Managerial  Accounting  

 

 

 

Project  

On  

Budgets  an  effective  tool  for  achieving  goals: Union  Budget  of  India  

 

Submitted  To:  

Dr.  K.  B.  Singh    Managerial  Accounting  

 

Submitted  By:  

HARLEEN  PAUL  (232006)  VIKASH  KUMAR  (232013)  

PGDM  –  WMG  23,  First  Year  (Term  Two)  

 

EXECUTIVE SUMMARY

The project has been undertaken on the topic “A STUDY ON BUDGETARY

CONTROL” and how as a CEO, we can ensure that the organizational goals- short term or

long term, are achieved. As a case study, we have studied the UNION BUDGET of INDIA.

This case study helped us to evaluate the actual performance of an organization with its

budgeted performance.

OBJECTIVES OF THE STUDY:

To understand

1) Budgeting as a tool of management planning and control

2) Application of budget

3) Budgeting process

4) Types of budget

5) Budgetary control system as an effective tool

6) To study the union budget and the existing budgetary controls method & practices.

METHODOLOGY:

PRIMARY SOURCE:

Government Web sites:

• Union Bugdet of India website (indiabudget.nic.in)

• PRS Legislative Research (www.prsindia.org/parliamenttrack/primers/how-to-read-

the-union-budget-1023

• Controller General of Account, India (www.cga.nic.in)

• Reserve Bank of India (www.rbi.org.in/scripts/Publications.aspx)

• Comptroller and Auditor General of India (CAG)

• Dept. of Commerce (commerce.nic.in)

INTRODUCTION

The origins of the modern Budget can be traced to the Norman period, where two departments

dealt with finance—the Treasury and the Exchequer. The Treasury received and paid out

money on behalf of the monarch. The Exchequer, had a 'lower office' which received money,

and an 'upper office', concerned with regulating the Kings’ accounts.

References to budget can also be found in Kautilya’s Arthashastra. It states that the “Chancellor

should first estimate revenue from each place and sphere of activity under different heads of

accounts and then arrive at a grand total. The actual revenue is to be estimated by adding

receipts into the treasury for current year and delayed payments received, which were due in

earlier year/s.”

From this deduct the expenditure on king, standard rations, other exemptions granted by King

and authorized postponement of payments into treasury. The outstanding revenues were

estimated from work under construction for which revenue will accrue on completion, unpaid

fines, unrecoverable dues, uncollectible sums, advances to be repaid by officers etc.

The term ‘budget’ has been derived from the old French word ‘bougette’,

which means a leather bag or wallet. The first use of the term 'budget'

may date back to 1733 financial statement by Walpole as Prime Minister

and Chancellor of the Exchequer.

Budgeting acts as a tool for both planning and control and is a formal process of financial

planning using estimated financial and accounting data. Budgetary control is an important

aspect for industry development since budgets provide a yard stick against which the actual

performance is measured. It always benefits the top management in taking the appropriate

decisions towards well set plans, goals and policies for the company.

Budgetary control is applied to a system of management & accounting control by

which, all operations & outputs are forecasted as much as possible. Once the actual results

are known, they are compared with budget estimates.

The budgetary system integrates key managerial functions as it links top

management’s planning function with the control function performed at all the levels in the

managerial hierarchy. A more accurate budget can be developed for those activities, where

direct relationship exists between inputs & outputs.

By considering the advantage of the budgetary control “The Government of India”

maintains yearly budget with the help of reports from various ministries. The reports contain

items like, expenditure on various schemes, Loan receipts and expenditure, manpower

demand, consumption of electricity, labour wages etc. These reports are used by the

Budgetary Control manager to prepare a monthly profitability statement for a particular month

& then submit it to the state finance head and finally to the Finance ministry at the Centre.

The Finance Minister presents an annual statement to Parliament of how much money the

central government expects to raise in the next financial year and how it plans to spend that

money. The documents also contain information on how much money was budgeted for

various schemes or ministries in the past year, and an estimate of how much it is likely to

spend by the end of the current financial year.

