What is a Budgeted Income Statement? Meaning, Example, and Importance

Meaning

The budgeted income statement is useful for reporting all the earnings and expenses for a particular period, say a month, quarter, and year.

In simple words, it predicts income statements for future periods. This statement forms the focal part of every enterprise’s financial planning process.

The budgeted income statement is also popularly called the pro forma income statement. With the help of a budgeted balance sheet, the enterprise can easily determine the feasibility of finance.

The budget projections help managers make sound decisions on which project to pursue to achieve enterprise objectives.

At the end of the period of the budgeted income statement, the senior manager shall compare the budgeted and actual income statements to analyze the performance of the business.

By doing so, it can be known if the business is headed in the right direction and if any changes need to be made in the current scenario.

The various stakeholders such as lenders and proposed investors always want to see the progress of budgeted income statements to make rational lending and investment decisions.

Therefore, management shall be able to reasonably explain the assumptions they made in preparing the budgeted income statement.

Preparing the Statement

The budgeted income statement will be prepared after preparing budgets for purchases, sales, production, administration, and selling expenses.

Each department in the enterprise has to provide financial data in a timely fashion to prepare budgeted financial statements.

The budgeted income statement is the projection of the actual income statement of last year including sales, cost of goods sold, operating expenses, and other items.

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Further, it provides for anticipated adjustments in the current year.

Example of Budgeted Income Statement

In the below-budgeted income statement, we can see the columns prior period actual item, budget for the period, and current period.

All these figures will be computed at the end of the budgeted period for analysis.

If there is more than 1 product, that shall be exclusively mentioned in the budgeted income statement.

The operating expenses and other parts of the normal income statement shall be mentioned and provided for.

  Prior Period Budget Current Period
    
Sales Revenue   
    
Product/Service 1   
Product/Service 2   
Total Sales Revenue  [J] $                 –   $                 –   $                 –  
    
Cost of Sales   
    
Product/Service 1   
Product/Service 2   
Total Cost of Sales  [K] $                 –   $                 –   $                 –  
    
Gross Profit [L] = [J – K] $                 –   $                 –   $                 –  
    
Operating Expenses   
    
Sales and Marketing   
Advertising   
Direct marketing   
Other expenses (specify)   
Other expenses (specify)   
Total Sales and Marketing Expenses  [M] $                 –   $                 –   $                 –  
    
Research and Development   
Technology licenses   
Patents   
Other expenses (specify)   
Other expenses (specify)   
Total Research and Development Expenses  [N] $                 –   $                 –   $                 –  
    
General and Administrative   
Wages and salaries   
Outside services   
Supplies   
Meals and entertainment   
Rent   
Telephone   
Utilities   
Depreciation   
Insurance   
Repairs and maintenance   
Other expenses (specify)   
Other expenses (specify)   
Total General and Administrative Expenses  [O] $                 –   $                 –   $                 –  
    
Total Operating Expenses 
[P] = [M + N + O]
 $                 –   $                 –   $                 –  
    
Income from Operations 
[Q] = [L – P]
 $                 –   $                 –   $                 –  
    
Other Income  [R]   
    
Taxes   
    
Income taxes   
Payroll taxes   
Real estate taxes   
Other taxes (specify)   
Other taxes (specify)   
Total Taxes  [S] $                 –   $                 –   $                 –  
    
Net Profit  [T] = [Q + R – S] $                 –   $                 –   $                 –  

Importance of Budgeted Income statement:

The budgeted income statement helps to analyze the differences between anticipated income and expenditure items and actual items at the end of the period.

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It helps to measure the effectiveness of the financial planning process of the enterprise. The importance of the budgeted statements can be summarized in the following points.

To evaluate performance

The budgeted income statement anticipates future income and expenses. So, the managers can easily gauge if they have outperformed or underperformed as per the standards they set in the beginning.

To make necessary adjustments

Often, out of internal requirements or uncontrollable outside business dynamics, the budget needs to adjust or the business may need to increase its performance.

Further, the budget helps management understand possible outcomes and make decisions.

Helpful for stakeholders.

Apart from the management, the budgeted income statement is helpful to stakeholders such as lenders and prospective investors.

The lenders such as financial institutions regularly call the company for budgeted financial statements to keep track of the anticipated progress of the company.

The proposed investors take the help of a budgeted income statement to figure out the current valuation of the company on a forward basis.