# Budgets

This chapter explains how to create and use budgets with &app;.

## Basic Concepts

A budget is a tool for estimating expected income and expenses. You can use it to help you plan how you intend for your finances to change over a period of time, and to examine how your actual financial transactions for the period compare to your planned transactions.

The budgeting concept is quite general, so &app; offers a budgeting tool that is both simple and flexible. You, the user, have to decide how complex or simple you want to make your budget. This guide will help you make some of those decisions.

### Terminology

There are a few helpful terms listed below that will be used to discuss budgeting.

- Budget - A financial plan describing the expected revenues and/or disbursements for a particular time period

- Cash Budget - A budget planning for expected cash receipts and cash disbursements. This type of budget tracks cash flow -- where your money comes from, where it goes, and, of course, how much.

- Expense Budget - A budget chiefly for planning what you spend your money on. This type of budget tracks your expenses. It is typically not concerned with things like appreciation or repayment of liabilities. However, it would account for interest charges. For example, if you buy $100 worth of groceries with your credit card, you incur an $100 expense for groceries, and a $100 liability to your credit card company. When you pay the credit card bill for $110, you are incurring an additional interest expense of $10. An expense budget plans for the transaction of buying the groceries and paying the interest, but not the transaction of repaying the credit card company.

- Capital Budget - A budget that describes a plan for paying for a large future expense, often through a combination of saving and borrowing money. Note: Capital budgets can sometimes get quite complex because they can try to answer the question "Can we afford to do such-and-such?" by exploring various hypothetical scenarios that can involve hypothetical accounts.

- Budget Period - The period of time during which the plan is expected to take place. The most common budget periods are annual and monthly. Sometimes, you may budget for several consecutive periods at once, for convenience or for finer-grained planning. For example, an annual budget may include 12 monthly budget periods.

## Creating a Budget

Even before you begin to make a budget, it’s important to have given some thought to your account hierarchy. For example, if you want to budget a certain amount for your electric bill and a certain amount for your water bill, you can’t have only an Expenses:Utilities account. Your accounts must be at least as specific as your budget.

### Choose Which Accounts To Budget For

The first step in creating a budget is to decide what it is you want to plan for. This decision will affect which accounts you include in your budget. For example, if you are only interested in tracking your expenses, you may create an expense budget by only entering amounts for expense accounts. On the other hand, if you want to track all of your cash flow, you may create a cash flow budget by entering amounts for asset, liability, income and expense accounts.

Before you begin to create your budget, you need to make two decisions: What accounts do I want to budget for? and When do I want my budget to be for? You can always change your mind later, after you’ve created a budget, but you need to start with something.

As a rule of thumb, if you mostly care about what you spend your money on, you may want to make an expense report. If you’re also concerned about having enough money in the right places at the right times, you may want to use a cash-flow budget.

### Choosing a Budget Period

Before creating a budget you must also decide what period of time you want to plan for. The most common budget periods are monthly and annual. If you want your budget to plan for changes in financial patterns over time, then you should include multiple budget periods in your budget. For example, if you want to plan on having higher utility expenses in the winter than in the summer, then you might break your annual budget into 4 quarters or even 12 months, and budget a higher value for the winter periods than for the summer periods.

### Getting Started

To create your first budget click on Actions Budget New Budget . You will immediately see a new budget with the default settings and no entries. Then click on the Options button. The most important options are the budget period and the number of periods. For the budget period, choose the beginning date and the smallest period of time that you want to plan for. Then, for the number of periods, choose how many periods you want to plan for.

The budget page now shows a list of accounts with a column for each budget period. The date shown in the title of each column is the beginning of that budget period.

### Entering Budget Values

Now, you must enter the budget values - the amounts that you expect the account balances to change during the budget period. There are two ways to enter budget values. The first way is to simply click on the cell and enter an amount.

If you have past transactions recorded in &app;, the second way is to let &app; estimate the budget values by looking at those transactions. First, select the accounts you want &app; to estimate. Then click on the Estimate Toolbar button. In the Estimate Budget Values dialog, select the date past which &app; should look for past transactions. &app; will start at that date and look forward for the duration of your budget. For example, if you are making an annual budget, and you select Jan. 1, 2005, &app; will look at all the transactions in that account from Jan. 1, 2005 through Dec. 31, 2005.

## Budget Reporting

You’ve already done the hardest part - creating your budget. But now you want to know how your actual financial transactions compare to your plan. You need to run the Budget Report.

Click on Reports Budget Budget Report . For each account, the Budget Report will show the budgeted and the actual amounts in two adjacent columns for each period in the budget. If you have created multiple budgets, you can use the Budget Report Options to select which budget to use in the report.

Two other types of budget reports are commonly used in the small business setting. They are the Budgeted Income Statement and the Budgeted Balance Sheet.

### Budgeted Income Statement

The budgeted income statement is similar to the income statement. Both show the revenues and expenses for a given period as well as the profit, which is the difference revenue - expenses. The income statement is based on historical data, but the budgeted income statement is based on the predictions made in the budget.

### Budgeted Balance Sheet

The budgeted balance sheet is similar to the balance sheet. Both show the assets, liabilities, and equity. The difference is that the balance sheet is based on historical data, and the budgeted balance sheet is based on the predictions made in the budget.