ttfs vision Agricultural Sciences UNIVERSITY OF CALIFORN f lN ANCIAL RECORDS FOR California Farmers •• o oo## ••oao • #, • •a gq##, A. D. REED CALIFORNIA AGRICULTURAL Experiment Station Extension Service CIRCULAR 460 (Revised) Financial records are an important part of any business operation. The California farmer is engaged in a highly commercialized business involving large income, great expense, and many laborers. He must keep at least the minimum records required for income tax purposes and for the social security tax paid on his farm workers. In addition, he should keep more detailed accounts as an aid in making management decisions and as a check on whether his business is showing a profit or losing money. This circular has a two-fold purpose: (1) to help you decide what you want from your financial records; (2) to show you how to achieve your aim with the least possible expenditure of time and money. Beginning on page 17, four systems of record keeping are described: check book and business papers; farm record books; double-entry ac- counting for the farm as a whole; farm enterprise accounting. The check list on page 25 will show you which system best meets your needs. This publication is largely based on the original circular written by Arthur Shultis, now Agriculturist Emeritus, Cooperative Extension, and Associate, Emeritus, on the Giannini Foundation, Berkeley. November 1974 THE AUTHOR: A. D. Reed is Economist, Cooperative Extension, Davis [2] FINANCIAL RECORDS FOR CALIFORNIA FARMERS YOU WILL NEED TO KEEP SOME OR ALL OF THESE RECORDS OF OPERATION Income tax Anyone receiving more than a specified gross income in a year (and the figure changes) is required to file an income tax return whether he has any taxable net income or not. The farmer, therefore, must report farm income and expenses, and figure his net farm profit on the In- ternal Revenue farm schedule 1040F, whether reporting on a cash basis or on an accrual basis. Schedule 1040SE, now required of every farmer, also contains his computation of social security tax on self-employment income. If he sells any assets, such as farm equipment or breed- ing or dairy stock held for 12 months or more, and such sale produces a capital gain, he reports this on schedule 1040D. He then reports all personal income, and figures the tax on Form 1040. Since in- come tax laws and regulations change frequently, it is advisable to consult cur- rent instructions from the Internal Rev- enue Service for further information. The Farmers Tax Guide is available at your Farm Advisor's office. (California also has a state income tax, with similar forms and methods of figuring, but the mini- mum gross income required for filing is higher.) Cash basis. The minimum records re- quired for income tax reporting on a cash basis are annual totals of cash re- ceipts and payments by kind, and a means of reporting depreciation. Depreciation may be listed in the farm schedule and carried forward from year to year. Net farm profit, cash basis, as figured on the [ farm schedule, is merely the difference between cash receipts during a year, and cash expenses paid during that year plus depreciation. This does not show the true profit from farming operations for a given year. The method is simple, however, and is used more often by farmers for income tax reporting than is the accrual basis. Accrual basis. Profit estimated on an accrual basis for income tax purposes closely approximates the true profit from farming operations for the year. In ad- dition to a cash record, the farmer must keep an annual inventory of livestock, products, and supplies on hand, and a record of adjustments, for income ac- crued but not yet received, and for pre- paid and unpaid expenses. Reporting on an accrual basis has an advantage over the cash basis if the products of a year's operation are not ordinarily sold within that year. The accrual system stabilizes and assigns profit to the year in which it is earned, and could thus result in lower total taxes over a long period. On the cash basis, sales from the production of two years could show in a single year. Capital gain. The sale of farm real estate will usually result in a capital gain (or loss) which will affect the amount of income tax paid. Hence, adequate rec- ords of cost of a farm and of subsequent capital outlay or development costs may be badly needed at some future date. The purchase of a farm also requires the dis- tribution of the purchase price over the 3] dwelling, land, trees, and depreciable assets as a basis for further reporting. Therefore, capital and property records are needed for income tax purposes. Farm profit statement An accurate profit statement for the farm business as a whole is essential to good management. Such a statement should contain some detail, including quantities and prices, as well as the true profit for a particular year's operation. The profit figure will not necessarily be the same as that reported for income tax purposes even though it has been prepared from the same records and facts. When substantial values of livestock, feeds, supplies, and unsold crops are on hand at the end of the year, an inventory must be made and used in calculating the actual profit for that year. You may figure profit for in- come tax purposes on a cash basis, and profit for management purposes on an ac- crual basis. You may even have to handle certain items differently for income tax than for management purposes. For ex- ample, you may not be able to claim tree depreciation as a cost in your farm sched- ule, yet it is a real, current cost in fruit production. For significance, you may wish to estimate farm profit for a crop year while reporting for income tax on the basis of a calendar year which may include the end of one production cycle and the beginning of the next. A compari- son of such a true profit statement with those of previous years may reward you with many ideas for changes that will make your business more profitable. Net worth statement This is a listing of property and debts, and may be called a "net worth statement," "financial statement," or "balance sheet." It is of greatest value when made at least once a year to show whether you are get- ting ahead financially or are running be- hind. The information may also be needed should you wish to obtain credit. A sys- tematic set of capital records and inven- tories will help in making up this state- ment. Reference record of financial transactions A written record of all financial transac- tions, with dates, names, quantities, and prices, can be very useful for future ref- erence. Information may be needed to help settle a difference of opinion or make a managerial decision, or it may merely be of personal interest to the individual. When a farmer keeps his own records, he seldom enters a transaction until money has been paid or received. A record of cash received and paid is a major part of the farm record books. Cash records, journals, and other books of original en- try in full accounting systems provide a complete, accurate record of all financial transactions. The check book and business papers provide a check on other cash rec- ords, but are not, in themselves, a consecu- tive record of all transactions. They are usually incomplete, inconvenient to use, and generally require a hunt among pieces of paper and check stubs. Owner's investment and withdrawals In managing combined personal, or non- farm, and farm finances, it would be help- ful to keep a record of the money put into the farm business and the money taken out for nonfarm purposes or personal liv- ing. It is too easy to write checks so long as there is money in the bank. Knowing the monthly and annual totals, watching living and farm operating expenditures, and planning to meet future needs will help you avoid spending more than the farm business can safely provide. Keeping such records would not be easy with only the check book record. It is easy if the farm record book has, in its "Cash Rec- ord" a column for personal or nonfarm re- ceipts put into farm funds, and another column for personal expenditures or with- [4] drawals. This information can usually be made available in full accounting systems by keeping an account for each person furnishing funds or labor to the farm business and obtaining moneys and other valuable items from it. Investment and depreciation record A detailed listing of the major items of investment in the farm business is rec- ommended. The capital and depreciation record mentioned above in connection with income tax needs and the figuring of capital gains and losses is also helpful in listing property when making a net worth statement. Listing of individual items is usually made by groups, with totals for current remaining value and de- preciation available for use in statements. Instead of listing each item, you may use group totals in the depreciation schedule of the income tax farm schedule 1040F, with the statement that these are from the farm record book. A capital and depreciation record should permit the figures to be carried forward for several years to avoid the additional work of relisting each year. Inventories Any substantial value of unsold crops, livestock, feed, and supplies on hand at the end of a year should be carefully in- ventoried. This inventory value is used in figuring profit on the accrual basis for income tax purposes and is essential in figuring the true profit from farming operations, for the year, for management purposes. Inventory totals by kind of item are also needed in making up a net worth or financial statement. Careful tak- ing of an inventory is of great benefit to the operator. It forces him to count and classify his livestock and other items on hand. This information can help prevent thefts and losses, and aid in figuring pro- duction, feed