Agribusiness Recordkeeping and Accounting

1. Agribusiness Recordkeeping and Accounting Chapter 9

2. Objectives Differentiate bookkeeping from accounting Complete budgets Describe the single-entry bookkeeping system Describe the double-entry bookkeeping system Complete journals and ledgers Complete a trial balance

3. Objectives Explain basic accounting considerations Prepare an income statement, balance sheet, and statement of cash flowers Prepare a statement of owner equity Analyze a financial statement Describe the impact of computer technology on agribusiness recordkeeping Explain the benefits of using computer software to complete tax returns

4. Introduction Planning is a big part of success. Part of planning in an agribusiness includes budgeting, financial planning, and keeping good records. Keeping records takes time and effort, but it is essential. We should work as hard at our recordkeeping as at any other phase of the business

5. Your attitude determines your success. Your agribusiness can achieve new heights if you develop a positive attitude toward recordkeeping and what it will do for your business. In reality, good records save time and money. Records must be kept accurately and in an orderly fashion. We need records to: Know our cash balance Know who is in debt to our business Keep track of our business debts File correct and timely tax reports Know our financial position Make business decisions

6. Role of the financial Manager Whether an agribusiness is large or small, one person is usually responsible for the bookkeeping, accounting, and financial management of the business. In a small agribusiness, the owner may be the person responsible for the finances. Therefore, the owner has to make sure the agribusiness can meet its financial obligations. To do this, the financial manager determines how money comes into the business and how the agribusiness uses that money. Refer to figure 9-1.

7. Sources of Income Sources of income include revenues from the sale of products and services, profits reinvested in the business, loans and credit received from outside the business, and the owner equity, which is the money the owner invests in the business. The owner or financial manager must decide the best way to use these sources of income.

8. Expenses Operating expenses include wages and salaries, cost of maintaining the machinery and equipment needed to produce products and services, advertising, rent, electricity, and insurance. To meet unexpected expenses, the owner or financial manager needs to have reserve or emergency fund of cash that can be made quickly.

9. Accounting versus Bookkeeping The distinction between accounting and bookkeeping is often confusing. Bookkeeping refers to the actual recording of business transactions Accounting goes far beyond bookkeeping. The purpose of an accounting system for a business is to allow preparation, review, and understanding of reports.

10. Bookkeeping If you were a bookkeeper, you would divide all the business�s paperwork into meaningful categories, such as sales documents, purchasing receipts, and shipping documents Accounting Accountants categorize and summarize the data provided by bookkeepers.

11. The Six-Step Accounting Cycle The sequence of accounting procedures used to record, classify, and summarize accounting information is often termed the accounting cycle. The accounting cycle generally requires the work of both the bookkeeper and the accountant. It begins with the preparation of formal financial statements summarizing the effects of transactions on the business�s assets, liabilities, and owner equity.

12. Analyze and categorize documents Record the information into Journals Post the preceding information in to ledgers Prepare a trail balance

13. Prepare an income statement, balance sheet, and statement of cash flows The balance sheet reports the financial condition of the business on a specific date. The income statement records revenues, costs, expenses, and profits (or losses) for a specific period of time; thus, it shows the results of business operations during that time period. It is helpful to make notes disclosing any facts necessary for proper interpretation of the balance sheet and income.

14. Budgets If something does not work on paper, it will not work once the agribusiness opens. After an agribusiness owner or manager has planned for customers� needs and projected income and expenses, he or she must complete a budget. This technique is called budgeting, and the plan is called a budget. Three types of budgets must be prepared: an operating budget, a cash flow budget, and a capital expenditures budget. A discussion of each follows.

15. The operating budget The cash-flow budget When cash receipts should be available to the agribusiness during the year When the agribusiness will need to make cash payments

16. The cash-flow differs from the operating budget in that the cash-flow budget leaves out such items as: Credit sales that do not generate a cash flow during the year Depreciation and other noncash expenses Noncash portions of any capital purchases or sales The cash-flow budget may tell the owner little about the profitability of the business

17. The capital expenditures budget Each agribusiness must make regular capital investments in equipment because wear and tear will eventually take their toll and contribute to depreciation of the item Relationships between the operating, capital expenditures, and cash-flow budgets The sales part of the operating budget supplies the basic information for preparation of the cash-flow budget.

