S|| j. ' v^J L ^** £= ^ .V:-:, :..:::■:-. -;«,'- 1 . 4 i //fil\V&---. 1 • '''*» v DIVISION OF AGRICULTURAL SCIENCES UNIVERSITY OF CALIFORNIA OAV1S FAR k i 4 ENTERPRISE 'sC€miM i/tiwMi €wwl by ARTHUR SHULTIS CALIFORNIA AGRICULTURAL EXPERIMENT STATION EXTENSION SERVICE ( MMinifimimm MANUAL 31 Price; $1.00 CONTENTS Chapter 1— THE FARM MANAGEMENT JOB ... 2 Chapter 2— BASIC PRINCIPLES IN FARM ACCOUNTING 6 Accounting for the Farm Business as a Whole . . 11 Business Methods 13 Chapter 3— ENTERPRISE ACCOUNTING— WHAT IT IS AND HOW IT IS DONE 16 How Enterprise Accounting Is Done . . . . . 18 Designing the System to Fit the Business .... 24 Chapter 4— ENTERPRISE ACCOUNTING BY SUPPLEMENTAL WORK SHEETS 27 Farm Example 31 Chapter 5— ENTERPRISE ACCOUNTING BY ACCOUNTING PROCEDURES 54 Enterprise Accounting in the General Ledger . . 54 Enterprise Accounting in Supplementary Ledger . 55 Designing the System 55 The Tramino Ranch 57 Special Journals 58 Enterprise and Service Unit Account Ledger . . 60 Chapter 6— ENTERPRISE ACCOUNTING IN A CITY OFFICE 76 Designing the Enterprise Accounting 76 Information Reports 77 Chapter 7— MECHANICAL METHODS IN FARM ACCOUNTING 79 THIS MANUAL is one of a series published by the University of California Division of Agricultural Sciences and sold at a price which returns only a portion of the production cost. By this means it is possible to make avail- able publications which, due to relatively high cost of production or lim- ited audience, would otherwise be beyond the scope of the Division's publishing program. FOREWORD This manual is designed to help farmers attain greater profits through the better managerial decisions made possible by enterprise accounting. Written mainly in nontechnical language, it has been planned especially for three groups of people: commercial farmers, account- ants, and students in farm accounting and management. The first three chapters deal with general considera- tions of the management job and the ways in which enterprise accounting can be of value. The general prin- ciples and definitions in these chapters are basic to the use of methods which follow. Chapter 4 presents an accurate short-cut method of enterprise accounting. This chapter is primarily intended for farmers who keep their own financial records and who also wish the benefits of enterprise accounting at the end of the year. Chapter 5 presents enterprise accounting by double entry accounting procedures and ledger accounts. Farm- ers with full accounting systems, and their managers, bookkeepers, and accountants, will find this section help- ful in designing and conducting a full enterprise ac- counting system. It gives the basic methods of enter- prise accounting followed when the work is done on the farm without mechanical or electronic equipment. Chapter 6 gives additional methods and forms for transmitting the necessary information to an off-farm office where accounting is done. Chapter 7 briefly discusses mechanical and electronic methods and suggests how these can reduce clerical work in enterprise accounting. This manual was not prepared as a textbook for teach- ing enterprise accounting. It does not teach the basic principles of accounting. But it does show how these principles may be applied in farm enterprise account- ing and how one may attain some of the goals of enter- prise accounting without knowing technical accounting procedures. The author has long felt, however, that a course in farm enterprise accounting is needed at the college level for students preparing for a career in farm management and in research and teaching in this field. Such a course should probably follow a basic course in accounting, and this manual could well serve as a text. For most effective teaching, it will need supplementing by assignments or a work book so that the student masters the processes by realistic practice. THE AUTHOR Arthur Shultis is an Extension Economist (Farm Management) and on the staff of the Giannini Foundation of Agricultural Economics, Berkeley. AUGUST, 1961 LIBRARY CTNIVERSITY OF CALIFORNIA DAVIS Chapter 1 THE FARM MANAGEMENT JOB A modern commercial farming business involves the use of con- siderable land, capital, equipment, supplies, and labor in the production of agricultural products to sell at a profit. Management obtains and organizes these resources in the proper proportion and makes the de- cisions and takes the actions to use them most effectively to attain the goals of ownership. This manual, which deals primarily with accounting aids to management, will consider mainly the important managerial functions of making decisions, evaluating results, and making changes to improve future profits. As used here, management includes all de- cision-making levels, from the owner or board of directors who make the important policy decisions on down to employees to whom some responsibilities are delegated. Function of Management A manager takes action only after a decision is made. A decision usually