Tony taught Business and Aeronautics courses for eight years; he holds a Master's degree in Management and is completing a PhD in Organizational Psychology
What is a Master Budget in Accounting?
When you think of a budget, you probably picture a list of numbers that show your income (from work or an allowance) and all of your expenses (such as car payments, rent, or even video game subscriptions). Like a household, a company must also have a budget. Companies cannot grow without closely following a budget that accounts for expected income and expenses and helps them plan for the future. A master budget in accounting refers to a specific type of document, based upon other specialized, individual budgets. Individual budgets within a firm can change depending on the type of business. However, they frequently fall under one of the three main categories:
- Operating budgets
- Capital expenditures budgets
- Financial budgets
Operating budgets contain a sales, selling expense, and general and administrative budget. Companies that manufacture goods also have production and manufacturing budgets that include the number of units to be made and the costs associated with production. By comparison, companies that only sell products manufactured by others use a merchandise purchases budget to track the number of units it needs to purchase over time to cover expected sales.
The sales budget includes the expected number of sales and projected income for the upcoming period in months, quarters, or years. Companies typically complete this budget first, as it allows them to estimate how much income is available to meet corporate goals.
The selling expense budget commonly follows the sales budget. It records the estimated income and predicts expenses directly related to the sale of goods. Examples of direct sales expenses include sales commissions, sales managers' salaries, and advertising expenses.
Expenses not directly related to the sale of particular items are accounted for in the general and administrative budget. Costs such as facility rentals, administrative personnel salaries, depreciation expenses, and shared utilities can be found in this budget.
Capital Expenditures Budgets
Capital expenditures budgets track any money that a business receives from selling large plant assets and buying new equipment to carry out production schedules. Typically, companies try not to keep a lot of cash in their accounts because it doesn't generate a lot, if any, revenue. Planning for large expenditures helps firms decide how they will pay for major equipment upgrades, additional facilities, or other related expenses. This budgetary section may be left out if the company does not have any income or expected expenses related to capital expenditures.
Financial budgets include the cash budget, budgeted income statement, and budgeted balance sheet.
Cash budgets track the expected income and spending of cash over an upcoming period of time to ensure that a company has enough cash on hand to meet future needs. As previously stated, companies do not like to keep too much cash on hand, especially when the money could be better spent by expanding products, services, and/or a customer base.
Budgeted income statements attempt to predict how much a company will earn from sales and how much it will pay in expenses related to those sales. The development of a budgeted income statement is one of the last steps in the master budget process because it incorporates the other budgets.
Budgeted balance sheets constitute the final part of a master budget and provide a summary of the company's expected financial status at a future date. Like the budgeted income statement, the budgeted balance sheet uses information from the other budget components.
A master budget is actually a combination of many other budgets developed by different departments across an organization. Master budgets typically fall into one of three categories: operating budgets, capital expenditures budgets, and financial budgets. Operating budgets include a general and administrative budget, sales budget, and selling budget. Financial budgets include the cash budget, budgeted income statements, and budgeted balance sheets. The capital expenditures budgets track any money that a business receives and may not be included in every budget. The results show a financial picture of what a company expects to achieve over the course of an upcoming period of time, information of great use to managers making both long-term and short-term corporate decisions.
To unlock this lesson you must be a Study.com Member.
Create your account
Master Budget in Accounting: Definition, Components & Example Quiz
Instructions: Choose an answer and click 'Next'. You will receive your score and answers at the end.
Carol was asked by her boss to develop a master budget for the company she works for, ''The Big Spoon.'' She doesn't know where to start with this project. Which budget would you suggest she start with, and why?
Register to view this lesson
Unlock Your Education
See for yourself why 30 million people use Study.com
Become a Study.com member and start learning now.Become a Member
Already a member? Log InBack