consumption, et cetera. Inventories are made as of the begin- ning of the first day of each record or accounting year, and also serve as the closing inventory for the preceding year. Careful, consistent methods and valua- tion policies are essential. Livestock should be counted by kind and age groups, and feed and other items should be estimated. Inventories used in figur- ing profit for income tax must be valued on the same basis from year to year until permission is obtained from Internal Revenue to change. Payroll record Wages paid farm labor should be re- corded as a separate item of farm ex- pense. Where there are several employ- ees, some time record is usually kept to show the wages due, and a payroll record is frequently used to show the names of employees, time worked, rate of pay, any deductions, and the amount of pay re- ceived. On large farms, the payroll would be in a separate listing or record book. In enterprise accounting, the payroll rec- ord is also used to show the distribution of wages over the several farm enterprises. Time cards provide the information for wage payments, and entries in the payroll records distribute labor costs to enter- prises. Social security tax records Farmers must withhold social security taxes from wages of farm workers who receive cash wages. These withheld taxes, plus the equal employer's tax, must be remitted to the Internal Revenue Service periodically. The farmer needs adequate records of wage payments in order to determine whether a worker is subject to tax. He must also keep records of taxes withheld, remitted to the Internal Rev- enue Service, and returned to any em- ployee not. subject to tax. Such records also serve as a basis for the required receipt given to each employee, showing his wages and the amount of social se- curity tax withheld. The amount of in- [5] formation required makes it necessary for the farmer to keep at least an indi- vidual employee's wage and tax record, and justifies his keeping a payroll record as well. The individual record of earnings and social security tax can be in any form, such as a separate card or sheet for each employee, with the columns and headings entered by the user. Commercial social security books are available at stationery stores. The record can be the minimum four columns for social security tax pur- poses, or it can contain additional facili- ties to make it a more adequate record of employment and basis of wage payment. Crop and livestock production records Although these are not strictly finan- cial records, quantities produced should be incorporated as a part of certain en- tries. You must know what your produc- tion per acre is in pounds or tons, the egg production per hen, or the milk or beef production per cow before you can decide whether the enterprise may be improved, and, if so, how. It is also important to have a map of the farm showing the acreage and crop in each field, the yield per acre for each year, and the total annual yield. Com- parison of yields in the light of crop sequences, fertilizer treatments, et cetera, gives basic information to help in ob- taining maximum yields. There have also been times when crop acreage and yield records were needed to establish acreage allotments and marketing quotas. Livestock records should provide calf or lamb crop percentages, selling weights, and prices. Net quantity of production should be figured in number of head, total pounds, and value. Sales during a year, plus closing inventory, less pur- chases and opening inventory, provide this net stock production. It is necessary to keep a record some- where of number of head and pounds sold, as well as income received. If a sales slip or invoice is obtained for each sale, these may be segregated and added to obtain total sales. The same may apply to eggs, milk, or crops sold. Farm record books may contain a map and a page for listing production each year, for both crops and livestock. Quan- tities may be included in the financial en- tries for sales and purchases. Farmers who hire a full accounting system for the farm business as a whole seldom receive production records on major crop and livestock enterprises from their accountant. This is usually a sup- plementary job that the operator must do for himself. Upon his request, how- ever, reports on total sales by quantity could easily be furnished. Supplemental records to complete the information needed should be developed by the man- agement. Production records for each enterprise are an integral part of enterprise ac- counting. They are used to develop the basis for analyzing and improving each enterprise. Joint ownership accounts When more than one family is in- volved in the ownership or operation of a farm, special accounts must be kept of the financial relationship of each to the farm business. Investments of money, livestock, or equipment, and of labor or management, should be recorded, as agreed upon, as should withdrawals of money and perquisites. This is best done through the capital, drawing, and asset ledger accounts in a full accounting sys- tem. To avoid suspicion or bad feeling, it is much bettter to have a neutral book- keeper or accountant keep the records or accounts, rather than one of the own- ners. If the business is not large, and one of the parties concerned keeps the farm record book, he needs to supplement those records with a partial ledger containing accounts with each person. [6] Accounts receivable and payable Farmers who do their own bookkeep- ing usually leave it up to their debtors or creditors to keep records of what is owing or owed. The farmer makes his first entry of a transaction when he pays or receives cash. This procedure is usu- ally adequate except at the end of a year when he wishes to list unpaid bills or money due him on sales of products in order to figure a true profit for the year and a net worth or financial statement. Usually he will have adequate statements and other business papers from which he can list these balances for an accrual adjustment in figuring profit or for the net worth statement. Most firms with full accounting sys- tems have ledgers containing accounts with others. When a delivery of feed or fertilizer is made, it is credited to the vendor's account at once on the basis of the invoice. This account is debited when the vendor is paid. Such accounts usually show balance owed to and owed by the firm or individual. But a partial ledger may be used with any system to keep such information up to date. A ledger account is a page on which all transac- tions with a particular person, firm, or thing are brought together. Enterprise profit statement and analysis Each crop and kind of livestock is a separate enterprise undertaken for profit. Some farms are composed of a single enterprise, but most farms have several, such as two or more crops and one kind of livestock. If the farm business as a whole is to attain maximum profit, each crop or type of livestock produced on that farm must be as profitable as pos- sible. The production, income, costs, and profit for each enterprise comprise in- formation most important to manage- ment. Without this information, analysis to discover changes which could increase profit in an enterprise is difficult. Operating costs of service units In making managerial decisions, it is helpful to know the operating cost of a service unit, such as a tractor, combine, or truck, or of boarding and rooming employees, or of irrigation water. The elimination of a service unit, such as a mess hall or large, special machine, may frequently save more than the cost of an accounting system. Gasoline use for tax refunds Farmers may now obtain refunds of both federal and state taxes on gasoline used in farming operations within the farm. Claims for refunds must be based on ad- equate records that can be inspected to verify the accuracy of the claim. Some farmers use separate tanks and have de- liveries marked by tank. Others keep rec- ords of gasoline put in each tractor and vehicle and indicate "on farm" or "high- way" use. These records can be supple- mental to any system, and would auto- matically be a part of service unit cost accounting. [7] SOME BASIC PRINCIPLES OF FARM RECORD KEEPING Farmers' expenditures fall into three main groups : personal, or nonfarm ; farm operation; and capital items, such as the purchase of a tractor. Their receipts are also from the same three sources: personal, aside from farming; the sale of farm products; and capital items, such as the sale of property. The major re- quirement of any system of accurate farm accounting and computation of true profit is the separation of amounts in these three major account groups. Correct income tax returns likewise require the separation of personal, farming, and property, or capital, items. A record including all three types of receipts and expenditures is recom- mended. Some of the earlier, special farm record books called for the recording of only farm operating receipts and expendi- tures. It was left for the farmer to sep- arate the items, either mentally or on scratch paper, and to enter only the farm expense part of joint farm and home bills in the farm record book. Certain capital items, such as a building or piece of equipment, would be listed in the inven- tory or capital and depreciation records. This partial accounting is no longer safe with high living and farming costs, the growing importance and magnitude of capital items, and high income taxes. Personal affairs. Expenditures for food, clothing, and maintenance, and for operation of the personal dwelling on the farm are considered as personal and not farming expenses. Many bills, such as those for electric power, telephone, and purchases at a department store, are part personal and part farm. They should or- dinarily be paid by a single