The budgeted balance sheet is just like a balance sheet, i.e., it contains all the assets, liabilities, payables, capital depreciation, amortization, etc, exactly like a balance sheet, but there is one big difference and that is that the budgeted balance sheet, unlike the balance sheet, presents the future balance sheet, whereas balance sheet shows the present value of assets, liabilities and all the other things that are in a balance sheet.
The budgeted balance sheets are a very important tool as they help a business evaluate the future earnings of the company. It can also help in estimating the likelihood of success of a new project that the company is focusing on.
The accuracy of these, though, depends upon the accuracy of modeling used to carry out the calculations of the budgeted balance sheets. The more accurate, the better the results and more better can be the predictions.
It can also help a company make a decision on to whether carry out a future plan. The budgeted balance sheets just like the balance sheets can be prepared on a monthly, quarterly, or annual basis. It all depends upon the needs and requirements of the company,
Budgeted balance sheets are also a great tool for the budget department to help them prepare a budget.
Main parts of a budgeted balance sheet
There are three main parts of a budgeted balance sheet, which are depicted in figure 1 below:
The three main parts of a budgeted balance sheet shown in figure 1 are assets, liabilities, and equity. All of these are explained below:
Assets can be land, product, trademark, or intellectual property owned by a company. The assets can be classified into current and non-current assets.
Current assets are those assets that can be monetized quickly, ideally within a year, whereas non-current assets are classified as fixed assets. These may contain equipment and machinery.
Liabilities are what a company owes to others. These may be interest or loan payments, bonds, or utility charges.
Liabilities are also current and non-current liabilities. Current liabilities are those liabilities that are due within a year, whereas non-current liabilities are those which are due in more than a year.
Stockholder equity or equity as it is commonly referred to as is part of the budgeted balance sheets which show how many shares or equity a company holds.
The more the equity, the better the health of a company, it is because if any financial issue arises the company can sell shares to raise capital.
The equity for public companies is recorded at the current share price. So, it rises and falls as the value of shares of the company rise and falls.
How to prepare a budgeted balance sheet?
Preparing a budgeted balance sheet is very easy and simple. The same steps need to be followed as the steps are followed when preparing a balance sheet but keeping the future earnings in mind. Below is a step-by-step guide that will help in preparing a budgeted balance sheet:
Decide on the timing of the period of the budgeted balance sheet
As stated before, the budgeted balance sheets can be anywhere between a month, a quarter, or a year. It depends upon your requirements.
Consider if a person wants to create a budgeted balance sheet from March 1st to April 1st that person must mention this at the start.
As this is a budgeted balance sheet, it must also mention that it is a projection, which means it is a future balance sheet.
State the company assets
The assets of the company are one of the major parts of the budgeted balance sheets. All of the assets and their market value are mentioned.
The assets in the balance sheet are divided into current and non-current assets, separately, and then both are added together under assets.
The current assets can be money, short-term bonds, cash equivalents, etc. The non-current assets can be fixed machinery and equipment, long term bonds. These must all be what the company expects to be held in the future.
Stating liabilities of the company
The procedure is exactly the same as 3.2. But, instead of stating future assets, the company must mention what it expects its future liabilities to be. Just like the assets side, the liabilities are also divided into current and non-current liabilities.
The current liabilities are short-term loans, interest, and tax payments. For the future budgeted balance sheets, this must include any borrowing the company is planning to do to pay for its future expansion plan, or if the company is planning on reducing its liabilities, it must also mention any reduction in liabilities of the company.
Estimate the equity
At this step, the estimated equity must be shown. For example, if a company plans to sell to finance any future projects, the company’s balance sheet must show that. But, if the company does not plan on doing so, the equity should remain unchanged.
It can be pretty easy to calculate the equity for a private company as most shares would be held by a single entity, but it becomes difficult when estimating it for a public company, as share price changes every minute, but only projections are to be made, not an exact value.
Balancing the budgeted balance sheet
It is the final step in preparing a budgeted balance sheet. This is done to make sure that the balance sheet balances.
Just add the liabilities with the equity and subtract them from the assets. If the answer is zero, then you have prepared a correct budgeted balance sheet.
Budgeted balance sheets are a great tool for calculating future cost estimations, and also for preparing the budget.
But, great precaution must be taken in the preparation of budgeted balance sheets as the type of models used to predict the future value of assets, liabilities, and equity can greatly impact the accuracy of the budgeted balance sheet.