1

Accounting basis: accrual.

I've estimated an arbitrary budget for my Company's next 12 months.

Some of the values on there are precise certainties (such as my salary).

Some of them are best guesses (such as the total of 12 mobile phone bills, the values of which cannot be known precisely until the company is billed by the supplier; stationary budget; client engagement mileage estimate).

Is it appropriate to list this budget as a single Current Liability item, thus allowing me to use the equity value as a more meaningful pointer to the amount of distributable profit in the company?

2

In accrual accounting, you're not meant to book expenses before they happen. The "accrual" part means you recognize (accrue) expenses as they are incurred, which is not necessarily when they are paid (which often happens later). The idea with accrual accounting is to recognize that unpaid liabilities are still a claim against current assets, even if the cash to pay hasn't left the bank account yet.

Under accrual accounting, consider that if you had prepaid future expenses, the prepaid expense amount would actually be recognized in the books as an asset, up until the point where the company actually incurs the expense. Only when the expense gets incurred is it booked as an expense, using up a portion of the prepaid amount.

What ought to be clear from accrual's treatment of prepaid expenses is that you generally don't get to claim as a liability any expense that has not yet been incurred.

That being said – while financial accounting (and the tax man) says you should maintain your books as an accurate historical record, you are still free for your own purposes to make separate "forward looking" projections of your company's income or other metrics. Forward-looking projections for informing decision making is generally what management accounting is concerned with.

Just don't book these fictitious liabilities in your books of record – work in a separate spreadsheet or on a copy of your books. Your actual books should reflect what has actually happened, not what might.

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  • Thank you for this clarification. Your comment about management accounts has made the penny drop. However, it strikes me that substracting forecast budget amounts from, say, the bottom-line Net Income from an Income Statement report would be a common move for a busines owner to identify the "real" profit in the business (i.e. for removal as a Dividend). Could you recommend a "common" report that I would use to achieve this? I'm keen not to "invent" my own type of report for this purpose and instead use something tried, tested and recognisable. – 8bitjunkie Feb 18 '14 at 10:48

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