involves the comparison of two or more alternatives and the selection of what appears, on the basis of available information, to be the best or most profitable course. Obviously, the soundness of the decision depends on the information on which it is based. But risk and uncertainty are ever-present in farming; the vagaries of weather, plus the varying effects of pests, diseases, and market price uncertainties, make it difficult to estimate the probable effect on profit of alternative crops or actions. An adequate system of records and accounts can, however, provide much useful information on current and past yields, costs, prices, and profits on the individual farm. These data can reduce uncertainty to the point where a careful appraisal of probable yields and prices can result in a valid estimate of probable profits for alternate courses of action. The ability to look ahead, to make sound decisions, and to take forthright action, may be a personal trait possessed to varying degrees by different people but proper information will help any manager to make sounder, more profitable decisions. Most alternatives can be compared by calculated budgets of probable income, costs, and effect on profit. Adequate recent records are indis- pensable in figuring probable future yields and costs. In the past, this process of testing future action by budgets has not been a widely used rool of farm management — largely because records have not been ade- quate to provide the information. Also, farming has changed and it is now more difficult to make a profit. In modern farming with its high cash costs and narrow profit margins few mistakes can be made if the business is to continue profitable and solvent. Listed below are a few illustrations of important decision groups where the use of budgets in the comparison of alternatives can result in better decisions. What to Grow Conditions and prices change. Each year, the manager must decide what to grow in each field. He can select several adapted crops and corn- Table 1. Comparison of Probable Earnings per Acre of Alternative Crops Item Probable yield per acre Estimated price per crate or ton .... Probable gross income per acre .... Growing costs : Man labor, hour, and piece rate. Tractor and machine work, in- cludes depreciation Materials — seed, fertilizer, water, pest control Subtotal, growing costs Harvesting and delivery costs, in- cludes everything Variable cash overhead costs Subtotal variable cash costs and depreciation Fixed cash overhead costs (taxes) and estimated interest on invest- ment involved Total cost of production per acre Probable income over variable costs per acre Probable income over all costs per acre Sweet corn 1 -year crop 300 crates $ 1.40 420.00 55.00 23.00 62.00 $140.00 154.00 21.00 $315.00 65.00 $380.00 105.00 40.00 Canning tomatoes 1-year crop 22 tons $ 22.50 495.00 70.00 29.00 63-50 $162.50 187.00 26.00 $375.50 65.00 $440.50 119.50 54.50 Sugar Beets 1 -year crop 25 tons $ 13.50 337.50 72.00 24.00 35.00 $131.00 65.00 15.00 $211.00 65.00 $276.00 126.50 61.50 Alfalfa hay, average of 3 years 8 tons $ 26.00 208.00 17.00 5.00 15.00 $ 37.00 48.00 8.00 $ 93.00 65.00 $158.00 115.00 50.00 In the above example, costs are as they would be determined by enterprise accounting by the methods suggested later so depreciation is included in the costs of machine work and irrigation water. Comparison of earnings is usually made on the basis of income over variable costs. This net income comparison would be considered along with other factors in arriving at the final decision of what to grow. In this case, sugar beets are shown to have a slightly better profit potential and also have the advantage of being a crop of low hazard and with mechanized harvest. The three-year potential income over variable costs for alfalfa would come to $3-15 as compared to a $35 1 total for one year each of the other three crops. pare them. Where past operation costs are known, a budget of probable costs of production can be computed. After careful consideration of the market situation, prices are estimated for the several crops. Incomes are computed, using probable yields, and probable profits are figured. Production plans can then be made and tested, and profit will be im- proved thereby. Costs within any farm business may be classified as fixed or variable as influenced by the proportion of the different crops or livestock grown. Fixed or overhead costs may stay about the same for the farm as a whole regardless of what is grown. But, different crop and livestock enterprises use different quantities of inputs of labor, machine work, and materials such as seed, fertilizers, and irrigation water, or feed for livestock. These are the variable costs. In budget comparisons of alternative enterprises, it is usually necessary to consider only these variable costs, since the fixed or overhead costs stay about the same in total for all enterprises. How- ever, a new enterprise may require additional