18. Single-entry Bookkeeping System The simplest way to keep one�s books is with the single-entry bookkeeping system. This is because the entry is made only in the checkbook or in the checkbook and the journal. Therefore, one of the first activities when starting your agribusiness is to establish a checking or other bank account for your business.

19. Separate business accounts from personal accounts Business funds and accounts should always be kept separate from all personal funds and accounts. This is best for tax records. Mixing personal accounts with business accounts will lead to problems.

20. Sales slips plus checking account Besides the checking account, a small agribusiness should use sales slips. The checking account and use of sales slips will provide the information needed to file income taxes. The single-entry system must allow the owner of the agribusiness to: Ensure that the business will pay all the taxes it owes Prevent errors in accounts receivable Prevent erroneous payments for good receivable Have an up-to-date cash position Make projections for the future

21. Double-entry bookkeeping system It is possible to make a mistake when recording a financial transaction. For example, you easily write $12.97 as $12.79. because of this, a bookkeeper records all the transactions in two places. The bookkeeper can check one list against another list to make sure all the transactions add up to the same amount in both places. If they do not, the bookkeeper knows that a mistake was made. The practice of writing every transaction in two places is called double-entry bookkeeping.

22. Journals and Ledgers Journals The single-entry and double-entry systems of bookkeeping could be considered journals, but not in the world of accountancy. In an actual accounting system, information is initially, recorded in an account record call the journal, as shown in figure 9-9.

23. Use of the Journal The journal is a chronological (time ordered) record of business transaction Why use a Journal? It is technically possible to record transactions directly in the ledger, so why is the journal necessary? The unit of organization for the ledger is the transaction.

24. The Ledger At convenient intervals, the debit and credit amounts recorded in the journal are transferred (posted) to the accounts in the ledger. The updated ledger accounts can then be used to prepare the balance sheet and other financial statements. The ledger is an accounting system that has separate record for each item.

25. Parts of the Ledger Very simply, a ledger account page has only three parts: A title, consisting of the name of the particular asset, liability, or owner equity A left side, which is called the debit side A right side, which is called the credit side The terms debit and credit simply means left and right, and do not have any hidden meaning or value connotations.

26. Posting Posting is the process whereby debits and credits are transferred from the general journal into the ledger account. The debits from the journal are recorded on the left side (debit side) of a ledger account. Likewise, the credits from the journal are recorded on the right side (credit side) of a ledger account. Posting methods may vary with the preference of the individual, but the sequence shown in figure 9-10 is commonly used.

27. Basic accounting considerations Before we proceed to the next step (balance sheet, income statement, and statement of cash flows), let us discuss a few basic accounting considerations: assets and liabilities; capital and owner equity; sales, cost of sales, and net profit; operating and incidental expenses; depreciation; principal and interest payments; inventory; and profit and loss.

28. Assets and liabilities An asset is something value that is owned. Assets are economic resources that are owned by a business and are expected to benefit future operations. Some examples of assets are cash, receivables, inventory, investments, equipment, buildings, and prepaid accounts Liabilities are amounts that are owed (debt). Liability arising from the purchase of goods and services on credit are called accounts payable. The person or company to whom the account payable is owed is call a creditor. The form of liability when money is borrowed is usually a note payable, which is a formal written promise to pay a certain amount of money, plus interest, at a definite future time.

29. Capital and Owner Equity Capital is the investment that the owner has made or put into the business. For example, money used to start the agribusiness is capital. Capital also includes machines, tools, and buildings. Owner equity is the difference between total assets and total liabilities.

30. Revenue, Cost of sales, and net profit Revenue is the value of what is received from goods sold and services rendered, plus what comes in from other financial sources. Be careful not to confuse the terms revenue, sales, and income. Most revenue (money coming into the agribusiness) comes from sales. However, there could be other sources of revenue, such as rents received, interest earned, or income from other sources.

31. Cost of Sales (also known as cost of goods sold) is the expenses and labor that are directly associated with the production or acquisition of products held for sale. Net profit Is revenue minus the cost of sales. Net profit is also called the profit margin.

32. Operating and Incidental Expenses Operating expenses are any regular expenses associated with operation. Incidental expenses are any other expenses, including ones that seldom occur but are business related. Examples are unexpected expenses incurred because of emergencies, accidents, or weather damage.

