Budgeted balance sheet definition
/What is a Balance Sheet?
A balance sheet lays out the ending balances in a company's asset, liability, and equity accounts as of the date stated on the report. As such, it provides a picture of what a business owns and owes, as well as how much as been invested in it. The balance sheet is one of the key elements in the financial statements, of which the other documents are the income statement and the statement of cash flows.
What is a Budgeted Balance Sheet?
The budgeted balance sheet contains all of the line items found in a normal balance sheet, except that it is a projection of what the balance sheet will look like during future budget periods. It is compiled from a number of supporting calculations, the accuracy of which may vary based on the realism of the inputs to the budget model. The budgeted balance sheet is extremely useful for testing whether the projected financial position of a company appears to be reasonable. It also reveals scenarios that are not financially supportable (such as requiring large amounts of debt), which management can remedy by altering the underlying model.
A budgeted balance sheet should be constructed for each period spanned by the budget model, rather than just for the ending period, so that the budget analyst can determine whether the cash flows estimated to be generated will be sufficient to provide adequate funding for the company throughout the budget period.
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Example of a Budgeted Balance Sheet
A sample budgeted balance sheet appears in the following exhibit. Its “source” column describes where the information for each line item is supposed to come from.
When to Prepare a Budgeted Balance Sheet
The preparation of a budgeted balance sheet is especially important during the annual budgeting process, when management needs to ensure that assets, liabilities, and equity will remain in balance and that sufficient resources will be available to support operations and growth initiatives. Preparing a budgeted balance sheet also helps identify potential financial risks, such as liquidity issues or excessive leverage, allowing corrective actions to be planned in advance. Additionally, it is useful when seeking external financing, as lenders and investors often require evidence of a company’s anticipated financial strength. Overall, the budgeted balance sheet serves as a key tool for strategic planning and financial decision-making.
FAQs
How is retained earnings projected in a budgeted balance sheet?
Retained earnings are projected by starting with the current retained earnings balance and adding budgeted net income for the period. Expected dividends or owner distributions are then subtracted to arrive at the ending balance. This calculation links the budgeted income statement directly to the budgeted balance sheet.