                                                                                                                                                                       

BUDGET and BUDGETING:

A budget is a comprehensive, formal plan that estimates the probable expenses and the

revenues for an organization over a specific period of time. Budgeting describes the overall

process of preparing and using a budget. Since budgets are such valuable tools for planning

and control of finances, budgeting affects nearly every type of organization—from governments

and large corporations to small businesses—as well as families and individuals. A small

business generally engages in budgeting to determine the most efficient and effective strategies

for making money and expanding its asset base. Budgeting can help a company use its limited

financial and human resources in a manner which best exploit existing business opportunities.

Intelligent budgeting incorporates good business judgment in the review and analysis of past

trends and data pertinent to the business. This information assists a company in decisions

relating to the type of business organization needed, the amount of money to be invested, the

type and number of employees to hire, and the marketing strategies required. In budgeting, a

company usually devises both long-term and short-term plans to help implement its strategies

and to conduct ongoing evaluations of its performance. Although budgeting can be time-

consuming and costly for small businesses, it can also provide a variety of benefits, including an

increased awareness of costs, a coordination of efforts toward company goals, improved

communication, and a framework for performance evaluation.

GENERAL OBJECTIVES OF BUDGETARY CONTROL:

1) Planning: The idea behind any profitable commercial enterprise lies in employing resources to

exploit various business opportunities. If the profits are consistent, a company may

purchase more assets and, therefore, expand its base of wealth. To do this effectively, a

company undertakes the budgeting process to

• assess the business opportunities available to it and the keys to successfully exploit these opportunities

• device the strategies which the historical data support as most likely to succeed

• plan the goals and objectives the company must establish

• plan long-term strategies which define its overall effort in building market share, increasing revenues, and decreasing costs

• plan short-term strategies to increase profits, control costs, and invest for the future

• plan control mechanisms incorporating performance evaluations and good business judgment

Although opportunities initially find their impetus in the business judgment of company

leaders, a company expresses its assessment of them and formulates its strategies in

quantifiable terms, such as: the volume of units which the company expects it can sell, the

percentage of market share the volume of units represents, the revenue it will receive from

these sales, and the amount of profit it will earn. Likewise, a company outlines its long-term

goals and specifies its short-range plans in quantifiable terms which detail how it expects to

accomplish its goals: the amount the company will spend in selling the units; the costs of

producing the units; the costs of administering the company's operations; the company will

invest in expanding and upgrading facilities and equipment; and the financial position at

specific points in the future.

Thus the budgeting system integrates key managerial functions as it links top management’s

planning function with the function performed at all the levels in the managerial hierarchy.

2) Co-Ordination: The common objectives of the firm may be successfully achieved by the way of

budgetary control because it stimulates the co-operation of all concerned. The Budget officer

prepares the Periodical Budget Reports for circulation to the individuals concerned, co-

ordinating with them in formulation of budgets for subsequent periods. Thus, the process of

budgeting also needs to coordinate all individual budgets (like, sales, production, purchasing

and personnel budgets) into an integrated plan.

3) Communication: It is necessary in an efficient organization that all people be informed about the

objectives, polices, programmers and performance. This is made possible through their

participation in the budgeting process. Budgets inform each manager of what others have

agreed to do. They also inform managers of the resources available objects and targets and

also guide the managers in Responsibility Centers to overcome any practical difficulties in its

working.

ESSENTIALS OF BUDGET:

• It is prepared in advance based on a future plan of action.

• Objectives to be attained should be defined precisely with areas of control clearly

demarcated.

• The period covered by a budget (known as the Budget period) should be decided.

• Choice between Fixed & Flexible budgets: A fixed budget is based on a fixed volume

of activity. It is ineffective & meaningless because of actual capacity utilization may

vary from month to month or quarter to quarter.

A flexible budget is prepared for changing levels of activity. The flexible budget

considers the fixed and the variable costs separately.

• Items of revenue and expenditure should be expressed in monetary and for physical

units, so that there is a clear understanding of the plan and its scope to all those who

must cooperate to make its implementation a success.

• For proper budgeting, identification and estimation of Key (or Budget or Limiting or

Principle) factor is very important. This represents a resource whose availability is

less than its requirement and thus, puts a limit on the firm’s objective of maximum

profitability.

