Understanding Budget Cycles

The budget cycle is the time interval between budget formulation and budget auditing and evaluation (Khalo, 2007). At the core of gearing the budget to a periodic cycle is the need for accountability. The cycle aids in achieving this end by allowing the system to absorb as well as to respond to new information. In this way, the budgeting entity can be held to account. A budgeting entity need not be a government or business institutions as the concept of the budget cycle also apply to individuals. Four main stages comprise the cycle (Hansen & Mowen, 2007).

First, there is the budget formulation. This is the preparation stage of the budget. It is also one of the most difficult phases in the cycle. In the case of the government, budget formulation is normally the prerogative of the executive arm of the government. Businesses also have the function assigned to various levels of the organization (Khalo, 2007). The second stand of the cycle is to have the draft budget approved by the relevant persons or institutions. Approval is the power to follow through with what the formulated budget indicates. It is normally the legislature that has the responsibility of approving the budget presented to it by the executive. Different people play the same role in the private sector. For instance, a business organization may have a budget committee as the authorizing organ.  It is after the authorization or approval that budget implementation begins. As the third stage in the budget cycle, the relevant centers of implementation carry out the outlined programs. Government agencies begin to the programs for which they are responsible. A similar thing happens in the private sector. Lastly, budget auditing and assessment becomes the last phase of the cycle. It seeks to evaluate actual outcome of the implementation as against what was planned. All four stages of the cycle are, however, continuing without any need for one to be complete before another one begins.



Hansen,D.R.,& Mowen,M.M.(2007).Managerial Accounting, Eighth Edition.Mason,and   OH:Thomson.

Khalo,T.(2007).Municipal Financial Management. In G.Waldt (Ed.,), Municipal Management:     Serving the People (pp.188-221).Cape Town, South Africa: Juta& Company Ltd.

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