A balance sheet is a financial statement that is prepared annually at the end of each accounting period reporting the levels of assets, liabilities, and equity that the company owns at that time. It is also called a statement of financial position as it is reporting the company’s position in the financial term.
Similarly, at the end of each accounting period a master budget is made by the budgeting department.
It constitutes several small budgets such as the cash budget, the sales budget, production budget, expense budget, etc, and is then compiled into the final plan i.e. master budget.
After the preparation of the master budget, pro forma or forecasted financial statements are prepared.
These financial statements are a guideline to the company that is to be followed throughout the year in order to achieve maximum profitability.
Budgeted Balance Sheet:
Hence, a budgeted balance sheet is a financial statement that reports the expected value of assets, liabilities, and equity that a company will be held in the future.
This expected value is arrived at by making inflation adjustments or maybe increasing or decreasing capacity.
The budgeted financial statement checks whether the budgeted plan will be profitable for the company or not and whether it should go with the current budget plan or come up with another.
In order to prepare a budgeted balance sheet, each of its line items must be separately looked at.
Fixed asset or property, plant and equipment are huge investments which why they are depreciated over their lifetime.
A proper capital budgeting and investment analysis is done for the decision making regarding purchase of a fixed asset.
Hence, if there are any plans to purchase property, plant or equipment in the future, it shall be included in the current period’s fixed asset and depreciated as per the policies of company to derive the Net Book Value (NBV).
The closing inventory will be the value of safety stock that the company maintains every year to avoid stock-out.
These depend on the projected sale of the year and the turnover receivable days. In order to estimate the closing accounts receivable value for a future accounting period, the company’s credit sales shall be estimated and the turnover period ratio will indicate how many months or days it takes for the customers to pay back the amount.
For example, it takes 3 months for a company’s customer to pay back. Hence, the estimated sales for the budgeted year made in November will be accounted for as accounts receivable for the year ended 31st December.
The following format shall be followed to estimate the accounts receivable:
|(+) Opening accounts receivable balance||xx|
|(+) Budgeted credit sales||xx|
|(-) Cash received against receivables||(x)|
|Closing accounts receivable balance||xxx|
Cash will be reported as per the cash budget prepared before.
Accounts payable are similar to accounts receivable. The estimated accounts payable closing balance would depend on the payable turnover days and the number of credit purchases that are expected to be made as per the purchase budget. It can be calculated through the following format:
|(+) Opening accounts payable balance||xx|
|(+) Budgeted credit purchases||xx|
|(-) Cash paid against payables||(x)|
|Closing accounts payable balance||xxx|
The equity section of the balance sheet comprises of retained earnings and the common stocks/shares. Stocks are issued at their market price to finance the business.
Hence, if any such financial plans are included in the master budget then the common stock shall be increased accordingly at the estimated market price of the shares, increasing the equity section of the financial statement as well as the asset section.
The retained earning can be calculated through the following formula:
Opening retained earning + Net Profit – Drawings
The opening retained earnings balance can be extracted from the previous year’s financial statement whereas the Net profit refers to the budgeted net profit that the company expects to earn in the following year.