14.1. Basic Concepts

A budget is a tool for estimating expected income and expenses. You can use it to help you plan how you intend for your finances to change over a period of time, and to examine how your actual financial transactions for the period compare to your planned transactions.

The budgeting concept is quite general, so GnuCash offers a budgeting tool that is both simple and flexible. You, the user, have to decide how complex or simple you want to make your budget. This guide will help you make some of those decisions.

14.1.1. Terminology

There are a few helpful terms listed below that will be used to discuss budgeting.

  • Budget - A financial plan describing the expected revenues and/or disbursements for a particular time period

  • Cash Budget - A budget planning for expected cash receipts and cash disbursements. This type of budget tracks cash flow -- where your money comes from, where it goes, and, of course, how much.

  • Expense Budget - A budget chiefly for planning what you spend your money on. This type of budget tracks your expenses. It is typically not concerned with things like appreciation or repayment of liabilities. However, it would account for interest charges. For example, if you buy $100 worth of groceries with your credit card, you incur an $100 expense for groceries, and a $100 liability to your credit card company. When you pay the credit card bill for $110, you are incurring an additional interest expense of $10. An expense budget plans for the transaction of buying the groceries and paying the interest, but not the transaction of repaying the credit card company.

  • Capital Budget - A budget that describes a plan for paying for a large future expense, often through a combination of saving and borrowing money. Note: Capital budgets can sometimes get quite complex because they can try to answer the question "Can we afford to do such-and-such?" by exploring various hypothetical scenarios that can involve hypothetical accounts.

  • Budget Period - The period of time during which the plan is expected to take place. The most common budget periods are annual and monthly. Sometimes, you may budget for several consecutive periods at once, for convenience or for finer-grained planning. For example, an annual budget may include 12 monthly budget periods.