check, and the entire amount should be recorded in a single entry — the personal portion in the personal column or account, and the farm expense portion in appropriate farm expense columns or accounts. Occasionally, incomes from sources other than the farm occur and should be shown as cash received in the farmer's financial records. These incomes should be entered in separate columns or ac- counts, where they will not be included in or confused with income from the farm business. When a farmer has some other business or investments, such as rented dwellings, it may be well to have additional separate columns or accounts in his financial records so that he may figure his net income from that business separately. In any event, he will need a record of all nonfarm and personal in- come for his personal income tax return. It is also well to keep records of per- sonal contributions and withdrawals by various members of the farm family or families. A minor child may be paid wages for actual farm labor, and these become a deductible farm expense for income tax purposes. The operator him- self may wish to keep a record of the value of the labor he contributes. Farm- produced food used in the home need not be considered as income to the farm in figuring profit for income tax purposes provided expense incurred in its produc- tion is not claimed. Hence, expenses per- taining to a family garden or cow or chickens would be personal and not farm expenses. For management and personal purposes, it would be well for the farm family to prepare and study a list of their combined contributions to and withdraw- als from the farm business, to be sure that they are not using, in living, more than the farm earns. Capital. Think of capital as property. That property may be in the form of cash, equipment, livestock, or real estate. The purchase of farm equipment or breeding livestock is capital outlay. Capi- tal in the form of cash is exchanged for property in another form. Borrowing and [8] repayment of money are capital transac- tions and are not considered as farm operating income or expense. These capi- tal transactions need to be recorded in detail for future reference, but should be segregated from farm operating items by use of different columns or accounts. In some borderline cases, an expenditure might be considered to be either a capital outlay or a current expense. Larger pieces of equipment that will be usable over a period of years should be considered as capital outlay. To charge the purchase price of a tractor as farm expense to the year in which it is pur- chased would obviously be incorrect. The purchase price should be handled as a capital outlay and spread over the years of use by an estimated charge called "de- preciation." This would apply to all items costing more than, perhaps, $50, and usable over 3 years or more. On the other hand, it is not justifiable to list small items of low cost and short life, such as shovels or pruning shears, in the capital and depreciation record, and to figure depreciation thereon. Such small items may be considered as current expenses; this is permitted by income tax regula- tions. Minor repairs that merely maintain the usefulness of an existing building or piece of equipment for its previously estimated life are current expense. Major repairs, such as reroofing, should be con- sidered as capital outlay and spread over the remaining life of the building through additional depreciation. An addition or improvement to a building to increase its usefulness is a capital outlay. Major re- building of an old machine or building that extends the useful life of that item is also a capital outlay. Land development, such as clearing and leveling, is usually capital outlay. If the improvement is permanent, it re- mains a part of the cost of the farm, and is not depreciated. Subsequent repairs or releveling to restore to the original im- proved condition are current operating costs. If a releveling job makes the im- proved land better than ever before, how- ever, a part of the cost would be capital outlay. Certain soil and water conserving improvements may be considered as ex- pense for income tax purposes rather than as capital outlay. Borderline cases often cause farmers considerable difficulty in reporting expenses for income tax pur- poses. In such matters, be sure to follow income tax regulations and instructions. The costs of planting a new orchard or vineyard and of its care until it comes into bearing are capital outlay. However, when subsequent care is included with other farming expense, it may be con- sidered as current costs for income tax purposes. Only with enterprise account- ing would it ordinarily be possible to keep the costs of developing a young orchard for several years separate from other costs in order to consider them as capital outlay. For income tax, only that part of the cost of developing an orchard which has been considered as capital outlay and not as current operating cost may be written off as depreciation in later years after the orchard is bearing. Occasional replants in an existing or- chard would be considered as current expense and not as additional capital out- lay. The purchase of livestock for breeding or productive purposes is also a capital outlay. Such livestock may be depreciated over its useful life. Stock of low value or short life, such as poultry, would be han- dled as current expense and income when bought and sold. The same is true for animals bought to be fed for a gain in value before resale. In reporting for in- come tax purposes, farmers may treat certain animals raised on the farm and held for breeding or dairy purposes over 24 months as capital assets when sold, rather than as current income. Such ani- mals would not be included in the inven- tory, and, when sold, would have no cost because previous costs of raising them [9] would already have been deducted as part of the expense. Therefore, the in- come would be a long-term capital gain, only half of which would be taxed. In the records, it is important to segregate stock raised both from stock purchased and from stock not subject to this treatment when sold. If all the farmer's personal and busi- ness affairs are handled in his farm finan- cial records, these records then apply to him as an individual, even though his farm income and expenses are kept in separate accounts or columns. All property, whether farm or personal, belongs to the owner. Deposit of money from combined farm and personal funds, in a savings bank, or the use of that money for the purchase of bonds, would be a capital item not requiring classifica- tion as to whether it were farm or per- sonal. Income from interest thereon would be personal income and not income from farming. Capital outlay would, of course, be recorded, as made, in the cash record. Farm equipment and livestock purchases would be listed as farm capital items, whereas a home freezer bought from the same funds for personal use would not be listed in the farm capital and deprecia- tion record, but rather in the inventory of personal and household goods. The sale, purchase, or transfer of farm real estate is a large and important capi- tal transaction calling for allocation of the total sale price, or value, to the land and to depreciable improvements, equip- ment, growing crops, and livestock. The seller may have a tax to pay on a long- term capital gain. The buyer may use part of the purchase price as the cost of the growing crop he will later sell. The portion of the price allocated to depreci- able improvements, trees, and equipment may be written off as depreciation. The important thing about all capital transactions is to record them fully for later reference. The price paid for the land and the remaining value of the de- preciable assets would be used as the basis in figuring capital gain or loss in a subsequent sale. In transfers by gift or inheritance, the current market values should be appraised and allocated to the assets concerned, since these values may become the cost basis to the new owner, and be involved in estate taxes. It would be advisable to have this appraisal made by a competent professional appraiser. Farming operations. The main ob- jective in farm financial records is to figure the profit or loss from a year of farming operations. This requires that income from farming and the expenses of producing that income be accurately determined. Farm incomes are largely from the sale of farm products, with an occasional small, miscellaneous income from use of farm equipment and livestock or from government payments. Farm ex- penses are largely for labor, materials, and supplies used or paid for during the year. Most farm financial records are kept in terms of cash. Transactions are not recorded until cash is received or paid. This procedure conforms to the usual method of reporting on a cash basis in the farm schedule for income tax, al- though this profit figure for the year will not usually be the true profit earned by the farm in that year. One year's expense might include the purchase of fertilizer and seed to be used on next year's crops, while income from a crop produced this year might not be received until next year. Farm products exchanged for some- thing for personal use should be listed as farm income even when reporting under the cash basis. Under the full accrual basis, expense items are always charged to the year in which they are used. A 3-year insur- ance premium would be prorated over the 3 years of insurance coverage. In- come and costs in the production of a particular crop are usually applied to the year in which that crop is produced, [10] even though the crop has not yet been sold by the end of the year. Products and livestock on hand at the close of the year are treated as income from that year. Supplies bought