Question

explain in your own words why budgets might exert negative influence on accounting decisions. and please offer some examples where this might be the case.

Answer 1

Firstly, to know the negatives of budget, we need to know the meaning of budget.

MEANING OF BUDGET:

A budget is a detailed plan of operations for some specific future period. It is an estimate prepared in advance of the period to which it applies. It acts as a business barometer as it is a complete programme of activities of the business for the period covered.

The CIMA, London defines a budget as "a financial &/or quantative statement, prepared prior to a defined period of time, of the policy to be pursued during that period for the purpose of attaining a given objective".

A budget may have positive as well as negative influence on accounting decisions. As the budget is a systematic statement of activities to be done, for eg., where & how much cash we have to spend for a particular activity; how much sale has to be done in a particular period; etc. These are some of the merits of budget.

Likewise, it may have negative aspects. Here, we will discuss that how budget may have negative influence:-

1) Time consuming : Budgeting is a time consuming process. It takes a lot of productive time which have limited value. It also requires extra manpower to think & forecast. It sucks the energy, time, fun and big dreams out of an organization. Therefore, it is essentially, the most ineffective practice in business.

2) Expensive : As it requires manpower, it leads to expenses in large. It also incurs expenses in terms of infrastructure. It brings out the unproductive behaviour in an organization. Not every organization can afford to spend on this as this influences their accounting decisions.That's why it is an expensive process.

3) Assumption based : The budget is prepared in advance for attaining any specific objective in future, so it is all based on the assumptions about future. A sudden change in government policy, fluctuations in currency value & many other unforeseen factors may impact the business.

4) Restricts thinking : The activities are going on according to the budget, means you are not controlloing the business. When you are wholly covered by budget, you cannot think out of that. You can't bring out innovations, modifications due to restrictive thinking. It leads the business towards decline in growth.

5) Unproductive spending : Sometimes, an organization may spend more time on budgeting, so it may end up   with less from needed. It leads to unproductive spending. The managers under pressure spend excess on these, it may have negative impact on decisions.

Due to all these factors, budgets might exert negative infuence on accouting decisions.

example; Government x revenue sources

Government's budgetary decisions impact the public sector.Some pragrams are guarenteed, while others are not where tough economic decisions to be made. The public sector is controlled by the government. The services like education, infrastructure, defense, healthcare facilities for poor & aging, public transit; are subjected to annual budget. The government has few sources of revenue, majority of which comes form tax. Any changes in sources , such as movement of business in different region, decline in resident's income, results to decline in government's income and influence the accounting decisions.