V 1 0f K Division of Agricultural Sciences UNIVERSITY OF CALIFORN ''''«H«;// zj* '/>»"> 3>o /4>o - / oo /e> - /? /<& co » /*■ T&vwf *f***tX Ceo -co- toe luAfuxnA »// y,> /■Hi,. •to /o% - A. lc ■%o /OS- 3o DISTRIBUTION OF LABOR COSTS (Opposite page from above) A^zt^t/ OJ^U^ 4^ l&£a.iio fotiduf ^£6-^- /^^J- O^ttuLA^ //&- - /d>o - 9 - &/ - 6/ - /S~ _ page is the record and the right-hand page indicates the distribution of labor costs used in enterprise accounting. Com- mercial loose-leaf accounting forms are available, and some of the social security record books on sale at stationery stores also contain such a record. Social security tax records □ Farmers must now (1957) withhold social security taxes from wages of farm workers who receive $150 or more in cash wages in one year or who work for 20 days or more. 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- 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 head- ings entered by the user. Commercial social security books are available at stationery stores. The record can be the minimum four columns for social se- curity tax purposes (see illustration on page 8), or it can contain additional facilities 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 7] HE MINIMUM INDIVIDUAL EMPLOYEES RECORD OR ACCOUNT d>+£^ Social Secur. No. OOP ' &Q -QQQ Address ^X ; £& /SG? , /%U^H^ DATE OF PAYMENT CASH WAGES PAID WAGES YEAR TO DATE SO. SECUR. TAX WITHHELD *2fc*C /£* /AT — //r — 2 S8 %C J/ Z/^ -~ 330 <^» Z 3 \ .21 \3 vs CO I I v g I 1 II •33 1 2*. &) ^ "£ 5? <8 C 2 « 5 J 1! 01 .2 .1 l= : cc'5 -o 5"? hi •S|J method which is, for most farmers, the simplest and perhaps the best system. A chicken house costing $3,000 might be assumed to have a useful life of 30 years with no salvage value. Depreciation would therefore be $100 a year. By the time the house was 10 years old, it would have a remaining value of $2,000, since 10 times $100 ( $1,000) would have been been charged into annual expenses as depreciation. Perhaps before the 30 years have passed the building may be destroyed or reconstructed, with changes in the remaining value and depreciation thereon. A continuous yearly capital and depreciation record listing all important items and showing depreciation, added capital outlay, remaining value, and years of life is an important feature in an adequate system of farm financial records (see pages 16 and 17). 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 $30 an acre, and with an intended life of four years, might be estimated 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 $1.25 per ton, or $10 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 orchard. For income tax purposes only, that part of the development cost that was handled as capital outlay during the years of development would be consid- ered as the cost, and subject to deprecia- tion. The amount might be only $150 an acre, all incurred in the first year. If it were a peach orchard in commercial bearing at five years of age, and with an expected productive life of 20 years from that time, then annual depreciation would be $7.50 per acre, starting in the sixth year. Table 2 lists probable useful lives and depreciation rates for many California farm facilities. The illustration on page 16 shows examples of depreciation and added development cost for orchards and perennial crop stands. Selection of depreciation rates for use in farm financial records should be based on intellegent estimates for the condi- tions 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 tendency is to use high depreciation rates — writing off equipment, such as tractors, in five years. When once the equipment is written off, no more de- preciation may be charged, and taxable profits are increased and usually taxed at increased rates. Any reasonable rate for the particular farm conditions can be defended, even though it may exceed the rates suggested in income tax regu- lations. An irrigation well put in by a tenant under a five-year development lease, and becoming the property of the landlord at the end of that period, would be depreciated over the five-year period, by the tenant. A citrus orchard in an area where trees are producing for only 20 years should carry that depreciation rate, even though a 33-year life is con- sidered 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 capi- tal and depreciation record as a supple- ment to the other records. It should list each depreciable asset considered as capital outlay, beginning with the year it was obtained, and show remaining [18] value at the start of each year, any added capital outlay, remaining 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 will be more convenient to use specially prepared and labeled record books or accounting forms. The Califor- nia Farm Record Book (p. 26) contains forms for a continuous record for four years with listings in five 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 one 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 following years unless permission is obtained to change, in which case rec- ords and adjustments to cover the shift will be required. 