• Formulation of a budget usually requires a whole time services of a senior executive

along with assistance from a Budget Committee (consisting of Heads of all

departments), along with the Managing Director as the Chairman. The Controller is

responsible for the co-ordination and development of budget programmes and

preparing Budget manual. Members of the Budget committee are framed for true

delegation of authority and responsibilities. The work should be divided under

different heads i.e. Sales, production, and finance etc. The duty of budget committee

is to submit, discuss and finally approve of the budgeted figures.

• Budget manual is a schedule, document which has details of the budgeting

procedures. A copy of this document needs to be handed over to each departmental

head for guidance.

ADVANTAGES OF BUDGETING: • The budgets provide a discipline that brings planning to the fore front as a key

managerial responsibility

• The use of budgeting in an organization develops an attitude of “Cost Consciousness”,

stimulates the effective use of resources, and creates an environment of profit-

mindedness throughout the organization, which effectively means meeting

organizational goals.

• Budgeting compels and motivates management to make an early and timely study of its

problem.

• Budgeting provides a valuable means of controlling income and expenditure of a

business as it is a “plan for spreading”.

• Budgeting provides a means to analyze which managerial polices and goals need to re-

evaluated, tested and established as a guideline for the entire organization.

• Budgeting helps in directing capital and others resources into the most profitable

channels.

• Budgeting encourage productive competition.

LIMITATIONS OF BUDGETARY CONTROL: • Based  on  estimates:  The  strength  or  weakness  of  the      budgetary  programmer  depends  to  a  

degree  on  the  accuracy  with  which  the  basic  estimates  are  made.  The  estimate  must  be  based  on  all  available  facts  and  good  judgments.  

• Need  for  continuous  adaptation:    A  budgetary  programme  cannot  be  installed  and  perfected  in  a  short  time.  Budget  techniques  must  be  continuously  adapted  not  only  for  each  particular  concern  but  for  changing  conditions  within  the  concern.  As  a  disadvantage,  Budgeting  takes  away  management  flexibility.  

• No  automatic  execution  of  the  budget:  Once  the  budget  is  complete,  it  will  be  effective  only  if  all  responsible  executives  get  behind  it  and  exert  continuous  and  aggressive  efforts  towards  its  achievement.  

• It  is  difficult,  if  not  impossible,  to  estimate  revenues  and  expenses  in  a  business  enterprise  realistically.  

• Budgeting  is  too  costly,  aside  from  the  management  of  time.  

 

 

UNION BUDGET OF INDIA:

The Union Budget of India, referred to as the annual Financial Statement in Article 112 of

the Constitution of India, is the annual budget of the Republic of India, presented each year on

the last working day of February by the Finance Minister of India in Parliament.

 

The budget has to be passed by the House before it can come into

effect on April 1, the start of India's financial year.

Before going into the “Indian Budget Process” let us have understanding of

“Structure of Account and Flow of Fund”.

The financial management of any organization must have a prudent

financial system backed by sound and effective accounting procedures

and internal controls. A well-designed and well-managed accounting

system helps ensure proper control over funds.    

Accounting policies and procedures are designed to compile accounts fulfilling legal/procedural

requirements that govern financial control. Accounts are an integral part of financial

management of activities. On the basis of accounts, the Government determines the shape of

its monetary and fiscal policies.

STRUCTURE OF ACCOUNTS AND FLOW OF FUNDS

The accounts of Government are kept in three parts: -

1 Consolidated Funds of India 2 Contingency Funds of India 3 Public Account

CONSOLIDATED FUND OF INDIA

All revenues received by the Government by way of taxes like Income Tax, Central Excise,

Customs, land revenue (tax revenues) and other receipts flowing to the Government in

connection with the conduct of Government business like receipts from Railways, Posts,

Transport etc. i.e. Non-Tax Revenues are credited into the Consolidated Fund constituted under

Article 266 (1) of the Constitution of India. Similarly, all loans raised by the Government by issue

of Public notifications, treasury bills (internal debt) and loans obtained from foreign governments

and international institutions (external debt) are and all moneys received by Government in

repayment of loans and interest thereon are also credited into this fund. All expenditure of the

government is incurred from this fund and no amount can be withdrawn from the Fund without

authorization from the Parliament.

