Budgeted Income Statements
What is a Budgeted Income Statement?
A Budgeted Income Statement is alike a regular income statement, the only difference being this is an informal report (used internally within the business) and as such, does not have to abide by AASB Accounting Standards.
Unlike a formal Statement of Comprehensive Income, the budgeted income statement only has to list the income and expenses of a future period, with the Management Accountant having freedom on the categorisation of income and expenses.
Worked Example: Simple Budgeted Income Statement
Below, we will go through steps to produce a simple budgeted income statement for the business, Tents Galore Pty Ltd.
Prepare a Budgeted Income Statement for Tents Galore Pty Ltd for the Month Ending 31st August 2020. For the month of August, Tents Galore Pty Ltd has the following expected transactions:
- Sales for the month of August are expected to be $60,000.
- Inventory purchases for the month are expected to be $40,000. Cost of goods sold for the month are estimated to be $30,000.
- Interest income is expected to be $5,000 for the month of August.
General and Admin Expenses of $10,000, Wages Expenses of $8,000 and Marketing Expenses of $3,000 are expected to be incurred in August.
- The business is expecting to purchase new plant and equipment costing $100,000. This is depreciated using the straight-line method at 12% per year.
- Income tax is taxed at 30% of operating income.
Step 1: List Income and Cost of Sales to Determine Gross Profit
The first step in producing a budgeted income statement is to list the income, costs of sales and other income.
First, list the primary income source, in this example it's sales of Tents at $60,000. Income sources can also be Fees Income. Secondly, list the relative cost of sales (if applicable), in this case it is $30,000.
Afterwards, calculate the Gross Profit, which is the Income less the Cost of Sales ($60,000 - $30,000 = $30,000).
Lastly add any other additional income to the Gross Profit, in this case it's $5,000 from Interest Income.
The only trick in the question is under the second bullet point, where it lists both the purchases of Inventory ($40,000) and the Cost of Sales ($30,000). It is important to recognise that the Income Statement measures only Income and Expenses, so we can ignore the purchase of inventory which is related to the Business's Inventory Asset Account.
Step 2: List Other Expenses and Taxes to Calculate Operating and Net Income
The second step is to list our other expenses and taxes. Unlike the formal Statement of Comprehensive Income, the budgeted Income Statement is an informal report and does not require any specific standards to abide by.
In this example, we list all remaining expenses expected for the Month of August, obtaining a total of $22,000. We deduct this number from the $35,000 obtained in Step 1, achieving an Operating Income of $13,000.
Afterwards, we apply a tax rate of 30% to determine an income tax expense of $3,900 ($13,000 * 30% = $3,900).
This results in us achieving an expected Net Profit of $9,100 for the Month of August 2020.
Step 3: Overview of Constructing the Budgeted Income Statement
This step provides an overview of the entire Budgeted Income Statement put together. We can see from the sample question above that a budgeted Income Statement is a Simple Income Statement for a future period of time.