Budgets - deprecation and prepayments

Best practice on including/ excluding depreciation and prepayments from budgets

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Our company policy is to exclude depreciation from budgets, but to include opening prepayments. Depreciation is excluded as it often causes confusion with budget holders, but the same applies to opening prepayments. Budget holders find this confusing as they don'y understand why an amount has been included in their budget (budgeted and actual figures) which differs to the invoice they authorised (both amount and timing).

I was just wondering what the company policy was for other organisations?

Many thanks in advance

Ang

 

Replies (8)

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By paul.benny
31st Oct 2019 08:14

Budgets should reflect the expected costs - so I would always include depreciation. As long as it's a clearly identifiable line, there should be no confusion.

Prepayments? Unless there is anything hugely expensive, the only reason prepayments are likely to be visible is if people are tracking spend at a minute level.

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By paulwakefield1
31st Oct 2019 09:16

How long is a piece of string? There are a myriad ways to budget depending on purpose, method, user, etc.

Do the budget holders have any degree of control over expenditure/usage of the assets giving rise to the depreciation? If not, there is an argument to exclude depreciation from their budgets although it will need to be included higher up the management chain. Even then it could be treated via an EBITDA presentation (but here be potential dragons).

Prepayments can be quite large on occasion. Naturally they arise from a difference between the period covered by the expenditure and the reporting period. The best way is to try to get budget holders heads around the, say, monthly cost they are signing off rather than the mechanics of prepayments. They may of course be upset, especially if they are new to the role, that they have to see off an inherited opening balance but with luck that should be reflected in the budget.

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By adam.arca
31st Oct 2019 10:15

I don't disagree with the above responses which are technically the right ones. Personally, I would go the other way, though.

Line managers / budget holders are not accountants and no amount of education is going to convince all of them that you're right and they're wrong. You can be surprisingly successful with some but others will still think you're a w@nker just because they don't want to understand what you're trying to tell them.

So I'd keep accounting concepts out of low level budgets and add them back in at a higher level as a reconciliation to the financial accounts. I definitely wouldn't mix'n'match with an inconsistent treatment of say depreciation and prepayments as that seems to be asking for trouble.

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RLI
By lionofludesch
31st Oct 2019 12:24

The over-riding rule is to weigh the usefulness of the information with the cost of providing it.

Always subjective, of course, and will, no doubt, vary from company to company.

As far as depreciation goes, I don't have strong feelings. It might be appropriate to omit depreciation and to include instead the actual expenditure on the asset as it arises. Obviously, that would be totally inappropriate for the statutory accounts but it might be what you need.

Prepayments ? I'd spread them if they were material and, if they weren't, I'd let them lie where they fell. Again, very subjective.

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By johngroganjga
31st Oct 2019 13:48

I wouldn’t dumb down the figures to avoid having to provide explanations to the uninitiated. The ability to explain technical matters intelligibly to the uninitiated is one of the hallmarks of the good accountant.

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Replying to johngroganjga:
By Moonbeam
31st Oct 2019 16:52

But many of the uninitiated don't find it interesting enough so immediately forget what they were told every month!

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Replying to Moonbeam:
John Hextall
By John Hextall
07th Nov 2019 10:49

Some of the 'low-level' line managers will eventually work their way up the chain and be grateful someone took the time to explain these accounting concepts to them.

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By PChapman
07th Nov 2019 10:55

Personally I would include prepayments and depreciation as appropriate.
I would also seek to seperate out in the presentation the items which the budget holder controls and those they do not control, but make sure that the budget reconciles back to the bigger budget and the accounts.
In my experience, when you have budgets and management accounts that vary greatly from the picture painted by the stat accounts you end up with more confusion and difficulties. Especially if important decisions are being made on the back of the figures presented. (in particular if something appears profitable at one level but not at the other)
Finally - I see it as part of my job to educate the budget holders how to interpret the accounts and budgets as appropriate to their role.

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