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 pe- riod, about April 1, when inventory of feed and livestock is lowest, might be most satisfactory. Beef feeders who buy feeder cattle in the fall would start their record year just before 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 pro- duction and marketing cycles of most of the crop and livestock enterprises on the farm. Once a record year has been adopted, it is doubtful 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 in- come tax reporting should not be made for management purposes. 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 com- bined 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 would usually contain, in addition to the dairy enterprise, hay, pasture, and perhaps silage enterprises. Large irri- gated farms might have cotton, potatoes, sugar beets, alfalfa, irrigated pasture, and one or more livestock enterprises. A cattle ranch selling nothing but cattle would still have several enterprises — the breeding herd, a range, a hay, and per- haps a grain enterprise, and a beef feed- ing enterprise in which range-produced [19] steers are fed in the feedlot for market- ing 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 ultimate 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 inventory in which they are listed by quantity and value is essential for figur- ing 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 in- ventory plus expenses 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 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 harvested 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 prod- ucts being held for sale would be as- signed farm value at inventory time. Livestock about ready for sale would likewise be assigned farm value at in- ventory time. Young stock not ready for sale would be valued proportionately 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 varia- tions in market values although it should probably reflect their upward and down- ward trends. Value of mature breeding bulls and work stock inventoried indi- vidually would be lowered each year until each animal is culled at the end of its useful life. For income tax reporting on an accrual basis, breeding and dairy stock raised on the farm and subject to capital gains treatment when sold may be excluded from the inventory under current income tax regulations. (Since these regulations change, be sure to fol- low the latest ones.) They should of course be included in a separate inven- tory used in figuring profit for manage- ment purposes and for figuring net worth. Association revolving funds. Many California farmers belong to coopera- tives through which they market prod- ucts and obtain supplies. These coop- eratives frequently withhold part of the income from a crop and put it into a revolving 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 certificates are as good as cash, have been received as part of the income from a crop, and should be included in figuring the profit for a [20] given year. This represents a capital out- lay the same as if the farmer received the income and invested it in securities. Re- volving funds pertaining to previous years, but cashed during the present year, represent income made in a pre- vious year, not the current one. The re- ceipt of cash is from a capital invest- ment in the certificates or book credits of the association. The value of these certificates and credits would be listed among the indi- vidual'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 incur- red for supplies or marketing services. The farmer usually receives such a pay- ment after his records for the year to which payment applies are closed. Such a receipt may as well be considered as income for the year in which it is re- ceived rather than for the previous year in which it was earned. It is a simple matter to adjust the profit statement for management 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 dividends, 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. FIGURING PROFIT FROM YOUR FARM OPERATIONS Farm profit may be figured in a num- ber of ways, each of which may show differing results from the same set of figures. In other words, there are several different measures of farm earnings. Different earning 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 agri- cultural literature, it may be well for you to understand the different terms as described below. Net cash income represents cash income, 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 profit, 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 profit, accrual basis, in- cludes farm income arising from this year's business plus closing inventory, minus opening inventory plus farm ex- penses for this year plus depreciation. [211 Table 3 — Three ways to figure profit from same financial records on a 60-cow dairy farm For manage- ment* For income tax Item Accrual basis Cash basis Incomes : Milk sales $29,615 359 1,130 630 196 3,838 19,420 $29,615 359 196 3,838 $29,615 Sale of 41 head of calves 359 Sale of 8 head of purchased cowsf Sale of 5 head of cows