Budget preparation steps

Financial Statements

Establishments in various business sectors are keen to state their financial position during the fiscal year, and also seek to provide daily accounting reports on their general financial condition. This contributes to knowing the current financial position of the establishment, comparing it with the previous situation, and future expectations, which contributes to developing the work and increasing its efficiency. On an ongoing basis, the reports that the facility seeks to provide during or at the end of the fiscal year are called financial statements.

Financial statements are known as a group of lists that help understand the financial statements in order to reach specific results that contribute to describing the establishment’s general financial situation. Financial statements are also known as a means used to monitor the company's performance during the past financial period, which contributes to setting a set of expectations about its future financial condition. The financial statements include: the income statement, the balance sheet statement, and the owner’s equity list.

Definition of budget

The budget (in English: Balance Sheet), or what is called (the financial position statement), is known as a final financial report issued at the end of the financial year, through which the financial situation of the institution is known, and in light of that, the owner of the institution or the owners of the companies are able to know the expenses and profits. Loss is also known as a summary of the financial situation during a specific date, and this contributes to determining the general financial condition of the facility.

The budget contains everything the organization owns, and its obligations to others, whether they are cash amounts or securities. The components of the budget vary depending on the nature of the organization’s activity, but it generally contains the following accounting terms: assets, liabilities, and property rights (shareholders, partners, or owners).

The financial department or accounting department prepares the budget in the institution, but it is audited and reviewed by an external party. The person who works on reviewing and auditing the budget is called the auditor, who certifies the validity of the institution’s budget, and through it the general administration of the institution can understand its activity. And make appropriate financial and administrative decisions.

The main equation of the budget

The success of preparing the budget for an establishment depends on the application of a special budget equation, which must be taken into account to include all budget components. This equation is written based on the following main form:

Assets = liabilities (liabilities) + ownership rights of individuals or shareholders.

This equation achieving the condition of balance between the financial (digital) values ​​resulting from all its components is the main basis for the success of budget preparation.

Budget components

The balance sheet list consists of two main sections (parts):

• Assets (left side): It is all the property and assets of the establishment, and is divided into two parts:
  • Fixed assets: are existing assets; That is, those that can be dealt with directly, depend on a set of physical components, and are used for the longest possible period within their lifespan. Examples include: plots of land, vehicles, computers, and others.
  • Current assets: are assets that can be sold, bought, or reused, and may be used for a short or long period of time. Examples include: securities, bank loans, and money in the establishment’s fund.
• Liabilities (liabilities) and equity (right side):
  • Liabilities: They are all the liabilities incurred by the establishment towards the clients, customers, or merchants who deal with it. These obligations may be short-term, such as purchases on account, or medium-term, such as checks with a specified receipt date, or long-term, such as financial loans.
  • Ownership rights: These are all the rights owed by the company towards the owners, capital owners, or stockholders, all of whom are considered owners of the facility, and have their own ownership rights that appear on the balance sheet.

Steps for preparing the budget

In order to prepare the budget, the following steps must be applied:

• Using paper or a computer to draw a budget plan based on drawing a table in the shape of the letter (T) in the English language. The left side contains assets, and the right side contains liabilities and equity.
• Determine the value of assets sequentially, dividing them into current assets and fixed assets, and writing the details of the asset sections, which include all financial transactions that occurred during the financial period, and then performing calculations to find out their value together, in the total sum of assets at the end of the list on the left side.
• Determine the value of obligations in a sequential manner, dividing them into short-term, medium-term, and long-term obligations, and then performing mathematical operations to determine their financial value.
• Determine the value of property rights, which is: the net income that is added to it with the details of property rights, such as: capital and shares, which are combined with the sub-value of liabilities, and this leads to determining the value of liabilities and property rights.
• Ensure that the value of assets is equal to the value of liabilities and property rights by relying on the application of the main equation of the budget, and thus the budget is prepared successfully.

Summary

The work on preparing the budget is summarized based on the following points:

• The budget always consists of two parties: Where the right side includes what are called assets, and the left side includes the total liabilities (liabilities) and property rights.
• When preparing the budget, the two parties must always be equal in the final value. Otherwise, if the budget is not equal, it is completely rejected in accounting laws and standards.
• In the final outcome of the budget, the result of the facility’s loss or profit can be known, and accordingly, important decisions are taken after the facility’s Board of Directors meeting if it is a company and not an individual institution.
• The budget is usually prepared at the end of the fiscal year after closing all accounting transactions and the annual inventory of the company’s assets (according to its activity).