Budget Making Principles:
Budget-making i.e. budgeting is a technical and complicated activity. It has to be undertaken in a systematic and scientific way. In budget-making, the budget-maker has to follow several standardized principles.
The following principles stand accepted, in almost all countries, as the principles of budget-making.
(1) A Budget, as far as possible, must be a balanced Budget- The first important principle of budget-making is that a budget must be a balanced one. The estimated expenditure should not exceed the estimated income. When the expenditure exceeds the estimated income, it is called a deficit budget. Deficit budgeting can lead to inflation. But it is acceptable up to some extent because it helps fighting trade depression. A surplus budget is also not considered healthy because it shows a lack of government efforts. A balanced budget is considered to be ideal and in it, the revenue and expenditure are kept equal or nearly equal.
(2) Estimates should be on a cash basis- In India, Britain, and the USA, the accepted principle is that estimating of income and expenditure has to be done on a cash basis. The estimates should cover expected actual revenue and expenditure and not projected demands. The cash budgeting has the advantage that the final preparation of accounts of a year can be done soon after its closing. However, a drawback of cash budgeting is that it does not reveal a true picture of the finances of a state.
As against cash budgeting, there can be revenue budgeting. It is followed in France and other continental European countries. Under it, the budget estimates are based on the liabilities of payments and demands for revenue for the year, without any regard for when these may be actually realized. Revenue budgeting involves long delays in the preparation of final accounts and this daley often defeats the purpose of financial control. As such, cash budgeting is preferred over revenue budgeting.
(3) A Budget should be Gross and not Net- Another principle of budgeting is that all the transactions of income and expenditure must be clearly and fully shown. It should not be merely an account of the resultant net positions. Non-compliance with this principle can adversely affect the established financial procedure and result in laxity of control and incomplete accounts.
(4) Estimation should be as exact as possible- Close estimation is another vital principle of budgeting. Gross over-estimation leads to heavy taxation and gross under-estimation can throw the whole budget out of gear when it comes to implementation. Close estimation, by taking at least 3 year averages, has to be followed for avoiding these defects.
(5) The rule of lapse- The rule of lapse is another important principle of budgeting. It means that no part of the grant that is approved in the financial year can be carried forward into the coming year. Grants which remain unspent within the financial year lapse. Non-compliance with this rule involves the possibility in which a department would try to live on accumulated and unspent balances and be independent of legislative control.
(6) Separation of revenue and capital parts- A budget must distinguish between securing expenditure and income on the one hand and capital payments and receipts on the other. In other words, there must be a distinction between the current or revenue budget and the capital budget. Non-adherence to this principle can cause confusion in the financial picture. Overall budget surplus or deficit has to be counted by taking into consideration both the revenue account and capital account.
(7) Uniformity of style in the keeping of accounts and preparation of estimates- Finally, budget-making should ensure that budgetary heads must correspond to the form in which accounts are maintained. Uniform recording of accounts and estimates greatly facilitates the budgetary process.
These are the seven generally accepted principles of budgeting. No legislature has enacted them. These have gradually evolved. Experience of budget-making since times immemorial has been the mother of these principles. These stand accepted and justified in the interest of scientific and efficient budgeting. Sound budgeting involves adherence to all these principles. A budget can become a tool of administration only when budget-making is based upon these principles.