Comparison of an Income Statement to a Budget

by Vicki A. Benge

Simply put, a budget is a plan; an income statement is a report. A budget shows plans for the future. An income statement shows what happened in the past. A budget is a plan about how to allocate future revenues to expected upcoming expenditures. An income statement details how a firm allocated resources to expenditures in the past.

The Budget

A budget, a plan for applying future income to upcoming expenditures, comes in various types, such as household budgets and governmental agency budgets. In business, budgets may be constructed for the upcoming year, for a one-time project or for a single department within a company. For a large firm, a company-wide budget may include all expected revenues and expenditures for the upcoming year. Additionally, the budget may contain subsidiary departmental budgets. For example, a budget for the manufacturing division, a budget for processing and shipping, a budget for receiving and a budget for marketing, are just some examples of different departmental budgets that could be included in a company-wide plan for allocating revenues.

The Income Statement

An income statement, which investors sometimes call an earnings statement, shows the revenue a firm took in, the expenditures the firm paid out, and the net income the firm earned for a specific period. Where applicable to the company, items on an income statement include sales revenue, cost of goods sold, expenses related to sales, administration and management expenses, taxes, interest expenses and preferred stock dividends paid. Expenses listed on an income statement may be broken down into narrowly defined categories such as postage, office supplies and so forth, or listed in broader categories such as administrative expenses and utilities.

Uses of a Budget

Budgets set down goals for the future and, if adhered to closely, can restrict or curtail spending beyond set limits for specific items or a broad class of costs. If complied with, a well thought-out budget adds efficiency to a business venture. All employees of a firm, to mark progress toward reaching goals and to make adjustments when necessary, can use the internal budget of a company as a point of reference.

Uses of an Income Statement

Income statements are used to show how a company spent incoming revenues and the total net income produced with those revenues. Private consumers scrutinize earnings statements of public companies to choose firms of interest for investing. Creditors look at income statements to assess the creditworthiness of a firm. Managers analyze income statements to evaluate internal procedures and transactions.

Budgeted Income Statement

In some cases, a firm may create a budgeted income statement to project forward net income. Data for a budgeted income statement is taken from internal reports and statements the firm has compiled, plus information from prior year income statements and internal documents. A budgeted income statement, much in demand from investors and creditors, projects future earnings for a firm.


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