raised on farmf Miscellaneous other cash incomes 196 Closing inventory — feed and supplies Closing inventory — dairy and breeding stock Total incomes $55,188 $21,115 350 661 1,500 5,360 17,875 $34,008 $21,115 350 661 700 5,360 $30,170 Expenses : Cash expenses paid during year Accrued but unpaid expense, less prepaid $21,115 Depreciation, buildings and equipment 661 Depreciation on purchased cows 700 Cows bought, five @ $300 Opening inventory feed and supplies Opening inventory — dairy and breeding stock Total expenses $46,861 $ 8,327 $28,186 $ 5,822 1,130 1,600 $22,476 Net farm profit for management purposes Net farm profit, Farm Schedule 1040F $ 7,694 On schedule D, capital gains and losses : Sale of purchased cowsf 1,130 Less book value from depreciation record 1,600 Capital gain or loss (minus -) long-term Sale of cows raised — all long-term cap. gainf - 470 630 -470 630 Net long-term capital gain 160 80 $ 5,902 160 Net taxable at one-half 80 Taxable net farm income $ 7,774 * Profit for management purposes is figured on the inventory basis, with all cattle included in the in- ventory; cattle bought are considered as expense, all cattle sold, as income. f For income tax purposes, dairy stock intended for breeding and dairy purposes, to be held for 12 months or more, and subject to treatment as capital assets, are excluded from the inventory on an accrual basis. Cow purchases and sales are considered as capital items, and sales are entered on schedule D. IMPORTANT: The above example is purely an illustration of how profit may be figured in different ways from the same facts. The income tax calculations are in accordance with rules in effect in 1956. The results in differences in profit and taxable profit are not significant, and could be in the opposite direction if different figures were used. [22] This is a truer earning figure for the year than is the cash basis above, but it does not ordinarily take into account the un- paid labor of the operator and his family, and includes only the interest actually paid on indebtedness — not in- terest on the operator's investment. Table 3 shows three ways of figuring profit from the same set of figures. 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 handled. Farm income, as used in reports and publications of the Agricultural Exten- sion Service of the University of Cali- fornia, would be gross income with inventory adjustment, less depreciation and expenses, except interest on indebt- edness. Operators' and unpaid family labor, and interest on the investment, would not be included as expenses. Farm income is, therefore, the total return from the farm family's management, from labor, and from all invested capital. It is the amount available for living and for payment of interest and debts. It shows the income potential of the family- sized farm. Capital and management income is "farm income" as explained above, less the value of the operators' labor and of unpaid family labor. It is the return to management and invested capital, and would be similar to net profit as figured by the operator when all labor is hired and no interest is paid. Management income is capital and management income less interest on in- vestment, usually figured at 5 per cent. It is the net earning of the farm after all production costs are subtracted ex- cept those of the operators' management. Management 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 considered. KEEP YOUR RECORDS IN A BUSINESSLIKE MANNER Good business methods in handling receipts and making payments can make the job of keeping financial records easier, and result in more accurate records. Business headquarters. Every farmer should have a business head- quarters 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, convenient 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 handled. Additions. In keeping your own rec- ords you will find an adding or calcu- lating machine a big help in making accurate monthly and annual totals. A small, inexpensive adding machine on your desk could save you an hour or more each month if used with the Cali- fornia Farm Record Book, and another three hours at the end of the year. If your time is worth $1 an hour, the $15 a year saved would cover the annual cost of owning a $100 machine. This me- [23] chanical aid could be the difference be- tween having a complete set of financial and other records for management pur- poses, 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. Spending a few minutes every two or three days to write the checks for in- coming 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 commercial 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 system of accounts it is the only cur- rently 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. Because of the many bills that need to be divided between farm business and personal or household expenses, it is impractical to pay farm bills from one checking account and home bills from another. However, when funds are adequate, a family may, for convenience, desire a separate checking account for the home. If payments from the personal, or home, fund included some farm expense, this could be entered as if the farm expense were paid from pocket cash, as explained below. Pay- ments from the farm checking account for nonfarm or personal amounts would be distributed to personal or nonfarm expense columns in the cash record, just as if there were only a single checking account. 