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How to Prepare Budgeted Income Statement

>> November 23, 2012

If you are preparing budgeted balance sheet, you have to show budgeted retained earning in it. For calculating budgeted retained earning, you need to prepare budgeted income statement because budgeted income statement will calculate the budgeted net profit or net loss. So, today, we are explaining the steps of preparing budgeted income statement.
1st Step : Calculate the budgeted figures

For preparing budgeted income statement, we need to calculate different budgeted figures like budgeted net sales, budgeted cost of goods sold, budgeted sales expenses, budgeted administrative expenses and other budgeted expenses and incomes. So, we explain all these budgets first.

(I) Budgeted Net Sales

Sales budget is made on the basis of past sales trend. It is on the management whether it will increase the sales price or decrease the sales price. Every year, sales manager fixes the target of new sales. For example, your previous year sales is Rs. 1,00,000. Sales manager can fix the target of 10% increase of previous year sale. If sale price is in the previous year is Rs. 100 and future sales price is Rs. 110. Then budgeted sales will be

Sales quantity previous year = 1000

New target of sale = 100

Budgeted sales quantity = 1100

Budgeted sales = 1100 X 110 =  121000

For calculating of net budget sales, manager will have to adjust with budgeted sales return.

(II) Budgeted Cost of Goods Sold

We know that cost of goods sold is opening stock + net purchase + direct expenses - closing stock. Once sales budget is made, then we have to calculate the budgeted cost of goods sold. For this, we have to take some information from purchase department, store department and production department. For example, if purchase department tells us that the new purchasing cost trending is increasing, we have adjust our old purchase price with new purchase price. After all estimation, we can write the 4% increase of previous cost of goods sold.

(III) Budgeted Sales Expenses

Advertising, sales promotion expenses, salesmen's salary, showroom rent and other sales related expenses are included in sales expenses. To make sales expenses budget is not difficult. Just see the trend of advertising offline and online cost. If it is increasing trend, your advertising cost will increase in next year. So, you have to increase your previous year advertising cost. If you will increase salesmen commission and salary increase in the budget. So, after all estimation, we will show budgeted sales expenses in income statement.

(IV) Budgeted Administrative Expenses

In administrative expenses, we include office expenses, salary of office employees, rent of office, stationery and other administrative expenses. Estimate them.

If we have any planning of new machinery for office, you should increase depreciation in your budgeted administrative expenses. Check previous year cash book and income statement and balance sheet, there are lots of outstanding expense which we have to get in this year add it in budgeted administrative expenses if these are related to office.

(V) Budgeted Other Expenses and Incomes

Except this, if there are any other business related expense or income, make the budget of these other expenses and write in budgeted income statement.

(VI) Budgeted Corporate Tax

We have taken following corporate tax reference from India Company Setup. For calculating net income after tax in the budgeted income tax. We have to calculate the budgeted net income before tax and deduct corporate tax with following rates.

Company with total income exceeding INR 10 millionCompany with total income less than INR 10 million
Domestic Company32.445% (30% basic rate  plus surcharge of 5% plus education cess of 3%)30.9% (30% direct tax plus education cess of 3%)
Foreign Company42.024% (40% plus surcharge of 2.5% and education cess of 3%)41.2% (40% plus and education cess of 3%)

2nd Step : Write the Calculated Budgeted Figures in BIS

After calculating all above budgeted figures, we have to prepare sheet. Actually income statement shows the both operating incomes and operating expenses. Difference between both will be our net income. Following is the performa of budgeted income statement.

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