AGEC 407 Record Keeping Why is record keeping important? –Measure profit and assess financial condition –Provide historical 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

AGEC 407 Record Keeping What data do we record? –Revenues: quantity sold, price received –Expenses: quantity, price –Inventories: quantity, price accounts, supplies, feeds/crops, livestock, machinery, buildings, land –Production: total, yield per unit

AGEC 407 Record Keeping Cash vs. Accrual Accounting –Cash Accounting is: Simple Allowed for filing income tax returns Not an accurate measure of profitability –Accrual Accounting is: More work More accurate

AGEC 407 Cash Accounting Record transactions only when cash is spent or received Ignores accounts payable or receivable Analysis may not accurately represent the production period!

AGEC 407 Accrual Accounting Products are counted as revenues in the year that they are produced Inputs are counted as expenses in the year that they are used Provides more accurate information for analysis and decision making When is cash accounting the same as accrual?

AGEC 407 Cash vs. Accrual Accounting For more info. see Appendix E of Farm Financial Standards Council: –

AGEC 407 Record Keeping An accounting system is necessary to create financial statements The Big 3 reports: –Income Statement –Balance Sheet –Cash Flow Statement

AGEC 407 Financial Statements Income Statement –also called Operating Statement or Profit and Loss Statement –measures the difference between revenues and expenses –should be accrual adjusted for accuracy –must incorporate balance sheet information

AGEC 407 Financial Statements Balance Sheet –also called a Net Worth Statement –provides a “snapshot” of financial position at a given point in time –difference between assets and liabilities is the Net Worth of the owner(s) for the business

AGEC 407 Financial Statements Balance sheet measures the stock of real and financial assets Income statement measures the flow of income generated from the stock of assets Both needed for calculating rate of return on assets

AGEC 407 Financial Statements Need beginning and ending Balance Sheets to make accrual adjustments to the Income Statement Accrual Adjustments are changes in: –inventories: livestock, machinery, feed, supplies, etc. –accounts: receivable, payable, prepaid and accrued expenses

AGEC 407 Record Keeping Know the basic accounting terms on page 41

AGEC 407 Depreciation The annual loss in value of an asset due to use, age, and obsolescence Depreciable assets: –have a limited useful life of more than one year –are used in the production activities of the business Is a business expense. Why? –The asset is consumed in the production process

AGEC 407 Depreciation Has important tax implications Has important profitability implications –matches the annual cost of the asset with the years that it contributes to revenue

AGEC 407 Depreciation Methods for calculating: –Straight Line –Sum of the Year’s digits (SOYD) –Declining Balance

AGEC 407 Straight Line Depreciation Annual Depreciation = (cost-(salvage value))/useful life Easy to use

AGEC 407 SOYD Depreciation Annual Depreciation = (cost-(salvage value))*(RL/SOYD) RL = Remaining useful Life SOYD = Sum of 1 thru Useful Life Declines by a constant amount each year

AGEC 407 Declining Balance Depreciation Annual Depreciation = (book value at beginning of year) * constant percentage Book value decreases by the amount of depreciation taken Double declining balance is an annual depreciation rate 2x greater than straight line method