What Is a Budget in Accounting?
Definition, types of budgets, and how budgets are compared with actual results.
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| Common types | Sales, production, cash and master budgets |
|---|---|
| Used for | Planning, control and performance review |
| Topic | Management accounting · Planning |
Budget in plain English
A budget is a plan expressed in numbers. It sets targets (for example monthly sales), limits (for example spending), and gives managers a yardstick to judge whether the business is on track.
Worked example
| Budget | Actual | Variance | |
|---|---|---|---|
| Sales | 10,000 | 9,000 | 1,000 adverse |
| Expenses | 7,500 | 7,800 | 300 adverse |
| Profit | 2,500 | 1,200 | 1,300 adverse |
Comparing the two shows that lower sales and higher expenses both reduced profit. This comparison is variance analysis.
- Setting a budget once and never reviewing it.
- Using unrealistic targets, which people then ignore.
Frequently asked questions
What are the main types of budgets?
Sales, production, purchases, cash and capital budgets, which combine into a master budget.
What is the difference between a budget and a forecast?
A budget is a target plan. A forecast is a prediction of what is likely to happen and is updated more often.
Why do businesses prepare budgets?
To plan resources, control costs, coordinate departments and measure performance.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.