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-readthe-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 financethe 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 Kautilyas 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
managements 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 organizationfrom governments
and large corporations to small businessesas 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 timeconsuming 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 managements
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, coordinating 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 firms 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 profitmindedness

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 reevaluated, 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 coordinated. The budgets of different departments have a bearing on one another. The coordination 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

borrowingsboth

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-onaccount 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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