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Acquiring and Organizing Management Resources. Farm Records. Measure profit and assess financial condition Provide data for business analysis Assist in obtaining loans Measure the profitability of individual enterprises Assist in the analysis of new investments Prepare income tax returns.
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Farm Records • Measure profit and assess financial condition • Provide data for business analysis • Assist in obtaining loans • Measure the profitability of individual enterprises • Assist in the analysis of new investments • Prepare income tax returns
Measure Profit and Assess Financial Condition • Profit is estimated by developing an income Statement. • The financial condition is shown on the balance sheet.
Provide Data for Business Analysis Use the information from the balance sheet and income statement to perform an in-depth analysis. Analysis of past decisions is useful for making current and future decisions.
Assist in Obtaining Loans • Lenders require financial information about the farm business to assist them in their lending decisions. • lenders are requiring more and better records. • Good records increase the odds of getting a loan.
Prepare Income Tax Returns • Internal Revenue Service (IRS) • Tax records are often inadequate for management purposes. • Sound record-keeping can also help reduce • income tax obligations.
Farm Business Activities • Production Activities
Farm Business Activities • Investment Activities
Farm Business Activities • Financing Activities
Figure 3-1Farm business activities included in an accounting system
Production Activities • These accounting transactions involve activities related to the production • Revenue from product sales
Production Activities • These accounting transactions involve activities related to the production • Production expenses.
Investment Activities • These activities relate to the purchase, • depreciation, and sale of long-lived assets, • such as land, equipment, or breeding livestock. • purchase date and price, • annual depreciation, • book value • current market value • sale date and price • gain or loss when sold.
Financing Activities • borrowing money, • paying the interest and principal • Financing activities include money borrowed to • finance new investments • money borrowed to finance production activities.
Account payable Account receivable Accrued expense Asset Credit Debt Expense Inventory Liability Net Farm Income Owner Equity Prepaid Expense Profit Revenue Basic Accounting Terms
Account Payable An expense that has been incurred but not yet paid. 30 to 90 days to pay the amount due.
Account Receivable Revenue for a product that has been sold or a service provided but for which no payment has yet been received.
Accrued Expense An expense that accrues or accumulates daily but which has not yet been paid. property taxes.
Asset • tangible or financial. • machinery • Land • Buildings • grain, • Livestock • bank accounts
Credit An accounting entry in the right-hand side of a double-entry ledger.
Debit An accounting entry in the left-hand side of a double-entry ledger.
Expense A cost or expenditure incurred in the production of revenue.
Inventory The physical quantity and financial value of products produced for sale that have not yet been sold.
Liability A debt or other financial obligation that must be paid at some point in the future.
Net Farm Income Revenue minus expenses. The same as profit.
Owner Equity The difference between business assets and business liabilities. It represents the net value of the business to the owner(s) of the business.
Prepaid Expense A payment made for a product or service in an accounting period before the one in which it will be used to produce revenue.
Profit Revenue minus expenses. The same as net farm income.
Revenue The value of products and services produced by a business during an accounting period. Revenue may be either cash or noncash.
Options in Choosing an Accounting System • What accounting period should be used? • Should it be cash or accrual? • Should it be single or double entry? • Should it be basic or complete?
Accounting Period A period of time used to summarize revenue and expenses and estimate profit. It can be either a calendar year or a fiscal year.
Single vs. Double Entry With single-entry, only one entry is made for each transaction. A double-entry system records changes in values of assets and liabilities as well as revenue and expenses.
Basic vs. Complete The most basic accounting system is one that is very simple and uses cash accounting. A complete system would be computerized with capabilities for both cash and accrual accounting,and with the ability to track inventories, loans, and depreciation, and to handle payroll accounting and perform enterprise analysis.
How Complete? • How much accounting knowledge does the user have? • How large and complex is the farm? • How much and what kind of information is needed or desired for management decision making?
Basics of Cash Accounting • Revenue: recorded when and only when cash is received for sale of product or service • Expenses: recorded when they are paid, even if that is not when the item is bought or used to produce a product • Advantages: simple and easy-to-use • Disadvantages: recorded revenues and expenses may not be accurate reflections of activities during the accounting period
Basics of Accrual Accounting • Revenue: recorded when the item is produced, regardless of when sold • Expenses: “matched” to revenue; recorded when used to produce • Advantage: accurate • Disadvantage: requires more time and knowledge than cash system
Cash vs. Accrual Example • November 2003: Purchased, paid for and applied fertilizer for the 2004 grain crop. $8,000. • May 2004: Purchased and paid for seed, chemicals, fuel, etc. $25,000. • October 2004: Purchased and charged to account fuel for drying. $3,000. • November 2004: One half of grain sold for $50,000. The rest placed in storage and valued at $50,000. • January 2005: Paid bill for fuel used to dry grain. $3,000. • May 2005: Remaining 2004 grain sold. $60,000.
Farm Financial Standards Council Recommendations • Accrual-based system recommended, but cash system accepted, with end-of-year adjustments
Output from an Accounting System • Balance Sheet: report that shows the financial condition of the farm at a point in time • Income Statement: report of revenue and expenses over the accounting period • Other reports, depending on complexity of system
