The Importance of Budget and Actual Accounting Principles

Executive Summary

The objective of this essay was to analyze more closely the importance of Budget vs. Actual in the accounting principles. The information used for this interview was gathered from a variety of sources including textbooks, Internet and interview with people in the accounting industry.

In the current day and age accounting is regarded as one of the most important aspect in the business environment. A successful service business has an excellent forecast and planning which are obtained through Budget vs. Actual principles. By using this principle helps them to achieve their sales target and gain a dominant market share.

To conclude, it is very important to use Budget vs. Actual in every company, as it will help them to evaluate the performance of individuals as well as overall profitability. It can also measure whether a it spends too many resources on any particular expenses e.g. labor, fuel or raw materials and whether these expenses can be reduced or adapted to the current condition. Users of information and stakeholders will also be benefited from using Budget vs. Actual principles.

Introduction

The Merriam-Webster Dictionary [1] defines Budget as

"a statement of the financial position of an administration for a definite period of time based on estimates of expenditures during the period and proposal for financing them" or "the amount of money that is available for, required for, or assigned to a particular purpose".

Whilst, the twelfth edition of Cost Accounting: A Managerial Emphasis [2] (written by Charles T. Horngren, Srikant M. Datar and George Foster) defines that a Budget is

"a quantitative expression of a proposed plan of action by management for specific period and an aid to coordinating what needs to be done to implement that plan. Which generally includes both financial and non-financial aspects of the plan such as expectations regarding income, cash flows and financial position, so financial statements...