Spencer Ag Business Curriculum 2012 Record Keeping Spencer Ag Business Curriculum 2012

Student Objectives Purpose of keeping records Financial statements Steps needed to set up a records system Types of records Accounting systems and terms Depreciation Other terms and key points

Why Keep Records? Required for income tax reporting Needed to obtain credit Assist in planning and managing

Record Keeping Terminology Accounts payable: money you owe Accounts receivable: money owed to you Taxes: money owed to gov’t for income Freight and trucking: money paid for transporting commodities Capital assets: breeding livestock and machinery

Record Keeping Terminology Capital purchases: money owed for breeding livestock and machinery Capital sales: money received for sales of breeding livestock and machinery Market cost: used to value purchased feed and seed Patronage dividends: money received from a cooperative

Types of Financial Statements Net Worth Statement: records assets and liabilities Shows financial condition of the business Lists all assets & values, liabilities & values A.k.a. balance sheet Cash Flow Statement: monthly cash inflows and outflows

Types of Financial Statements Income Statement: shows profit for a given time (1 year) A.k.a. Profit/Loss Statement Detailed Enterprise Analysis: profitability efficiency of an individual enterprise Budgets: Financial plans Partial: Compares/contrasts two options Enterprise: Plans for one part of a business Whole Farm

Steps Taken to Set Up a Record Keeping System Select a record keeping system Select an accounting system Select a method of reporting income and expenses Develop a procedure to get exactly the information needed from the records

What Records? Financial (Money) Physical Receipts & expenses Net worth Income statement Cash flow Physical Production records of crops & livestock Crop yield Birth weight, weaning weight

Types of Accounting Systems Double Entry Credit transaction balanced by a debit transaction Single Entry No balance maintained

Income and Expense Records Cash Method: record actual cash transaction No inventory kept Expenses not deducted until cash is paid Income may be erratic

Income and Expense Records Accrual Method: Income and expenses recorded when they actually occur Uses inventory to match income & expense with appropriate time period Detailed and complex Easier to analyze strengths and weaknesses of a business Work with abstract figures (may only show profit on paper)

Income and Expense Records What are cash receipts? Cash flowing into a business Examples Cash sales, government payments, dividends, insurance payments, capital sales, rental income, etc. What are cash expenditures? Cash flowing out of a business Hired labor, taxes, repairs & maintenance, supplies & inputs, interest, capital purchases, utilities, etc.

Income and Expense Records Entering Negative Balances $1,100 ($1,100) -$1,100

Inventories Inventory: List of all assets and values Why keep an inventory? Get a true picture of financial position Must use with accrual method Places values on assets

Inventories What should be inventoried? In short…EVERYTHING: Crops in storage, market livestock, supplies, breeding livestock, machinery, equipment, buildings, land, accounts receivable, accounts payable, liabilities

Inventories What guidelines should be followed? Measure quantity in common units (bushels, cwt., tons, pounds) Group like items (cows, bulls, replacement heifers, calves)

Inventories How are inventories valued? Cost minus depreciation (equipment) Cost minus depletion (example: gravel pit) Market cost (inputs) Net market price (products sold)

(Purchase Value – Salvage Value)/Useful Life Depreciation What is depreciation? Loss of value due to age and use Two types—Straight Line & Accelerated How is depreciation calculated? (Purchase Value – Salvage Value)/Useful Life Current Value = Purchase Value - Depreciation

Depreciation: Practice Problem 1: Combine Purchase Value: $200,000 Salvage Value: $20,000 Useful Life: 18 years Current Age: 10 years What is the current value of the Combine? (200,000-20,000)/18 = 10,000 *10= $100,000 $200,000-$100,000=$100,000

Depreciation: Practice Problem 2: Tractor Purchase Value: $120,000 Salvage Value: $10,000 Useful Life: 16 years Current Age: 8 years What is the current value of the Tractor?

Depreciation: Practice Problem 3: Truck Purchase Value: $40,000 Salvage Value: $2,500 Useful Life: 15 years Current Age: 5 years What is the current value of the Truck?

Review Describe the major financial statements in record keeping. List and describe the two accounting systems. What are the two methods used to enter income and expense records? How can negative records be recorded? Why keep records? How is depreciation calculated?