Consolidated Fund of India is divided into three main divisions, namely: -

(a) A Revenue Section with the two sub-divisions to account for

(i) Revenue Receipts (Tax and Non-Tax) and

(ii) Revenue Expenditure.

(b) A Capital Section, which is divided into two subdivisions dealing with-

(i) Capital Receipts.

(ii) Capital Expenditure.

(c) Public Debt and Loans and Advances etc.

CONTINGENCY FUND OF INDIA

The Contingency Fund of India records the transactions connected with Contingency Fund set

by the Government of India under Article 267 of the Constitution of India. The corpus of this fund

is Rs.50 crores. Advances from the fund are made for the purposes of meeting unforeseen

expenditure or provide immediate relief to victims of natural calamities, which are resumed to

the Fund to the full extent as soon as Parliament authorizes additional expenditure. This fund is

held on behalf of President by the Secretary to the Government of India, Ministry of Finance,

and Department of Economic Affairs.

PUBLIC ACCOUNT

In the Public Account constituted under Article 266 (2) of the Constitution, the transactions

relate to debt, other than those included in the Consolidated Fund of India. The transactions

under Debt, Deposits and Advances in this part are those in respect of which Government

incurs a liability to repay the money received or has a claim to recover the amounts paid. Each

state may have its own Public account. The receipts under Public Account do not constitute

normal receipts of Government. Parliamentary authorization for payments from the Public

Account is therefore not required.

Public Account is divided into six sub-divisions, namely:—

(i) Small Savings, Provident Funds etc.

(ii) Reserve Funds.

(iii) Deposits and Advances.

(iv) Suspense and Miscellaneous.

(v) Remittances.

(vi) Cash Balance.

Government Budget:

Under the Constitution, Budget has to distinguish expenditure on revenue account from other

expenditure. Govt. Budget thus comprises of -

• Revenue Budget • Capital Budget Revenue Budget

• Revenue Budget consists of the revenue receipts of Government (tax revenues and other revenues) and the expenditure met from these revenues. Tax revenues comprise proceeds of taxes and other duties levied by the Union. The estimates of revenue receipts shown in the Annual Financial Statement take into account the effect of various taxation proposals made in the Finance Bill. Other receipts of Government mainly consist of interest and dividend on investments made by Government, fees, and other receipts for services rendered by Government.

• Revenue expenditure is for the normal running of Government departments and various services, interest payments on debt, subsidies, etc. Broadly, the expenditure which does not result in creation of assets for Government of India is treated as revenue expenditure. All grants given to State Governments/Union Territories and other parties

are also treated as revenue expenditure even though some of the grants may be used for creation of assets.

Capital Budget

• Capital Budget consists capital receipts and capital payments. • The capital receipts are loans raised by Government from public, called market loans,

borrowings by Government from Reserve Bank and other parties through sale of Treasury Bills, loans received from foreign Governments and bodies, disinvestment receipts and recoveries of loans from State and Union Territory Governments and other parties.

• Capital payments consist of capital expenditure on acquisition of assets like land, buildings, machinery, equipment, as also investments in shares, etc., and loans and advances granted by Central Government to State and Union Territory Governments, Government companies, Corporations and other parties.

Types of Budgeting:

• Zero Based Budget – It is a method of Budgeting in which all budgetary allocations are set to nil at the beginning of financial year.

• Outcome Budget – This type of Budgeting tries to ensure that budget outlays translate into concrete outcome. Physical and quantifiable targets are monitored through this budgetary exercise.

• Gender Budgeting - Gender Budgeting came into force in 2004 – 05. To contribute towards the women empowerment and removal of inequality based on gender.

Role of budgeting has been accepted through this step:

• Appropriation Accounts • The Controller General of Accounts prepares the annual accounts of the Government,

comprising the Union Government Finance Accounts and the Appropriation Accounts. • The Comptroller and Auditor General of India present these documents before the

Parliament after their statutory audit. • Preparation and submission of Appropriation Accounts to the parliament completes the

cycle of budgetary process. • Through Appropriation Accounts parliament is informed about the expenditure incurred

against the appropriations made by the parliament in the previous financial year. All the expenditures are duly audited and excesses or savings in the expenditure are explained.