on credit and used, but not paid for, in a given year would be charged to that year's expenses. This ac- crual basis of accounting gives a truer profit figure each year. Although more trouble, the system is justified for man- agement purposes on most farms, even when the cash basis is used for income tax purposes. Regardless of the system followed, it will be necessary to estimate a fair divi- sion of certain expenditures between farming and personal purposes when the farmer occupies a personal dwelling on the farm. County taxes paid on the farm will largely be a farm expense, but those applicable to the personal dwelling and household goods are personal expenses, and should be separated. When the dwell- ing is also used, in part, for the farm business, as in housing or boarding em- ployees, or if it contains a farm business office, then a proportionate share of taxes and other expenses pertaining to that building is legitimate farm expense. Ex- penses of an automobile used for both farm and personal purposes are also to be divided in proportion to use. It is usually more convenient to charge all expenses on the personal car either to the personal account or to the farm busi- ness for the year, and then to divide the total cost and make appropriate adjust- ments at the end of the year. Interest on money borrowed to pay for or operate the farm would be current farm expense, while principal payments on the mortgage would be capital items. Hence, a loan installment of principal and interest would need to be divided between farm expense and capital. Depreciation. Modern farming in- volves a considerable investment in pro- duction facilities — improvements and equipment that wear out or become out- of-date. Irrigation wells, pumps, pipe- lines, orchards, tractors, trucks, farm buildings, farm machinery of many types, and considerable other equipment, such as ladders, result in a high average in- vestment per farm in California. The cost of these facilities is spread over their useful life by a charge called depreciation. To figure annual depreciation on an item, first subtract the final salvage value from the original cost, and divide the re- mainder over the estimated years of use. If salvage value is not likely to be sub- stantial, it is usually ignored, and annual depreciation is figured as a fraction or per cent of original cost. This straight-line method, in which an equal fraction or rate is taken each year, is used for most farm items. Table 1 shows some appropriate rates. Depreciation for income tax purposes may be figured in any of four ways: (1) by the straight-line method described above; (2) by the declining balance method, using a rate not exceeding twice the straight-line rate; (3) by the sum of the year's digits method; and (4) by any other consistent method, provided the total deductions during the first two-thirds of the useful life of the item do not exceed those allowable under the declining bal- ance method. These methods are ex- plained in instructions to taxpayers from the Internal Revenue Service. The follow- ing is an illustration of the straight-line method which is, for most farmers, the simplest and perhaps the best system. A machine shed costing $6,000 might be assumed to have a useful life of 30 years with no salvage value. Depreciation would therefore be $200 a year. By the time the house was 10 years old, it would have a remaining value of $4,000, since 10 times $200 ($2,000) would have been charged into annual expenses as depreci- ation. Perhaps before the 30 years have passed the building may be destroyed or reconstructed, with changes in the re- maining value and depreciation thereon. [in A continuous yearly capital and deprecia- tion record listing all important items and showing depreciation, added capital out- lay, remaining value, and years of life is an important feature in an adequate sys- tem of farm financial records Another valid method of figuring de- preciation would be to estimate it each year on the basis of the remaining value of the item in light of the used-car or equipment market, in which case, the drop in value the first year would be con- siderably more than that estimated by the straight-line method. Depreciation on an alfalfa stand could be in proportion to tonnage. For example, a stand costing $50 an acre, and with an intended life of four years, might be es- timated to produce 24 tons of hay — 5 tons the first year, 8 tons the second, 7 tons the third, and 4 tons the fourth. Depreciation would be figured at $2.08 per ton, or $16.67 in the second year. Depreciation on an orchard is not started until it reaches commercial bear- ing age. That is the age at which income would normally be expected to cover more than current annual expense in the or- chard. For income tax purposes only, that part of the development cost that was han- dled as capital outlay during the years of development would be considered as the cost, and subject to depreciation. The amount might be only $150 an acre, all incurred in the first year. If it were a peach orchard in commercial bearing at 5 years of age, and with an expected pro- ductive life of 20 years from that time, then annual depreciation would be $7.50 per acre, starting in the sixth year. The table on page 23 lists probable use- ful lives and depreciation rates for many California farm facilities. Selection of depreciation rates for use in farm financial records should be based on intelligent estimates for the conditions assumed. Usually the farmer does not need to use a different set of rates for income tax purposes than he does for his own records. For income tax, the ten- dency is to use high depreciation rates — writing off equipment, such as tractors, in 5 years. When once the the equipment is written off, no more depreciation may be charged, and taxable profits are in- creased and usually taxed at increased rates. Any reasonable rate for the par- ticular farm conditions can be defended, even though it may exceed the rates sug- gested in income tax regulations. An ir- rigation well put in by a tenant under a 5-year development lease, and becoming the property of the landlord at the end of that period, would be depreciated over the 5-year period, by the tenant. A citrus orchard in an area where trees are pro- ducing for only 20 years should carry that depreciation rate, even though a 33-year life is considered standard. Remaining values. Regardless of the system followed, a farmer having much in the way of depreciable assets would do well to have a continuous capital and de- preciation record as a supplement to the other records. It should list each depre- ciable asset considered as capital outlay, beginning with the year it was obtained, and show remaining value at the start of each year, any added capital outlay, re- maining estimated life, and depreciation for the year. Such a record will show when an item is fully depreciated, at which time no further depreciation will be charged. It will show remaining value as a basis for figuring capital gain or loss if the item is sold, or loss if the item is destroyed. If the item is traded in on a new machine, for income tax purposes the cost of the new machine is the remaining value of the old, plus the difference paid for the new machine. Such a depreciation record may be made up on any ruled, columnar paper, but it may be more convenient to use specially prepared and labeled record books or accounting forms. Most farm record books contain forms for a contin- [12] uous record for several years with listings in groups, so that only the totals for each group need be listed in the depreciation section of the Income Tax Farm Schedule. The record year. A complete cycle in farming is 1 year, and the calendar year is a satisfactory 12-month period for most farms in California. Work and production go on through most of the year, and about the same operations are performed in corresponding months. Thus, a year's expenses just about fit the year's production and income. For in- come tax purposes, it is necessary to adopt a year for reporting and then to use the corresponding 12-month period in follow- ing years unless permission is obtained to change, in which case records and ad- justments to cover the shift will be re- quired. The most valid and useful profit figure for management purposes would be ob- tained if the fiscal or record year started after the harvest and sale of one year's crops, and before much was done on the crops for the following year. For dry-farm grain growers, August 1 might be the best starting time. Grow- ers of irrigated cotton, a crop which does not have its final picking until January or February, would find a fiscal year starting on March 1 to be best. For mountain livestock ranches, the end of the winter feeding and marketing period, about April 1, when inventory of feed and live- stock is lowest, might be most satisfactory. Beef feeders who buy feeder cattle in the fall would start their record year just be- fore such cattle are usually purchased. In establishing a new business, it would be well to select a fiscal or record year that would best fit the annual production and marketing cycles of most of the crop and livestock enterprises on the farm. Once a record year has been adopted, it is doubt- ful whether it would be worth while to change or shift the dates. There is no reason, however, why a supplemental profit statement for a year different from the one used for income tax reporting should not be made for management pur- poses. In enterprise accounting, the profit statement for each enterprise is made for an appropriate crop year or production cycle regardless of the fiscal year of the farm business as a whole. Farm enterprises. In California, this term refers to the separate crops and kinds of livestock that may be combined into a farm