When a company prepares budget reports, which of the following journal entries is most likely to be recorded at the time the budget is adopted?

• A. Debit Retained Earnings; Credit Budget Expense
• B. Debit Budget Expense; Credit Accounts Payable
• C. No journal entry is required when a budget is adopted.
• D. Debit Cash; Credit Budget Revenue

Answer: (C)

Verified step by step guidance

1. Understand the purpose of a budget: A budget is a financial plan that outlines expected revenues and expenses for a specific period. It is not a transaction but a planning tool, so no journal entry is required when a budget is adopted.
2. Recognize the difference between a budget and actual transactions: Journal entries are used to record actual financial transactions, not plans or projections. A budget adoption does not involve any exchange of cash, goods, or services.
3. Review the options provided: Each option suggests a journal entry involving accounts like Retained Earnings, Budget Expense, Accounts Payable, Cash, or Budget Revenue. However, these entries are not applicable because a budget adoption does not create a financial event requiring recording.
4. Understand why 'No journal entry is required' is correct: Since a budget is a planning document, it does not affect the accounting records directly. Therefore, no debit or credit entries are made in the general ledger when a budget is adopted.
5. Conclude that budgets are used for internal planning and control: They help management set financial goals and monitor performance but do not directly impact the accounting system until actual transactions occur.