Master Budget in Accounting: Definition, Components & Example

Master Budget in Accounting: Definition, Components & Example
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  • 0:01 What Is a Master…
  • 0:50 Operating Budgets
  • 2:05 Capital Expenditures Budgets
  • 2:38 Financial Budgets
  • 3:35 Lesson Summary
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Lesson Transcript
Instructor: Anthony Aparicio

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

In this lesson, we'll outline the major components of a master budget and look at an example that shows how a company's individual budgets relate to each other and can be used to form a strategic plan for a company.

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:

  1. Operating budgets
  2. Capital expenditures budgets
  3. Financial budgets

Operating 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.

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