business. Some of our farms are single-enterprise farms — that is, with one product or crop, such as poultry or Valencia oranges. A dairy farm may con- tain, in addition to the dairy enterprise, hay, pasture, and perhaps silage enter- prises. Large irrigated farms might have cotton, potatoes, sugar beets, alfalfa, irri- gated pasture and one or more livestock enterprises. A cattle ranch selling nothing but cattle would still have several enter- prises — the breeding herd, a range, a hay, and perhaps a grain enterprise, and a beef feeding enterprise in which range- produced steers are fed in the feedlot for marketing as fat cattle. Enterprise accounting is a complete double-entry bookkeeping system, de- signed to furnish a profit statement and analysis for each enterprise. It is the ul- timate in farm accounting with respect to the information it provides manage- ment for use in attaining maximum profit. Making an inventory. When farm products, supplies, or livestock of sub- stantial value are on hand at the begin- ning and end of the record year, an in- ventory in which they are listed by quan- tity and value is essential for figuring the true profit earned for that year. Profit is figured on the accrual basis as closing inventory plus income for the year, minus the sum of the opening inventory plus ex- penses for the year, plus depreciation. Making an inventory requires four steps: (1) measuring or counting the quantity or number of like items; (2) applying a unit value, per ton, per head, et cetera; (3) multiplying number times [13] unit value to obtain total value of like items; and (4) adding total values of various items to obtain the total value for all items covered by the inventory. Valuation should be on a consistent basis from year to year. The following bases are suggested as most suitable for showing the most nearly valid profit fig- ure with a minimum of artificial or un- realized book profit included. Purchased feed and supplies on hand should be valued at what they cost delivered to the farm at the time of purchase. Feed har- vested on the farm and not held for sale but used for feeding to livestock would be assigned "farm value" at the time it was harvested and stored for future use. (Farm value is market value less the cost of marketing.) Farm products being held for sale would be assigned farm value at inventory time. Livestock about ready for sale would likewise be assigned farm value at inventory time. Young stock not ready for sale would be valued propor- tionately lower or given unit values that might approximate cost of production up to their present age. For management purposes, breeding stock and dairy stock kept for milk pro- duction would be given an average value per head, depending on the average age of the animals and the quality of the herd. This value per head would not be much above the average value of such animals when culled and sold. It need not reflect fully the year-to-year variations in market values although it should probably reflect their upward and downward trends. Value of mature breeding bulls and work stock inventoried individually would be lowered each year until each animal is culled at the end of its useful life. Association revolving funds. Many California farmers belong to coopera- tives through which they market prod- ucts and obtain supplies. These cooper- atives frequently withhold part of the in- come from a crop and put it into a revolv- ing capital fund with which to finance the association's operations. Sometimes these groups issue interest-bearing certificates which may be cashed by the farmer or used as collateral in obtaining a loan. From the farmer's standpoint, the cer- tificates are as good as cash, have been re- ceived as part of the income from a crop, and should be included in figuring the profit for a given year. This represents a capital outlay the same as if the farmer received the income and invested it in securities. Revolving funds pertaining to previous years, but cashed during the present year, represent income made in a previous year, not the current one. The receipt of cash is from a capital invest- ment in the certificates or book credits of the association. The value of these certificates and cred- its would be listed among the individual's assets, and included in making up the net worth statement. Patronage dividends. Cooperatives sometimes pay patronage dividends in cash or in certificates. These are usually a rebate on expenses previously incurred for supplies or marketing services. The farmer usually receives such a payment after his records for the year to which payment applies are closed. Such a re- ceipt may as well be considered as in- come for the year in which it is received rather than for the previous year in which it was earned. It is a simple matter to adjust the profit statement for manage- ment purposes for any year by correcting for these deferred receipts or expense rebates. For income tax reporting, farmers are expected to follow consistent methods of handling revolving funds, patronage divi- dends, further payments on delivered crops in marketing channels, and com- modity credit loans on stored farm prod- ucts. It is usually simpler, and also custo- mary, to report all these items when the cash is received, even though the amount does not entirely represent income from farm production during the current year. [14] FIGURING PROFIT FROM YOUR FARM OPERATIONS Farm profit may be figured in a number of ways, each of which may show differ- ing results from the same set of figures. In other words, there are several different measures of farm earnings. Different earn- ing figures result from the way in which inventories, depreciation, interest paid, the value of the operator's labor, interest on investment, and the value or cost of management are handled in a particular calculation of profit. Since several of these measures of farm earnings may appear in current agricultural literature, it may be well for you to understand the different terms as described below. Net profit is the profit as figured by any individual farmer according to his own accounting system, and is not com- parable for different farms because of differences in interest paid, the use (or lack) of an inventory, and the way in which operators' and family labor is han- dled. Other measures of net income are necessary when comparing farms. Net cash income represents cash in- come, less cash expenses. This is not a true earning figure since depreciation, inventory changes, and unpaid bills and family labor are not considered. Monthly figures are useful for management and budget purposes. Net farm income cash basis, means current cash farm income, less cash farm expenses and depreciation. This is the profit figure on the cash basis in the in- come tax farm schedule (1040F) unless part of the cash farm income were from animals handled as capital assets on schedule D. Expenses would include in- terest paid, but no value for operator's labor and no adjustment for an inven- tory or unpaid bills. Net farm income, accrual basis, in- cludes farm income arising from this year's business plus closing inventory, minus opening inventory, farm expenses for this year, and depreciation. This is a truer earning figure for the year than is the cash basis above, but it does not or- dinarily take into account the unpaid labor of the operator and his family, and includes only the interest actually paid on indebtedness — not interest on the op- erator's investment. Capital income is "net farm income" as explained above, less the value of the op- erators' labor and unpaid family labor. It is the return to invested capital, and may be best expressed as a percent of invest- ment. Management income is gross in- come less cash costs, depreciation, value of family labor, and interest on invest- ment. It is the net earning of the farm after all production costs are subtracted except those of the operators' manage- ment. Farm net income, as used in reports and publications of the Cooperative Ex- tension Service of the University of Cali- fornia, would normally be gross income, less depreciation, cash expenses, except interest on indebtedness, operators' and unpaid family labor and management, and interest on the investment. This net income is the best single figure by which to compare the earnings of different farms or enterprises since reimbursement to all labor and invested capital has been con- sidered. [15] KEEP YOUR RECORDS IN A BUSINESSLIKE MANNER Good business methods in handling re- ceipts and making payments can make the job of keeping financial records eas- ier, and result in more accurate records. Business headquarters. Every farmer should have a business headquarters in his home or office where he can write his checks, keep his records, and assemble and file all his business papers. The area should be well lighted, con- venient for use at all times, and should contain an adequate desk and possibly a file cabinet. Incoming mail may be held here for a day or two until it can be han- dled. Additions. In keeping your own rec- ords you will find an adding or calcu- lating machine a big help in making ac- curate monthly and annual totals. A small, inexpensive adding machine on your desk could save you considerable time each month and more time at the end of the year. This mechanical aid could be the difference between having a complete set of financial and other records for man- agement purposes, with net farm income improved by several hundred dollars, and doing poorly without records. Frequent entries. Make a habit of handling the farm business and making entries in the records as transactions occur. This will facilitate good record- keeping, and will actually take less time than if the work is allowed to pile up for many days. When too much time passes, it becomes more