equipment or facilities and hence require consideration of the increased investment and depreciation involved. Table 1 shows a comparison of returns and costs for four summer irrigated crops, with costs as they would be calculated in the method of enterprise accounting described later. Depreciation in this case is a variable cost since it is included in the variable charges for labor, machine work and irrigation water to the different crops. In much farm accounting, however, depreciation and over-all farm administrative costs are considered fixed costs, even though they are not used at an equal level per acre for all crops. What Equipment to Buy Records of equipment use and costs are helpful in deciding whether, for instance, another tractor is needed, whether an old one will be cheaper than a new one, and which size and type will do the work most economically. Table 2 presents calculation of probable costs of doing heavy tillage by any one of three tractors, or by a combination of two — the old one, and a new 40 h.p. machine. The above example is only one of many instances where a calculation of owning and operating costs will be helpful in comparing alternative methods of performing a job; in selecting the best method, time can be considered as well as cost, thanks to adequate records. Other examples are: 1.- Owning or renting a grain drill. Table 2. Comparison of Costs of Alternative Tractors Present 40hp tractor New tractors Old and new 40's 40hp 60hp Present value 12,800.00 2,200.00 $10,000.00 .900 fair $ 833.00 300.00 100.00 f 16,000.00 600 good S 1,333.00 480.00 160.00 Expected repairs needed Assumed comparable investment S5.000.00 ■ 1,000 poor $1,000.00 150.00 50.00 SI 5,000.00 Hours to do heavy tillage needed 950 Expectation of doing in time available excel. Annual fixed costs: Depreciation based on ex- pected life Two tractors $ 1,833-00 Interest on average invest- 'ment at 6% 450.00 Taxes, insurance, housing, etc 150.00 Total annual fixed costs Cost per hour to do work needed : Annual fixed cost Fuel, oil, current repairs. . . Equipment costs used with tractor $1,200.00 1.30 1.70 .30 1.50 $ 1,233-00 1.37 1.65 .40 1.50 $ 1,973.00 3.29 2.65 .50 1.50 $ 2,433.00 Av. of 2 2.56 1.68 .35 Operator 1.50 Total cost per hour of work $ 4.70 $4,700.00 $ 4.92 $ 4,428.00 S 7.94 S 4.764.00 S 6.09 Total cost of work to be done $ 5, 7 85.00 Since either old or new 40hp tractors would be of questionable adequacy to do the work in the time required, the above costs would favor the one 60hp tractor over a combination of the old and a new 40hp. 2. Owning a combine or hay baler or hiring the work done by a contract operator. 3. Sprinklers vs. surface methods of irrigation. 4. Machine vs. hand picking up of walnuts or prunes. 5. On farm grain storage vs. public warehouse or elevator. 6. A walk-through milking barn vs. the larger conventional stanchion barn. Analysis of a Crop or Livestock Enterprise Approaching maximum profit attainable requires selecting the most profitable things to grow or raise and growing or raising them as profit- ably as possible. Enterprise accounting, as explained in this manual, develops income and cost information in considerable detail on each separate crop and type of livestock. From this it is possible to prepare an enterprise statement of labor, machine work, materials, and other costs in detail in order to analyze and compare costs with those of previous years and on other farms. This will usually disclose some opportunity to improve production, quality, and income, and to reduce costs. Enter- prise-profit statements which enable such an analysis to be made are shown on pages 50, 51, 74 and 75. Handling People In any large farming business many people are involved — the em- ployees within the business itself and those with whom management deals in securing credit, obtaining equipment and supplies, and market- ing products. The manager must be skilled in handling people and he must keep them diligent and loyal. The development and availability of pertinent information on all dealings helps avoid misunderstandings and disputes or, if they occur, helps to settle them amicably. Thus, the "built-in" checks on performance and costs that are a part of enterprise accounting are a safeguard and aid to personnel management. Superior information is always an advantage in handling people. The discovery, recognition, and holding of superior employees through a sound system of awards and promotions is dependent on the proper allocation of responsibilities and the measuring of results by records. Marketing Decisions Profitable farming requires that products of good quality be sold through the best channels at the proper time. Better records and up to the minute costs on a crop are a real help to the manager in occasional decisions that must be made quickly. If he has this information he has the maximum chances of being right in deciding whether to accept an offer for the crop in the field, carry it