-term debt.

Shareholder’s Equity: Shareholders’ equity denotes the extent to which shareholders hold equity in the company. It is calculated by subtracting all liabilities from all assets, following a straightforward formula:

\text{Shareholders' Equity} = \text{Assets} - \text{Liabilities}

 

How to Create a Budgeted Balance Sheet

Creating a budgeted balance sheet is a less complex task compared to creating a budget, which involves numerous calculations and considerations. Here’s a simplified process:

Step 1: Since both reports share the same format and components, begin with the previous year’s balance sheet. Edit the figures as needed.

Step 2: As the master budget comprises various smaller budgets, gather all necessary data from it. Examples include the ending cash balance from the cash budget, raw materials from the direct material budget, and accounts payable from the financing budget.

Step 3: It’s time for modification of the components. Each modification follows a different method. Calculate each account (items) to adjust the balance sheet.

For example, the cash balance is taken from the budget, while accounts receivable will be calculated by estimating the percentage of sales to be collected from customers.

Budgeted Balance Sheet Example

Here is an example of a hypothetical company. Each component is calculated using specific formulas, and all estimated figures consider the previous year’s data. Let’s understand each item separately:

Budgeted Balance Sheet Example
Assets:
Cash in Hand100,000
Accounts Receivable50,000
Raw Material30,000
Finished Stocks20,000
Fixed Assets150,000
Liabilities:
Accounts Payable25,000
Loan/Debt40,000
Taxation15,000
Long Term Loan (Including changes as per management)10,000
Shareholders’ Equity:
Common Shares100,000
Retained Earnings90,000
Total Shareholders’ Equity190,000

 

Cash in Hand: This indicates how much cash the company will have at the end of the accounting period. It can be found in the cash budget as the ending cash balance.

Accounts Receivable: Representing sales on credit, estimate the percentage of sales expected to be collected next year. Use the following formula to calculate:

\text{Opening Balance} + \text{New Credit Sales} - \text{Cash Received from Old Sales}

 

Raw Material: Raw materials are used in making the company’s core products for sale in the market. Data can be obtained from the material, production, and cash budgets. The formula is:

\text{Opening Raw Material Stock} + \text{New Purchase (Cash and Credit)} - \text{New Consumption}

 

Finished Stocks: These stocks are kept annually to maintain inventory and avoid stockouts. Data is available in production, sales, and cash budgets. The formula is:

\text{Opening Finish Stock} + \text{New Production} - \text{New Sales (both Cash and Credit)}

 

Fixed Assets: Most of the company’s fixed assets remain unchanged in the long term, including property, plant, and equipment. If the company changes any of these, it will be modified in the budgeted balance sheet. Depreciation is also accounted for, and data are available in the projected plan report and plant utilisation budget. The formula is:

\text{Opening Balance} + \text{New Purchase} - \text{New Sales}

 

Accounts Payable: This is estimated by how much the company will purchase from suppliers on credit. Data is determined from the purchase budget and the schedule of cash payments. Use the formula:

\text{Opening Balance} + \text{New Purchase} - \text{Cash Paid}

 

Loan/Debt: The company takes short-term loans from the market to finance the business. Data regarding loans is available in the cash budget. The formula is:

\text{Loan Liabilities Opening Balance} + \text{New Taken Loan} - \text{Repayment of the Loan}

 

Taxation: Income taxes are generally paid during the first quarter of the next year. To adjust this figure, utilise the tax return, new income tax laws, and cash budgets.

Long Term Loan: These loans typically do not affect the balance sheet since they cannot be paid every year. If any changes occur, the management team includes them in the budgeted balance sheet.

Shareholders’ Equity: Shareholders’ equity consists of two elements: common shares and retained earnings. If the company intends to issue any stock, it is calculated in the master budget and modified in the budgeted balance sheet. Retained earnings are calculated by the formula:

\text{Beginning Retained Earnings} + \text{Net Income} - \text{Dividends Paid and Declared}

 

These data are presented in the cash budget and budgeted income statement.

Conclusion

In summary, the budgeted balance sheet serves as a forecast of the company’s financial position. It enables predictions regarding whether the company will achieve its targets and how it plans to manage its assets and liabilities.

However, I suggest you read our other amazing articles to increase your financial knowledge. Here are some suggestions:

We hope you find this post valuable. If you have any suggestions, feel free to share them in the comments.

Leave a Comment