difficult to hunt for or remember the information needed. Spend- a few minutes every two or three days to write the checks for incoming bills, make the entries, and file the papers, will keep the desk clean and eliminate the necessity of finding an hour or two in which to catch up. Checking account. The use of a com- mercial bank checking account with all receipts deposited and all payments made by check is recommended. The bank account provides an outside check on accuracy and completeness. In one sys- tem of accounts it is the only currently kept record, and in others it is a valuable supplement. When only one family is concerned, and the business and personal expendi- tures are not extremely large, it is an advantage to use a single checking ac- count for both farm and personal funds or transactions. Only one statement and check book balance would have to be reconciled, joint farm and personal bills could be paid by a single check, and the correct distribution could be shown in the cash record. However, when funds are adequate, a family will usually want a separate checking account for the home. Pocket cash. The usual pocket cash from which small farm and personal ex- penditures are made should be consid- ered as a personal, or nonfarm, fund. When cash is obtained from the farm funds it is charged to the nonfarm or personal column. Small farm expenditures from this personal cash could be accumu- lated on a card or slip of paper, and could be entered the next time a check was drawn to replenish pocket cash. Cash sales. When farm products are frequently sold for cash, this cash should be kept separate from personal pocket cash until it has been deposited and re- corded in the farm business records. Cash sales may, however, be counted at any time, credited to the proper farm income account, and charged to personal pocket cash, if preferred. In cases of large cash sales, it is advisable to make out a sales slip in duplicate, give the first copy to the buyer, and keep the carbon for reference. This slip should show the item sold, the quantity or weight, the price, and the total amount. Such duplicate sales slips are a big help in segregating incomes when entries are made in no cash record other than the check book. [16] Business papers. Most large farm re- ceipts are accompanied by a statement showing the items, quantities, prices, and amounts involved. Sometimes deductions are made for advances, farm expense items or association revolving funds. Such statements should be segregated and pre- served by kind. After use at the end of the year they may be assembled with other business papers for that year and stored for about 5 years, for reference. Expense items, bills, or statements, should likewise be segregated by kind, partic- ularly those with details not usually en- tered in the cash records. This is partic- ularly important when no records are kept other than the check book. Income tax papers should be kept at least 5 years, and perhaps permanently, as they might be the only source of information from which to establish a cost basis in case of a sale of property. When an accountant off the farm keeps the financial records, these business pa- pers are usually taken to him at frequent intervals as the basis for his entries. Monthly totals. Although profit figures in farming are seldom significant for pe- riods of less than a year, monthly totals of income and expense may be very help- ful in making plans and budgets and in securing needed operating capital or credit. When income is regular each month, as from a dairy or an egg farm, a record of the monthly net cash income is a significant aid to management. It is sug- gested that all business be entered, and totals made and proved correct at the end of each month. When only a check book is kept, the farmer would finish writ- ing his checks and reconcile his check book balance with his bank statement. With a special farm record book he would also prove his bank balance and see that all his checks and deposits had been properly entered in his cash record. He would then add his columns, and obtain monthly to- tals for each column or account. It is ad- visable to check to make sure that all items have been entered in the proper col- umns and that additions are correct. Do not let small errors and discrepancies dis- courage you to the point that you give up keeping records for yourself. When an accountant or bookkeeper handles the records for you, he should also be required to bring the records up to date and to provide a report of monthly totals or of the accumulating balances in all of the accounts. Comparisons with pre- vious months and with corresponding pe- riods of previous years may disclose a deficit situation that can be helped before it is too late. Having your financial records up to date and correct at the end of each month is bound to help you in the day-to-day running of your farm business. You will be more aware of mounting expenses, and you will make better decisions in your purchases, sales, and nonbusiness expenditures. Your year-end work will also be easier and take less time. You may complete your income tax returns and pay the tax by March 1, thus avoid- ing the extra work of an estimate on Jan- uary 15, and a final return by April 15. SYSTEMS FOR KEEPING YOUR FARM RECORDS A group or combination of records con- stitutes a system for keeping, concur- rently, a check on the farm and personal business of the operator. Different operators require different systems. Four main ones are discussed in this section : the check book and business papers; the special farm record book; full double-entry accounting for the farm business as a whole; and enterprise ac- counting. Select the system which best fills your needs. [17] The Check Book and Business Papers Many California farmers keep no for- mal books of record. They deposit their incomes in a checking account, and make their payments by check. The pur- poses of payment are entered on the check or check book stub, and the source of in- come is shown on the duplicate deposit slips. Farmers using this system usually keep all their business papers, statements, invoices, et cetera, as well as their check stubs or canceled checks. At the end of the year they sort these papers, add the deposits (or have someone do it for them), and make out their income tax returns. Although this is scarcely an ade- quate system of records, it is simple, and and it does provide enough for an income tax return on the cash basis. Several supplementary records are available and advisable under this sys- tem. Depreciation, once worked out, is usually carried forward from year to year by means of the depreciation sched- ule on the income tax form. A more formal depreciation and asset record, such as that mentioned on page 5, is recommended. A supplemental record of employees' earnings, for social security tax withholding and payment, is needed if labor is hired. Crop and livestock pro- duction records should also be kept as supplemental records in any suitable forms, maps, or books. The main advantage of this system is that it requires very little work, and is low in cost. When the nature of the busi- ness is such that additional records or information are not needed, this system is satisfactory if well kept. The disadvantages of this system are that it fails to meet most of the other record needs of the farm operator, aside from the income tax, and it does not, without supplements, provide a true profit statement for the farm business for a particular year of operation, nor does it provide periodic net worth statements. [ Transactions may be looked up by hunt- ing through the papers, but no convenient reference record is available. The time saved throughout the year by keeping no other records than the check book is par- tially offset at the end of the year by the extra time needed to sort and add the items of income and expense for the farm schedule. The Special Farm Record Book Many special record books are avail- able for the keeping of farm records. Some are complete and sound from the accounting standpoint. Some are less ade- quate than others. Most state colleges of agriculture have designed and made avail- able a complete farm record book ade- quate for use in that state by farmers who wish to keep their own records. Some farm service companies and banks give free farm account books. Bound and loose-leaf farm account books are also available in stationery stores. The California Farm Record Book is published by the University of California and may be purchased through your Farm Advisor. It is designed for any type of farm, and for the farm business as a whole. It meets most of the farmer's record needs: it contains the special forms needed, instructions for keeping the rec- ords and preparing the net w T orth state- ments, and the profit statements on both the cash and inventory basis. The main part of all special farm rec- ord books is the cash record in which receipts and payments are to be entered as they occur. Usually a number of col- umns are included for segregating differ- ent kinds of income and expense in order to obtain monthly or annual totals for each. The only supplement to these record books that is frequently needed is the social security tax record. Cash records in these books are essentially a cash jour- nal, in accounting terms, and could be supplemented by a ledger and other rec- 18] ords to become a part of double-entry bookkeeping or farm enterprise account- ing described below. Special farm record books are intended primarily for farmers who do their own record keeping in their homes. They are suited to "family farms" varying in size from small to large. Although the books are sometimes used in partial partner- ships, they are not recommended when more than one family is involved in the