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 expendi- tures from this personal cash could be accumulated 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 in- come 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. Business papers. Most large farm receipts are accompanied by a statement showing the items, quantities, prices, and amounts involved. Sometimes deduc- tions are made for advances, farm ex- pense items, or association revolving funds. Such statements should be segre- gated and preserved by kind. After use [24] at the end of the year they may be as- sembled with other business papers for that year and stored for about five years, for reference. Expense items, bills, or statements, should likewise be segre- gated by kind, particularly those with details not usually entered in the cash records. This is particularly important when no records are kept other than the check book. Income tax papers should be kept at least five 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 busi- ness papers are usually taken to him at frequent intervals as the basis for his entries. Monthly totals. Although profit figures in farming are seldom signifi- cant for periods of less than a year, monthly totals of income and expense may be very helpful in making plans and budgets and in securing needed oper- ating 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 man- agement. It is suggested 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 writing 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 totals for each column or account. It is ad- visable to check to make sure that all items have been entered in the proper columns and that additions are correct. Do not let small errors and discrepan- cies discourage 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. Com- parisons with previous months and with corresponding periods 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 ex- penses, and will make better decisions in your purchases, sales, and nonbusi- ness expenditures. Your year-end work will also be easier and take less time. You may complete your income tax re- turns and pay the tax by February 15, thus avoiding the extra work of an esti- mate on January 15, and a final return by April 15. [25] SYSTEMS FOR KEEPING YOUR FARM RECORDS A group or combination of records constitutes 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: A. the check book and business papers; B. the special farm record book; C. full double-entry ac- counting for the farm business as a whole; and D. enterprise accounting. A. The Check Book and Business Papers Many California farmers keep no formal 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 income is shown on the duplicate de- posit 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 some- one do it for them), and make out their income tax returns. Although this is scarcely an adequate system of records, it is simple, 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 18, 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 state- ments. Transactions may be looked up by hunting 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 partially 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. B. 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 adequate than others. Most state colleges of agriculture have designed and made available a complete farm record book adequate 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 and the California Poultry Farm Record [26] .1 "■5 ") »■ ^ bo ^ sS \S ^ 0C ^ Os r\ ^ ^ nS K \» Q N <*) Oq 1* 0«o > ro <5> >s ~». l>r ? cr » r< *i "I ^ ? ~^ 1 — ** N, V r l| c*. CO o SI to ^ Q Pf) fT) (Js ^. Qo 's * rN IN •0 IN CO N. <* to 0> K- ^ > NQ 1 VXl r( rl ^i 5 = $2 *> 1 N ** o- 5 £ § o 00 55 Ml to « <» <& ^ S& O r^ P0 8: ^ «* Si S f > *> 5? <0 3 3 NS •^ ^ ci- rri NO •* 3 > rs > N» tN en <*> ^5 rN <>• — > tN *• 61 > a. ■< «»i •i N& "I > 5 OQ ^ « * ^ > ^ Wi * nd r^ •v. **■ < a >* a 1 > <\ v3 S * > »o a X H o E* 22 tN *■ *** to 0° v0 * ^ so ? -5 *> ^0 4 si X - E o 3 a in JO £ - r; © Ol 35 z Ed gg 5 eu X a £ W >« 06 5 O Cu bh bt Cm © o © 00 00 <* o e 00 oo 00 tn © T 00 00 - 5 us T -*> © 10 00 00 C5 ■= •e e 1 s 1 "o a 5 13 O a ! a S a 'J: £ g 5 Js "S 3 a ! « X I j •s .9 1 a (a W in 2 J 1 I .3 1 1 i u 2 S & 1 1 I c £ i -c 3 u u E o -c X = l 9 a 1 o c 1 & "3 c o = S -3 "C a 1 o J 1 a 1 3 5 a c C 5 a 1 2 B i c _a "3 2 w -3 CI CO "O -o 3 i "3 c £ = H 1 3 1 1 1 — ■a w "3 "3 a 1 -3 c M i E 2 H 1 1 X- ! -3 J | "3 £ te ie ,c 1c I X 1 "3 a. cr > I 1 Cl © ■3 1 O s a. J ■S "3 a 3 O "3 .2 S a u 1 a c % '§ a (5 © c» a •a -3 1 1 | | -a c 1 J > j u X E- t S a c u c C-J 1 1 B ir I 1 H © M 3 £ J s I V i 00 ei -3 5 M § B •0 -0 a I J -1 c SJ ! 