Accounting and Finance Foundations

Unit 12

Accounting and Finance Foundations Unit 12: Budgeting and Business Plans 916

Subtracting the total expenses from the total monthly income leaves them with a balance of $786.67. This

amount is placed into an “expendable” account (at least on paper) and is the amount that Dick and Jane are

free to spend each month on non-budgeted items.

To manage their newly created budget, Dick and Jane need to do the following:

• The first month’s budget shows each expense item and the “left over” amount in their expendable
  account.


• On each payday, the amount received is placed in a checking account. If the amount received is the
  exact amount that was used to figure their budget, no notation is made. However, if the amount is
  greater or less than the budgeted amount, the difference is added to or deducted from their expend-
  able account.
  It is very important that they account for each paycheck in this manner. For example, if Jane takes
  a day off without pay, it would result in a loss of $100.00 for the pay period. If that is the case, she
  must deduct the $100.00 from the budget’s expendable account when she receives her paycheck.
  By the same token, if Dick receives a bonus of $500.00, the $500.00 is added to the expendable
  account. In this way, their budget is compensated for the loss or gain of income.


• Once a week, Dick and Jane withdraw $100.00 from their checking account, as indicated in their
  budget. The balance of the weekly cash account could be positive or negative at the end of any
  given month, depending on whether Dick and Jane withdraw money four or five times during the
  month. This variance does not need to be compensated for because it will even out over the course
  of the year.


• As each budget expense is paid, the amount is deducted from the item’s budgeted amount. If the
  amount paid is less than the budgeted amount, a balance will remain. On the other hand, if more
  than the budgeted amount is paid, the account will go negative (will be less than zero). For expense
  items that have been budgeted using an average amount, this is normal. The account will have a
  balance when the payment is less than average, and that balance will be available when the payment
  is greater than average.


• Any payment for an item that is not listed in the budget is deducted from the expendable account
  balance. Any extra income, from any source, is added to the expendable account. The expendable
  account thus becomes a sort of savings account from which money can be withdrawn as needed.


• At the end of each month, Dick and Jane start over with a new piece of paper. The budget is again
  listed, but this time each item’s budgeted amount is added to the balance left over (if any) from the
  previous month. If a negative balance is shown, it is subtracted from the budgeted amount, and
  the new amount is listed. If it becomes necessary, money can be transferred by subtracting a dollar
  amount from one account and adding the same amount to another account that needs it.


• If, after several months, Dick and Jane realize that a budget item is repeatedly going over or under
  budget, they need to make a correction. The budgeted amount for the month should be changed
  so that it is closer to what is actually being spent. Any change will, of course, change the amount
  credited to the expendable account at the beginning of each month.


• By using their budget, Dick and Jane are confident that they will never find themselves spending
  more money than what they earn. However, they also understand that no budget plan can work
  without commitment and diligence.

SOURCE: Household Budget Management. (1996-2012). A sample budget. Retrieved March 13, 2013, from

http://www.dacomp.com/sample.html

Budgeting and Business Plans Student Guide

Chapter 27