ownership of the farm and its equipment or in a share of the profits. The advantages of the California Farm Record Book are that it meets most of the needs of the operator of a single- family farm; that special forms and in- structions are provided; and that tech- nical training in bookkeeping is not required. Disadvantages are that it is limited as to number of entries and ac- counts or columns, and some time is required in keeping the records. Double-entry Bookkeeping for the Farm as a Whole Double-entry bookkeeping is the basic procedure used in business when accuracy and honesty must be proved and demon- strated. Each transaction is first entered in a book of original entry, such as a cash book or journal. The amount is later posted to a ledger or book of accounts as a debit to one account and a credit to another. There are usually a considerable number of accounts, and the total debits in all accounts equal the total credits when posting has been correctly done. In farm bookkeeping, some accounts are used to show the value of the assets, liabilities and ownership of the farm busi- ness. Other accounts are provided, as needed, for different kinds of expense and income. It is suggested that records be brought up to date at the end of each month, that postings be made to the ledger accounts, and that a trial balance be made to prove the accuracy of the work and show account balances to date. [ Since this system uses technical ac- counting procedures and is usually done by trained accountants, standard com- mercial loose-leaf forms and binders are usually used, selected to fit the needs of the business and the preferences of the accountant or bookkeeper. Many forms and rulings are available, including sup- plemental forms for a depreciation record and for the payroll and social security records. Blank forms require writing in of column titles, et cetera, but some large farming companies have their own forms printed. This system is recommended when more than one individual is concerned in the ownership, and when the relation of each to the business must be reflected accurately and the profits fairly divided. It is also needed by the individual with a large farm and other investments and income. Double-entry bookkeeping is con- sidered necessary in any large business with hired employees involved in the man- agement and handling of funds. It is re- quired for estates and corporations. The main advantages of double-entry bookkeeping are: (1) Many more segre- gations of income and expense are pos- sible in the unlimited number of ledger accounts. (2) Credit transactions and in- ventories may be handled more systemat- ically, and profit for a year on the accrual basis may be more accurately determined. (3) Complete accuracy is assured be- cause accounts may be audited and proved. The disadvantages of this system are that technical training is needed, and a greater amount of clerical work is re- quired. A farmer seldom keeps his own records under this system. Accounts are usually kept by a resident bookkeeper on the farm, or by a public or private accountant in a city office. The big dis- advantage of keeping records off the farm is that they are not readily available for reference when information is needed in making decisions. 19] This system is less adequate and valu- able, from a management standpoint, than is enterprise accounting, described below. The farmer who hires someone to keep this system of accounting may obtain bet- ter managerial help from it than has been usual in the past if he wants, and is will- ing to pay for, a better selection of ledger accounts and monthly progress reports and comparisons. In addition to income tax returns, he should also obtain a true profit statement on the accrual basis for the farm operations for a partiular year. Designing and conducting a double- entry bookkeeping system suited to a farm business require greater technical ac- counting ability than this circular can provide, but would present no great prob- lem to any trained accountant or book- keeper. If you choose this system, you will probably need some paid technical assistance. Farm Enterprise Accounting Farm accounting which provides a profit statement and analysis for each crop and livestock enterprise in the farm busi- ness is called farm enterprise account- ing. (Accountants usually call it cost ac- counting.) This system provides informa- tion on the farm business as a whole by the same methods and with the same re- sults as double-entry bookkeeping, but, in addition, shows the contribution made by each crop or field and each kind of live- stock to the profit or loss of the farm as a whole. This system also makes possible more precise segregation of capital items, as in the development of a young orchard. It provides operating or service costs on tractors, trucks, irrigation systems, et cet- era. It provides a more complete check on use of materials and supplies, and prevents loss and waste. Enterprise ac- counting is, therefore, recommended as the most desirable system when size and diversification of the business warrant, and when the accounting ability and cleri- cal help are available. The advantages of enterprise account- ing all lie in its greater aid to manage- ment and administration of the farm busi- ness. On any large farm, a number of crops or land uses may be needed for the best utilization of each land type, of wa- ter, and of other resources for maximum profit. Each of these enterprises must be kept profitable, and at a proper size in relation to other enterprises. Manage- ment must not only know the profit or loss on each undertaking, but also the reason for it, and must be able to make changes to increase profit or to replace a losing enterprise with a more profitable one. Some degree or form of enterprise accounting is essential to provide this type of information and to help management attain a maximum profit for the farm as a whole. The only disadvantage of enterprise accounting is that it is difficult. It takes ability, cooperation of the entire farm staff, and considerable clerical work. De- sign of the list of accounts and the ac- counting procedure for a particular farm may require more knowledge of account- ing than the average farm manager has, and more knowledge of farming and farm management than the average accountant possesses. After the system has been de- signed and installed, however, it should present no difficulties to any good book- keeper. It requires considerably more in- formation and clerical work than does a double-entry system. The bookkeeper of- ten has difficulty in obtaining the infor- mation on which to base his allocation of costs to different enterprises, and in mak- ing his inter-enterprise debits and credits, as explained below. Thus it is almost im- possible to do an accurate job in a city accounting or business office off the farm. However, a good bookkeeper on the farm can go out and obtain the information from other employees, and can do a good job at little additional cost over a double- entry system. [20] Since the process of enterprise account- ing is not widely understood by farm managers and accountants who might be interested, a brief description of the basic principles follows. Enterprises. Each crop and kind of livestock, as an enterprise, is covered by one account or group of accounts. Dif- ferent fields of the same crop, or fields of the same crop on different farms oper- ated from the same headquarters, could be treated as separate enterprises. A beef cattle breeding herd could be one enter- prise, and feeders bought or transferred to a feed lot could be another. The care of an outside field for, or in partnership with, an outsider would be another en- terprise. A nonbearing orchard or vine- yard would be handled as an enterprise to receive development costs each year, but these costs would be charged to an asset account as capital outlay. An enterprise statement should cover a cycle of production, and need not con- form to the fiscal year, for the farm busi- ness, although most of the enterprises begin and end with that year. Enterprise accounts are opened when work begins on a crop, and are closed at the end of the year after the crop is harvested. For example, work on summer fallow for the 1975 barley crop would begin in early 1974, seeding would be late in 1974, har- vesting in 1975, with stubble grazed that fall. The enterprise account for this crop would be opened early in 1974, carried over into 1975, and closed at the end of that year. How it is done. Enterprise account- ing is accomplished within a double-entry accounting system by use of a ledger ac- count, or group of accounts, for each enterprise and service unit, and by inter- account charges and credits. Each enter- prise is credited with what it produces in its cycle of production, whether the product is sold or used on the farm. Each enterprise is charged with its direct costs and its just share of overhead costs. Most of these charges and credits are made at the end of each month, and therefore show the accumulating costs and prob- able profit status as a guide to manage- ment in decisions on marketing or further expenditures. Inter-enterprise charges and credits are made at current farm values, which are current market values less marketing costs. For example, if the going charge for pasture is $5 an animal-unit month, and pasture furnished 90 animal-unit months of pasturage to livestock in March, the pasture would be credited with $450 worth of pasturage and livestock would be charged $450 for that pasturage for that month. Service units. Tractors, trucks, com- bines, feed mills, irrigation wells, mess halls, et cetera, are operated to provide services to the production enterprises, but not to make a profit. Accounts for these service units receive direct costs and their