• Budget speech – By Finance Minister  

Budgetary control:

• A budget is a blue print of a plan expressed in quantitative terms. Budgeting is a technique for formulating budgets. Budgetary Control, on the other hand, refers to the principles, procedures and practices of achieving given objectives through budgets.

• Maximization of Output / Profit: The budgetary control aims at the maximization of output. To achieve this aim, a proper planning and co-ordination of different functions is

undertaken. There is proper control over various capital and revenue expenditures. The resources are put to the best possible use.

• Co-ordination: The working of the different departments and sectors is properly co-ordinated. The budgets of different departments have a bearing on one another. The co-ordination of various executives and subordinates is necessary for achieving budgeted targets.

• Specific Aims: The plans, policies and goals are decided by the top management. All efforts are put together to reach the common goal of the organization. Every department is given a target to be achieved (RFD). The efforts are directed towards achieving some specific aims. If there is no definite aim then the efforts will be wasted in pursuing different aims.

• Tool for Measuring Performance: By providing targets to various departments, budgetary control provides a tool for measuring managerial performance. The budgeted targets are compared to actual results and deviations are determined. The performance of each department is reported to the top management. This system enables the introduction of management by exception.

• Economy: The planning of expenditure will be systematic and there will be economy in spending. The finances will be put to optimum use. The benefits derived for the concern will ultimately extend to industry and then to national economy. The national resources will be used economically and wastage will be eliminated.

• Determining Weakness: The deviations in budgeted and actual performance will enable the determination of weak spots. Efforts are concentrated on those aspects where performance is less than the stipulated.

• Corrective Action: The management will be able to take corrective measures whenever there is a discrepancy in performance. The deviations will be regularly reported so that necessary action is taken at the earliest. In the absence of a budgetary control system the deviation can determined only at the end of the financial period.

• Re- allocation of Budget in time is an important aspect. • Consciousness: It creates budget consciousness among the employees. By fixing

targets for the employees, they are made conscious of their responsibility. Everybody knows what he is expected to do and he continues with his work uninterrupted.

• Reduces Costs: In the present world on economy measures budgetary control has a significant role to play. Every government tries to reduce the cost of development and growth. This is possible by effective budgetary control.

 

Who controls Budget in the Govt.?

• Parliament • Standing Committee of Parliament • Planning Commission of India • Administrative Head of the Ministry/Deptt. • Financial Advisors • Media • Public

 

Indian Budget process:

The Finance Minister prepares the budget with the assistance of number of advisors and

bureaucrats. Various accounting and finance related organizations, industry captains and

economists send in their opinions and suggestions to the Finance Minister prior to the

preparation.

Normally, the budget-making process starts in the third quarter of the financial year. The budget

has four stages viz.,

(1) estimates of expenditures and revenues,

(2) first estimate of deficit, (3) narrowing of

deficit and (4) presentation and approval of

budget. We will use the date of current year

Budget (2014-15) of the Union of India

presented in Parliament by Finance Minister

Sri Arun Jaitly. .

Stage 1: Estimates of expenditures and revenues

Part A: Estimates of expenditure

The process begins with various ministries providing initial estimates of plan and Non-plan

expenditures. The ministries discuss the plan expenditures with the Planning Commission. The

Planning commission allocates resources for continuing plan programmes and decides on the

new programmes that can be undertaken on the basis of a tentative estimate or resources

available, that is provided to it by the finance ministry. The financial advisors of the ministries

prepare the Non-plan expenditures. The expenditure secretary consolidates them and after

intensive discussion with financial advisors, budget estimates are set for the ensuing fiscal year.

The majority of the Non-plan expenditure is accounted for by interest payments, subsidies

(mainly on food and fertilisers) and wage payments to employees.

 

 

 

 

 

 

 

Part B: Estimates of revenue:

Apart from estimating the expenditure, an assessment of expected revenues likely to flow into

the government treasury has to done as a concurrent exercise. Revenue receipts are of two

types - capital and current receipts.

