AGRI 4411 Farm Management Chapter 03


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Acquiring and organizing management information

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AGRI 4411 Farm Management Chapter 03

  1. 1. Chapter 3Acquiring and OrganizingManagement Resources  
  2. 2.  Purpose and Use of  A Cash Versus Accrual Example Records  Farm Financial Farm Business Activities Standards Council Basic Accounting Terms Recommendations Options in Choosing an  Chart of Accounts Accounting System  Output from an Accounting System Basics of Cash Accounting farm management 2 chapter 3
  3. 3. 1. To appreciate the value of establishing and selecting a good accounting system 2. To outline the concepts of cash and accrual accounting 3. To review some recommendations of the Farm Financial Standards Council 4. To introduce some financial recordsfarm management 3chapter 3
  4. 4. 1. Measure profit and assess financial condition2. Provide data for business analysis3. Assist in obtaining loans4. Measure the profitability of individual enterprises5. Assist in the analysis of new investments6. Prepare income tax returnsfarm management 4chapter 3
  5. 5. • These are among the most important reasons for keeping records. • Profit is estimated by developing an income statement, the topic of chapter 6. • The financial condition is shown on the balance sheet, the topic of chapter management chapter 3 5
  6. 6. • 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 management chapter 3 6
  7. 7. • Lenders require financial information about the farm business to assist them in their lending decisions. • Following the farm financial difficulties during the 1980s, many agricultural lenders are requiring more and better records. • Good records increase the odds of getting a management chapter 3 7
  8. 8. • Internal Revenue Service (IRS) regulations require keeping records for tax purposes. • Tax records are often inadequate for management purposes. • Sound record-keeping can also help reduce income tax management chapter 3 8
  9. 9.  Production Activities Investment Activities Financing Activitiesfarm management chapter 3 9
  10. 10. farm management chapter 3 10
  11. 11. These accounting transactions involve activities related to the production of: •crops and livestock •revenue from product sales or •other farm revenue is included •as are production management chapter 3 11
  12. 12. These activities relate to the purchase, depreciation, and sale of long-lived assets, such as land, equipment, or breeding livestock. Records should include: •purchase date and price, •annual depreciation, •book value, •current market value, •sale date and price, and •gain or loss when management chapter 3 12
  13. 13. • These transactions relate to borrowing money, and paying the interest and principal on loans.• Financing activities include money borrowed to finance new investments and money borrowed to finance production management chapter 3 13
  14. 14.  Account payable  Inventory Account receivable  Liability Accrued expense  Net Farm Income Asset  Owner Equity Credit  Prepaid Expense Debt  Profit Expense  Revenuefarm management chapter 3 14
  15. 15. An expense that has been incurred but not yet paid. Typical accounts payable are for items charged at farm supply stores where the purchaser is given 30 to 90 days to pay the amount management chapter 3 15
  16. 16. Revenue for a product that has been sold or a service provided but for which no payment has yet been received. An example would be custom work for a neighbor who has agreed to make payment at a future management chapter 3 16
  17. 17. An expense that accrues or accumulates daily but which has not yet been paid. Examples are interest on loans and property management chapter 3 17
  18. 18. An item of value, tangible or financial. Examples would include machinery, land, bank accounts, buildings, grain, and management chapter 3 18
  19. 19. • An accounting entry in the right-hand side of a double-entry ledger. • A credit entry records a decrease in the value of an asset. • It records an increase in liability, owner equity, or an income management chapter 3 19
  20. 20. • An accounting entry in the left- hand side of a double-entry ledger. • A debit entry records an increase in an asset or expense account. • It records a decrease in liability or owner management chapter 3 20
  21. 21. A cost or expenditure incurred in the production of management chapter 3 21
  22. 22. The physical quantity and financial value of products produced for sale that have not yet been management chapter 3 22
  23. 23. A debt or other financial obligation that must be paid at some point in the management chapter 3 23
  24. 24. Revenue minus expenses. The same as management chapter 3 24
  25. 25. • The difference between business assets and business liabilities. • It represents the net value of the business to the owner(s) of the management chapter 3 25
  26. 26. A payment made for a product or service in an accounting period before the one in which it will be used to produce management chapter 3 26
  27. 27. Revenue minus expenses. The same as net farm management chapter 3 27
  28. 28. • The value of products and services produced by a business during an accounting period. • Revenue may be either cash or management chapter 3 28
  29. 29.  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?farm management chapter 3 29
  30. 30. A period of time used to summarize revenue and expenses and estimate profit. It can be either a calendar year or a fiscal year. It is generally recommended that a firm’s accounting period follow the production cycle of the major management chapter 3 30
  31. 31. • 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. • In double-entry, there are equal and off- setting entries for every transaction. • Double-entry accounting requires more effort, but it is also more management 31chapter 3
  32. 32. • 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.• Between these extremes are many management 32chapter 3
  33. 33.  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?farm management 33chapter 3
  34. 34.  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 periodfarm management 34chapter 3
  35. 35.  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 systemfarm management 35chapter 3
  36. 36.  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 management 36chapter 3
  37. 37. Cash Accounting Accrual Accounting Cash grain sales 50,000 50,000 Grain inventory increase N/A 50,000 Total Revenue $50,000 $100,000 Fertilizer 0 8,000 Seed, chemicals, fuel 25,000 25,000 Drying fuel 0 3,000 Total Expenses 25,000 36,000 Net Farm Profit $25,000 $64,000farm management 37chapter 3
  38. 38.  Accrual-based system recommended, but cash system accepted, with end-of-year adjustments A full discussion of the adjustments will be provided in chapter 6farm management 38chapter 3
  39. 39.  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 systemfarm management 39chapter 3
  40. 40. farm management 40chapter 3
  41. 41. • This chapter discussed the importance, purpose, and use of records as a management tool.• Records provide the information needed to measure how well a business is performing.• They also provide information needed to make sound decisions in the future.• Any accounting system must be able to handle production, investment, and financing activities.• The output desired from the accounting system must be considered when choosing management 41chapter 3