share of overhead costs. Hence, the cost of providing tractor and truck work, or board, or irrigation water, is known at the end of each year. During the year, such costs may be estimated closely enough so that each enterprise can be charged monthly with the tractor work or irrigation water, et cetera. For exam- ple, a 4-plow tracklayer tractor has been found to cost about $2 an hour on a cer- tain farm. At the end of February, Barley "B," which received 180 hours of tractor work, would be charged $360, and this $360 would be credited to the service account covering or including the tractor. If, at the end of the year, these estimated rates proved to be a little high or low, adjusting entries could be made. Labor. The allocation of all labor costs to enterprises and even to operations within an enterprise is not difficult, but does require a record of the amount of time spent by each employee on each enterprise or service unit each day. The best way to get this information is by means of time cards and a payroll dis- [21] tribution record or work sheet. Time cards may be daily, weekly, semimonthly, or monthly. Some are kept by employees themselves, some by the foremen of vari- ous crews for the men in their charge. These time cards serve as the basis of wage payments as well as providing for the distribution of labor costs. A payroll record shows wage payments, advances, total employee earnings, social security tax deductions, and the distribution of each worker's pay to enterprises, service, and other appropriate accounts. Since large farms pay twice a month, a semi- monthly time card would be most con- venient, although a monthly time card could also be used, regardless of the pay period. General expenses. Some overhead and general expenses, such as taxes, in- terest, insurance, et cetera, are accumu- lated in appropriate accounts during the year instead of being charged monthly to enterprises. Some large farms never bother to allocate these overhead costs to enterprises, but it is recommended that each item be charged to enterprises and service units at the end of the record year on an appropriate basis. County taxes would be charged in proportion to the assessed value of the land and facilities used by each enterprise and service ac- count. Fire insurance would be charged in proportion to use of insured facilities. Compensation insurance, social security taxes, and undistributed labor, such as sickness and vacation with pay, would be charged in proportion to direct labor al- ready charged. Management. Managerial and office expense should probably be handled as a service unit during the year, and charged at the end of the year to enter- prise and service unit accounts accord- ing to some estimate of the time involved, or perhaps in proportion to total debits in that list of accounts. Owners' affairs. One or more own- ers will also have dwellings and personal affairs handled under an enterprise ac- counting system. These affairs should be handled as a service unit to receive direct charges and a proper share of certain gen- eral expenses, but accumulated charges should be charged to an owner's personal or capital account at the end of the year rather than to enterprise accounts. Depreciation. This charge would be estimated for each depreciable item, from a depreciation record, near the close of each year, and then distributed over enterprise and service unit accounts in proportion to the use of each item. Tractor depreciation would be charged to the tractor service unit account and hence would be included in the rate at which tractor work is charged to enter- prises. Judgment and familiarity with the farm operation would make this task easy for a resident bookkeeper. Inventories. A true profit statement requires an annual inventory of every- thing on hand at the beginning and end of the record year. Enterprise account- ing would require inventories to be taken of feed, supplies, livestock, et cetera, on hand in each enterprise and service unit. Consistent valuation policies at cost or farm value, and a physical count or esti- mate of quantities are essential. End of year. At the end of each rec- ord year, enterprise accounting calls for a certain order in clearing all ac- counts to asset, liability, and capital — the balance sheet accounts. First, general expense, depreciation, undistributed la- bor, and inventories are charged and credited to appropriate asset, enterprise, and service unit accounts. The service unit accounts are now cleared to enter- prise accounts by adjustments in propor- tion to previous charges. Income and expense accounts for enterprises that have completed a cycle are cleared to profit and loss. Uncompleted enterprise accounts are carried over as assets for completion [22] Estimated development period, probable useful life, and usual depreciation period of California crops and farm facilities for straight-line method of estimating depreciation Item Age in commercial bearing Useful life after commercial bearing Range Usual Common rate of depreciation Fruit trees and vines: Almond Apple Apricot Boysenberry. Cherry Date Fig Grape Grapefruit. Lemon. . . . Olive Orange. . . Peach Pear. . . Plum.. Prune. . Walnut. Strawberry Field and vegetable crops: Alfalfa Asparagus , Irrigated pasture Livestock: Work stock, horses and mules. Beef cows Dairy cows years 7 12 1 10 8 8 4 5 5 8 7 10 10 8 10 10 years 20-40 30-50 20-40 5-15 25-50 15-25 20-40 30-50 10-30 20-45 40-80 25-45 15-25 20-60 20-35 20-40 30-50 2-4 3-4 8-12 4-20 2-3 2-3 5 3-8 3-6 20 years 30 40 35 10 40 20 30 40 25 33 50 35 20 40 25 30 40 Buildings and improvements: Barns and other farm buildings Dwellings Fences Wells Irrigation pumps and motors Irrigation pipe, concrete Irrigation pipe, portable, and sprinklers. Farm machinery and equipment: Tillage and similar implements Harvesters, mowers, choppers, etc Ladders and lug boxes Milking machines, refrigerators, etc. . . . Field power and transportation units: Automobiles and trucks, 60,000 to 100,000 miles. Tractors 8,000 to 12,000 hours Trailers, wagons 20-60 30-50 10-30 10-30 10-25 20-50 6-12 5-20 5-30 3-10 10-20 4-20 8-15 10-40 30 40 20 20 15 30 10 7 10 20 [23] the following year. A nonbearing orchard receiving development costs during the year is closed to an asset account as capi- tal outlay. Statements. After the closing of ac- counts for the record year, a number of helpful statements, comparisons, and analyses become possible. In addition to the usual financial statement, or balance sheet, and the profit or operating state- ment for the farm business as a whole, operating statements may be made in detail for each enterprise within the farm business. Cost analyses may also be made on service units — such as the cost of several sizes of tractors and trucks, cost of board per meal or day, cost per acre-foot of irrigation water, and the like. But this useful management information is of little value unless it is in the hands of these who use it, and is studied and considered by owners, managers, and foremen or department heads. Partial Enterprise Accounting The system explained above is full and accurate enterprise accounting as a trained accountant would do it within a formal accounting system. Less complete systems have been kept, with apparent satisfaction to the operator. Several vari- ations and short cuts are possible, that will still allow a smart manager to de- velop useful information on each enter- prise. Sometimes this is done by supple- mental work sheets for cost distribution entirely outside the formal accounting system. If the farm business is not too large, the operator may keep columnar work sheets, and distribute his labor and other costs currently as he goes along. There is no reason why a farmer who keeps his own records in a farm record book could not come fairly close in at- taining the ends of enterprise accounting by keeping some supplemental records and work sheets, and perhaps a ledger with some accounts. The table on the next page will help you choose a farm bookkeeping system that will provide records you would like to have at the end of any given year. » [24] What Do You Want From Your Farm Records ? Check Information wanted your needs What each system provides: Check book Farm record book Double- entry accounting Enterprise accounting Income tax — Farm Schedule 1040F, cash basis Yes Yes Yes Yes Farm profit — accrual basis No Yes Op.* Yes Personal return — Form 1040, including nonfarm incomes, capital gains, etc. No Yes Yes Yes Farm profit statement for management, using inventories and true deprecia- tion No Yes Op. Yes Net worth or financial statement No Yes Yes Yes Reference record of financial transac- tions No Yes Yes Yes Owner's investment and withdrawals No Yes Yes Yes Investment and depreciation record, listing individual items No Yes Su.f Yes Inventory of crops, livestock, and sup- plies on hand annually No Yes Su. Yes Payroll record No Su. Su. Yes Social security tax records Su. Su. Su. Yes Crop and livestock production records No Yes P . Yes Joint ownership accounts No No Yes Yes Accounts receivable and payable No No Yes Yes Enterprise profit statement and analysis No No No Yes Operating costs of service units No No No Yes Gasoline use for tax refunds Op. o P . o P . Yes * Optional record or statement that may be made available if desired, but is frequently not a part of the usual system. t A supplemental record that may be kept if desired or needed. [25] The University of California's Cooperative Extension programs are available to all, without regard to race, color, or national origin. Issued in furtherance of cooperative Extension work, acts of May 8 and June 30, 1914, in cooperation with the United States Department of Agriculture. Gerge B. Alcorn, Director, Cooperative Extension, University of California. 10m-ll,'74(S1321l,)VL