In many companies, there’s this policy which requires awarded budget that must be spent completely once it’s approved. If the annual spend is below the allocated annual amount, there’s a chance next FY you won’t get the requested budget you asked for.
– why do such policy exist?
Isn’t it better to carry over unused expenses to the next FY? Saving expenses expenditure is a bad thing? Such a policy encourages employees to spend extravagantly the remainder amount nearer to FY-end.
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>Isn’t it better to carry over unused expenses to the next FY?
To measure performance (budget vs actuals) the budget needs to follow GAAP rules. The income statement is closed and resets every year. For the actuals, it is not possible to carry over income/expenses. The budget needs to follow a similar pattern.
Then there’s a matter of tracking. If you did carry over unused expenses, it would be a big hassle to track net expenses. Is this $1 counted against last year’s saves or this year’s budget? And you’d need to do this by invoice line and by account. It would be easy to game the system by always counting against current budget and letting the previous reserve grow. You’d have to use some type of inventory accounting, FIFO/LIFO so that dept managers couldn’t game the system.
OK sorry, I’m rambling. Net effect is that for the income statement, expenses do not carry over into a future year. The budget needs to follow the same convention.
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