Capital receipts include repayment of loans given by the government, receipts from divestment

of public-sector equity and borrowings—both domestic and

external.

Current receipts include mainly, tax revenues, receipts by way of dividends from public-sector

units and interest payments on loans given out by the central government.

The amounts to be received by way of tax revenues is estimated on the basis of existing rates

of taxation and taking into consideration the likely growth and inflation rate over the ensuing

fiscal year.

On the capital receipts side, targeted amounts to be realised through divestment of public sector

equity and amounts to be realised by way of repayments of loans is made. All the estimates are

provided to the revenue secretary.

STAGE 2: First estimates of deficit

After the estimates of revenue and expenditure are made, they are matched together. This

provides the first estimate of expected shortfall in revenue to meet projected expenditure. The

government then, in consultation with the chief economic advisor, decides on the optimum level

of borrowings to meet this deficit. The figure of external borrowings is known as much of the

external borrowing by the government consists of bilateral and multilateral assistance which is

known by the time budget exercises are undertaken. The level of domestic borrowing depends

partly on the desired level of fiscal deficit that the government targets for itself. A part of the

revenue gap is left unfilled to be met through the issue of ad hoc treasury bills.

STAGE 3: Narrowing of the deficit

After the targets for the fiscal deficits and the overall budget deficit is decided, any remaining

shortfall is filled through a revision in tax rates if feasible , keeping in mind the fiscal incentive

structure the government wishes to put in place to stimulate the growth in different sectors.

Following the initial plans, if any changes need to be made adjustments are made to the

expenditure; usually the plan expenditure has to be modified. The non plan expenditure

comprises of interest payments, subsidies and administrative expenditure. Due to the political

sensitivities involved in reducing subsidies, non-plan expenditure of the government is inflexible

about changing it and it is the plan expenditures which get the axe after pre-emption have

already been made for non-plan expenditure.

STAGE 4: The Budget

The presentation of the Budget for the ensuing fiscal year (beginning April 1) is usually done on

the last working day of February. The Indian constitution has made the Parliament supreme in

financial matters. The Union government, under Article 112 of the constitution, is required to lay

an annual financial statement of estimated receipts and expenditure before both Houses of

Parliament.

It can levy taxes or disburse funds only on approval in both houses of Parliament. However, the

proposal for taxation or expenditure has to be initiated within the Council of Ministers--

specifically by the Minister of Finance. The Finance Minister presents before the Parliament, a

financial statement detailing the estimated receipts and expenditures of the central government

for the forthcoming fiscal year and a review of the current fiscal year.

Under Article 114 of the Constitution, the government can withdraw money from the

Consolidated Fund of India only on approval from Parliament and so it has to get the

Appropriation Bills approved by Parliament. This authorises the executive to spend money.

Article 265 of the Constitution prohibits the government from collecting any taxes without the

authority of law. Therefore, the government comes up with the Finance Bill. The Bill may levy

new taxes, modify the existing tax structure or continue the existing tax structure beyond the

period approved by Parliament earlier.

The bills are forwarded to the Rajya Sabha for comment. The Lok Sabha, however, is not

obligated to accept the comments and the Rajya Sabha cannot delay passage of these bills.

The bills become law when signed by the President. The Lok Sabha cannot increase the

request for funds submitted by the executive, nor can it authorize new expenditures.

The proposals in the budget come into force on April 1. Between the presentation and effective

date there is a gap of 1 month during which the Lok Sabha can review and modify the

government's budget proposals. This does not happen most of the time and the Parliamentary

scrutiny of proposals and the passage of the budget gets completed in May, well after the

commencement of the new fiscal year. Since the proposed budget has to be effective from April

1, the government usually seeks an interim approval to meet emergent expenditures that have

to be incurred pending the approval of the budget.

This is called the vote-on-account and the sanctions given by the passage of the vote-on-

account get automatically overridden once the Budget is approved by Parliament.

CONCLUSION:

From the study we have concluded that process of Budget and Budgetary Control is the best practice for

achieving the aims and objectives set by government. By this process the government determines that how

the available monetary recourses can be effectively utilized in a particular period of time.

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