This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
In handling governmental business in nearly all civilized countries, it is customary for the executive power to submit to the legislative power a detailed estimate of the prospective revenue and outgo for the succeeding fiscal year. This estimate is known as a budget. It may be described as a detailed income and expenditure statement made out in advance of the period which it covers; it is a prediction or a guide, not a record of results. In governmental practice it is customary to secure the approval of the legislative power after required revisions have been made; and thereupon the adopted budget in its final form becomes a binding appropriation of the expected revenue. The various departments of the government are not authorized to go beyond the sums appropriated to their departments in their expenditures for the fiscal year.
In private corporations the budget, except in rough and fragmentary form, has not been much used. There is a growing interest, however, in the application of the principle of the budget in some practical form with a view to forestalling the serious financial errors and miscalculations that so frequently wreck the careers of otherwise successful corporations. Many directors and treasurers of corporations consider the present practice entirely too loose and too nearsighted and are looking to the budget as a means of bettering these conditions. It should be possible to make detailed financial plans and schedules for a year or more ahead, just as it is possible for many companies to make detailed operating plans and schedules.
Budgets are divisible into two classes - those which are merely estimates for the benefit of the active financial managers and those which are adopted as binding appropriations. It is usually best to start by making budgets of the first class - unless there is some emergency which demands that a definite financial plan be adopted and adhered to - always having in mind the expectation that the budget will in time reach the stage of being either formally adopted or accepted by general agreement as stating the limit for the year's expenditures.