1 ei c _= CJ 41 B •T I J 1 z oc -3 B T CI J -3 O 1 9 X i 3 3* 1 I auiq - ei ri „ in *- 00 OS © - ci ri 3 10 ® t: od oi © »m C) M C) s c» 3 ol oc § © C5 09 3 8 3 3 b 1 | 1 The California Poultry Farm Record book provides for a detailed profit statement and analysis. 22 Capital outlay § A ci M Lji ^ Q h •v es« 19 Farm automo- bile Water, electricity, telephone >. ^ ^ ^ ^ Taxes, insurance, interest ^ T 1 •>* M a- r 2 I 2 V ^ 9 Personal & uonfarm expense ft $ § § 81 N $ * >* % >K ^ ^ n» «S 3 Book are published by the University of California and may be purchased from Agricultural Publications, Room 22, Giannini Hall, Berkeley. The first is de- signed for any type of farm, and for the farm business as a whole. It meets most of the farmer's record needs, as shown in the check list on page 38. The Poultry Farm Record Book meets similar needs for a farm on which poultry is the main enterprise, and also provides for a de- tailed profit statement and analysis. Both books contain the special forms needed, instructions for keeping the records and preparing the net worth statements, and the profit statements on both the cash and inventory basis. The illustration on page 16 shows the four-year record for the Orchard and Perennial Crop group in the California Farm Record Book. That on page 27 shows the Poultry Enterprise Statement in the California Poultry Farm Record Book. 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 columns are included for segregating dif- ferent kinds of income and expense in order to obtain monthly or annual totals for each. The cash record in the Cali- fornia Farm Record Book is illustrated on pages 28 and 29. The only supplement to these record books that is frequently needed is the social security tax record, described and illustrated on page 8. Cash records in these books are essentially a cash jour- nal, in accounting terms, and could be supplemented by a ledger and other records to become a part of systems C or D, as described below. These special farm record books are intended primarily for farmers who do their own record keeping in their homes. They are suited to "family farms" vary- ing in size from small to large. Although the books are sometimes used in partial partnerships, 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 System B are that it meets most of the needs of the opera- tor of a single-family farm; that special forms and instructions are provided; and that technical training in bookkeep- ing is not required. Disadvantages are that it is limited as to number of entries and accounts or columns, and some time is required in keeping the records — more than in System A, but less than in C or D. C. Double-entry Bookkeeping for the Farm as a Whole Double-entry bookkeeping is the basic procedure used in business when ac- curacy and honesty must be proved and demonstrated. 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 cor- rectly done. In farm bookkeeping, some accounts are used to show the value of the assets, liabilities, and ownership of the farm business. 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 [30] record and for the payroll and social se- curity 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. System C is considered necessary in any large business with hired em- ployees involved in the management and handling of funds. It is required for estates and corporations. The main advantages of System C over A or B are: (1) Many more segre- gations of income and expense are pos- sible in the unlimited number of ledger accounts. (2) Credit transactions and inventories may be handled more sys- tematically, and profit for a year on the accrual basis may be more accurately determined. (3) Complete accuracy is assured because 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 avail- able for reference when information is needed in making decisions. System C is less adequate and valu- able, from a management standpoint, than is System D, described below. The farmer who hires someone to keep this system of accounting (C) may ob- tain better managerial help from it than has been usual in the past if he wants, and is willing to pay for, a better selec- tion 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 particular year. Designing and conducting a double- entry bookkeeping system suited to a farm business require greater technical accounting ability than this circular can provide, but would present no great problem to any trained accountant or bookkeeper. If you choose this system, you will probably need some paid tech- nical assistance. D. Farm Enterprise Accounting Farm accounting which provides a profit statement and analysis for each crop and livestock enterprise in the farm business is called farm enterprise ac- counting. (Accountants usually call it cost accounting.) This system provides information on the farm business as a whole by the same methods and with the same results as System C, but, in addi- tion, 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 cetera. It provides a more complete check on use of materials and supplies, and prevents loss and waste. System D is, therefore, recommended as the most de- sirable system when size and diversifica- tion of the business