33. Inventory An important aspect of financial accounting is the development of inventory for the agribusiness. An inventory is a physical count of all the assets of a business along with their estimated worth. When to inventory Determining inventory value

34. Depreciation Depreciation is the systematic write-off of the value of a tangible asset over the estimated useful life of that asset. Agribusinesses are permitted to treat depreciation as an expense of business operations. This loss in value occurs because of normal use, weathering, and/or changes in technology. Depreciation of machinery, buildings, equipment, and storage structures constitutes a major agricultural expense. Real estate depreciation Calculating depreciation Principal and interest payments

35. Profit and Loss Profit and loss are the difference between sales minus all expenses. In an income statement (discussed later in this chapter), profits can be noted as three different amounts: gross, operating income, and net income. Gross profit is the term used when the cost of goods sold is deducted from sales revenue. The gross profit is a subtotal. Operating income is the result when operating expenses are deducted from gross profit. This is also a subtotal. Some call this income from operation. Net income is determined by subtracting nonoperating costs from operating income. Many call this the �bottom line.�

36. Preparing and income statement, balance sheet, and statement of cash flows Agribusiness owners and managers need up-to-date financial information to make decisions about future operations. Financial statements summarize the financial information contained in ledger accounts. These financial statements provide adequate disclosure of the condition of the agribusiness. A financial statement showing the revenue, expenses, and net income or loss of a business is call an income statement. A financial statement showing all assets and equities of a business on a specific date is known as a balance sheet.

37. Income Statement An income statement measures the profit gained by an agribusiness over a given time period. Other names for the income statement are operating statement or profit and loss statement. The four major components of the income statement are revenue, expenses, taxes, and �other.� Refer to figure 9-15. Revenue Expenses Taxes Other

38. Balance Sheet The three major components of a balance sheet are assets, liabilities, and net worth. The name balance sheet refers the fundamental accounting operational axiom that �assets equal liabilities plus net worth.� this equation always holds true. Any transaction changing one side of this equation results in an equal change to the other.

39. Current assets and liabilities Current assets are those assets that an agribusiness manager could convert to cash within a 12-month period without disrupting business operations. Intermediate assets and liabilities Intermediate assets are those that are normally in service for more than 1 year but less than ten.

40. Long term assets and liabilities Long term or fixed assets have an expected life or maturity exceeding 10 years. These assets include land, buildings, and other permanent improvements. Net worth Net worth is the difference between total assets and total liabilities. If this value is positive, the business has solvency. This means that if management converted all the assets to cash, there would be more than enough to cover all liabilities.

41. Statement of owner equity The primary role of the statement of owner equity is to allow a final check on the accuracy of the change in owner equity between the beginning and ending balance sheets with net income and other possible changes in owner equity. As previously mentioned, the statement of owner equity utilizes information from the other three, basic financial statements. Beginning and ending owner equity amounts come from the balance sheets. Net income is calculated in the income statement, and other values are derived from the statement of cash flows.

42. Explanation of the statement of owner equity Figure 9-19 shows nine entries within the statement of owner equity financial statement. An explanation follows for each of the nine entries.

43. Beginning owner equity Net income (Accrual) Gifts and inheritances Additions to paid-in capital, including investments of personal assets into the business Distributions of dividends, capital, or gifts (cash or property) Withdrawals for living family, gifts made, and investments into personal assets Total change in contributed capital and retained earnings Change in valuation equity Ending owner equity

44. Analyzing financial statements The last step in the accounting cycle is to analyze the financial statements. Balance sheets, income statements, and cash-flow statements provide information to agribusiness owners and managers on how well the business is doing. An agribusiness manager can obtain a clear picture of the financial position and performance of the business only by analyzing the components of all three financial statements together.

45. Computer Technology and Agribusiness Records Many industries, such as tractor companies, supply computer software programs for their dealers to use. Certified representatives can train the workers at the dealership to execute most business transactions. Many things can be done with these computer programs, including:

46. Sales and billing Customer accounts Weekly payroll Receipt of products into inventory Monthly statement printing Financial records and reports Quarterly tax calculations Placement of monthly bills in correct accounts Journal balancing

47. Besides helping keep financial records, these same computer software programs can assist with ordering parts, locating part numbers, inventory, and various other functions the agribusiness needs. We hope that the information in this chapter will give you a better understanding of the information that such computer programs can provide.