Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What is the result when a government's income exceeds its expenditure?

1. Budget deficit

2. Budget surplus

3. Balance budget

4. Negative cash flow

The correct answer is: Budget surplus

When a government's income exceeds its expenditure, it results in a budget surplus. This scenario occurs when the total revenue generated from taxes and other income sources is higher than the total spending on public services, infrastructure, and other expenditures. A budget surplus indicates that the government has more financial resources available than it needs to fund its operations during a given period, allowing it the potential to pay down debt, save for future needs, or invest in new programs. In contrast, a budget deficit happens when expenditures exceed income, leading to the need for borrowing or drawing from reserves. A balanced budget is one where income equals expenditure, while negative cash flow suggests that outflows exceed inflows over a certain period, not necessarily relating directly to government financial operations. Thus, the characteristics that define a budget surplus highlight its role in promoting financial stability and fostering economic growth.