Acquiring and Organizing Management Information Chapter 3

Purpose and Use of 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

Agri-Business Activities Production Activities Investment Activities Financing Activities All transactions related to these three things go into an accounting system.

Business Accounting Terms Account Payable- an expense that has been incurred but not yet paid Account Receivable- revenue for a product that has been sold but not yet received. Accrued Expense- an expense that accrues or accumulates daily but has not yet been paid Asset-any item of value, tangible or financial

Business Accounting Terms Credit- in accounting, a credit is simply an entry in the right-hand side of a double entry ledger Debit- in accounting, a debit is simply an entry in the let-hand side of a double entry ledger Expense- a cost or expenditure incurred in the production of revenue

Business Accounting Terms 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 time in the future Net farm income- revenue minus expenses, we call this profit Owner Equity- the difference between assets and business liabilities

Business Accounting Terms Prepaid expense- a payment mode 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 Revenue- the value or products and services produced by a business during an accounting period, revenue may be cash or noncash

Cash versus Accrual Accounting Cash Accounting- no transaction is recorded unless cash is spent or received Advantages are that it is simple, easy to use system that requires very little knowledge of accounting. Disadvantages are that it is very common for production to occur in a period other than when the product produces revenue. This makes it difficult to assess actual profit for that year. This information is less useful for management decision making.

Cash versus Accrual Accounting Accrual Accounting- records as revenue the value of all products produced and all services provided during a year. Once revenue is determined for a year, all expenses incurred in the production of that revenue should be recorded in the same year.

Cash versus Accrual Accounting Advantages are that it produces a more accurate estimate of profit than cash accounting. It also provides accurate information for the purpose of financial analysis and management decision making. Disadvantages are the additional time and knowledge required to properly use this method. It also may not be the best method to use when calculating their taxable income.

Output from an Accounting System Balance Sheet- a report of the financial condition of a business at a point in time Income Statement- a report of revenue and expenses ending with an estimate of net farm income Cash Flow Report- This statement summarizes all sources and uses of cash during the accounting period and can also be used to compare actual versus budgeted cash flows

Output from an Accounting System Other output from an accounting system Transaction Journal General Ledger Depreciation Schedule Inventory Report Enterprise Reports Employee Records Income Tax Reports Statement of Owner Equity Family Living Expense Report