warrant, and when the accounting ability and clerical help are available. The advantages of System D all lie in its greater aid to management and ad- ministration of the farm business. On any large farm, a number of crops or land uses may be needed for the best utilization of each land type, of water, and of other resources for maximum [31] 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 manage- ment attain 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. Design of the list of accounts and the accounting procedure for a particu- lar farm requires more knowledge of accounting than the average farm man- ager has, and more knowledge of farm- ing and farm management than the average accountant possesses. After the system has been designed and installed, however, it should present no difficulties to any good bookkeeper. It requires con- siderably more information and clerical work than does System C. The book- keeper often has difficulty in obtaining the information on which to base his al- location of costs to different enterprises, and in making his inter-enterprise debits and credits, as explained below. Thus it is almost impossible to do an accurate job in a city accounting or business of- fice off the farm. A good bookkeeper on the farm can go out and obtain the in- formation from other employees, and do a good job at little additional cost over System C. Since the process of enterprise ac- counting 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 1956 barley crop would begin in early 1955, seeding would be late in 1955, har- vesting in 1956, with stubble grazed that fall. The enterprise account for this crop would be opened early in 1955, carried over into 1956, and closed at the end of that year. How it is done. Enterprise account- ing is acomplished 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 [32 are current market values less marketing costs. For example, if the going charge for pasture is $3 an animal-unit month, and pasture "A" furnished 90 animal- unit months of pasturage to livestock "L" in March, pasture "A" would be credited with $270 worth of pasturage and livestock. "L" would be charged $270 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 example, a 4-plow tracklayer tractor has been found to cost about $2 an hour on a certain 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 would be made. Labor. The allocation of all labor costs to enterprises and even to opera- tions 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- 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, as illustrated (p. 36) , 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 facili- ties used by each enterprise and serv- ice account. 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 already 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 System D. These affairs should be handled as a service unit to receive direct charges and a proper share of certain general 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. [33] £ a pa (0 -Q i- M- m is "* N o Q cs 0> CO K v. a c u 0) *- c UJ 3 TJ v i- . * U C ■o B> c c 8 3 +■ c E c TJ 3 «/> r (£ >* a ,. ■o a E in ■ 1 m is <* 0) c -Q 1- a> > u iq in t> in ■^ CO lO © O lO O M iO C5 ^ t- in ■«# m © ^ co CO co oo o d d I O "^ in oi CM CO | m t> © co co r^ CM © CO © © © 00 th m in in in co I> (N r>" t> M 3 IS 2-9 S 5 £ w s- OJ T3 ^ O © w s i <1) P * 2 ° • 9 £ U Id +3 eJ5 o o o CO 5> o £ s o o w 5 B9 • 2 & g S* 3 +? as -»^» O H & P 5J § § Ills w O So 2 ® og H 3 * g 2 • g I 3 8 3 2 - So o «« p bfl -J? ■3 -Sf >> >> ho o i5 pi ^ i f^ W UJ w o CC m O) m ^ S iH oc O iH en iH CO 6fi ►■ ta- W c c m m o it. c rn a l> ir: m c cm a oq oc r- t> «3 ri o' C «* in o t> IC oc M 00 H lO « w o> ^ i-i L- i— i e6 K 1 03 U T p • 1 jx ^ s «s o> rs fH 1 s- (L A is P 03 c 5 * 3-° to > 03 w 0) > 02 = o o Xi ci -J J* o 1 c Eh a- 03 a tu (= T 03 03 h pq Misc. supplies, ve Electricity and fuc General expense, DeDreciation. dair ' 03 Cfl £ • S 03 3 o ll 1 p 03 > 1- •id p 03 ! p o •a V p e9 03 03 h O « C m « ■a »n te fi.5 >».2 a> §".2 -2a "■S ©.3 3 >** 8*1 ■3 ft** ft 0) fl • sals Hi- o'?S -OftS^ c as- 1 ; *§- s .2« rt o C.2-S-' s^ M >>?. 2E" 2* ft --Sri ■Co*jj &ft-gS ^S boo O .2 » ft ^ IS Ow «) M S-23 01,00 £3 > . - *» o t> a) •ill H CXI 5b . . ho o3 tfj 4) I- -1-1 ftj= ft 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 record 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 the following year. A non- bearing orchard receiving development costs during the year is closed to an as- set account as capital 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- [35] Keeping track of labor costs is not difficult if you keep an efficient payroll record with t' me j cc ire s. 1 i 1 1 1 j I? N c r ^ to 5 ^ \ 1 3 §1 >4 HX V ^ 25 *3 ^ ^ K W * ** ^ ^ ^ ^ 2 * ^ - « K ^ s |* N. I | $-~ XI p. |* •»l <^ c s CN c- CI 'c-. 1 1- s - $ 2 Ov. 0- $ 2 «>. » § . 0*. *>. . 5K <3"~ - b* •>>. • *) «*■) » ^ ! ^ - > c o Q o "o V 1 | 1 o > i > ■ ^ 1 X .3 V 1 1 r i i i' f i i 1 ° 1 6 V £ § w is § £ 1 w 1 1 1 4 o -a c = S (J oj Si o >> I V) ^ o H ^ W X \ s g g s *.| CO a *-| ll 3 1 ^J S 1 1-^ S H\ E S s ^K 5 ° s I" 5 ^|h OT3 ^ C s |