through harvest, or abandon it. With past records and experience available he can make a better com- parison of alternative marketing methods or channels, and so can place himself in a better bargaining position. Experimentation Every large business is usually doing some research or experimenta- tion in order to develop better techniques or more profitable products. A progressive business should constantly be testing latest technical in- formation and seeking to discover the highest profit point for certain inputs, such as fertilizers. Records of inputs, costs, and results obtained are essential to intelligent application of results. The use of fertilizer and the number of cultivations, irrigations, etc., can be varied in different Table 3. High Profit Point in Fertilizing Dry Farmed Barley Fertilizer applied None 100 lbs. 16-20 200 lbs. 16-20 300 lbs. 16-20 Yield, pounds per acre Value ready to harvest at $1.60 cwt Cost of fertilizer, $4.00 cwt. plus $ .50 A. Income over fertilizer cost per A 1,500 $24.00 24.66 2,000 $32.00 4.50 27.50 2,100 $33.60 8.50 25.10 1,700 $27.20 12.50 14.70 The above figures show the 100 lbs. of fertilizer to be the most profitable level although 200 lbs. produced a slight increase in yield. The 300 lb. level was less profitable than no fertilization since under the limited soil moisture, too much early vegetative growth depleted the moisture and reduced the yield below the two previous treatments. fields and the results recorded. A range or pasture can be fertilized and the feed obtained can then be compared with a similar, but untreated, field. A brushy range can be burned and seeded and the costs compared with the recorded value of the extra feed obtained. Livestock can be fed at different levels and the resulting costs and values compared. Physical records of production and financial records of costs and returns are essential to evaluate results of experimental treatments. Table 3 shows the evaluation of three levels of fertilization of a dry-farmed barley crop. Size of Farm Business For greatest profit, full use must be made of all the available re- sources — land, labor, equipment, operating capital, and managerial abilities. Where any resource such as land is limited, consideration is given to adding more land to increase the size of the business and thereby use more fully the other resources and spread their fixed costs over more acres and products. If a farm manager in analyzing his business discovers an opportunity to improve total over-all profit by adding more land, he will seek ways of doing so. Aided by diligence and knowledge he finds one nearby piece of land he can rent and another he can buy. With adequate records and information he can calculate probable costs and returns for the future under several such alternatives as no change, renting the additional land, or buying it. All this will involve calculation of a total farm budget for each course, as well as consideration of plans for obtaining additional fixed and operating capital. Obtaining Capital Few farm businesses can be increased to the most profitable size or intensity of operations without additional capital. Forward-looking plans and budgets based on recent costs and results can show the increased 4 profit available from more capital. Individuals or partners may thus decide to invest more, or corporation directors may elect to issue addi- tional stock. Such sound plans and budgets are also essential in obtaining the additional long term and operating credit needed. Financial Management Having adequate operating capital to carry on operations in a most profitable manner requires planning ahead for borrowing, expenditures, and repayments. Advance monthly budgets for a year or more and current monthly financial statements are needed in some cases, and are helpful for all farm businesses where much capital is borrowed. Budgets promote economy, show future credit needs and repayment possibilities, and minimize interest costs. The monthly financial statement or listing of all assets and liabilities can warn of a decline in financial status while there is yet time to make necessary changes. Budgets and financial state- ments refer to the farm business as a whole, and the farm business as a whole is the sum of all its crop and livestock enterprises. Since these separate crop and livestock enterprises vary in size and kind from year to year, advance budgets can be made more accurately as a combination of budgets for the separate enterprises. Income Tax Management Farm owners and operators are interested in maximizing their per- sonal net incomes after income taxes. There are many legitimate ways in which they can affect this net income through what they do in their farm business. To begin with, they can compare the effect of re- porting profit on the cash receipts and disbursements basis or on the accrual or inventory basis. They have some options in considering certain expenditures as current expense, or capital outlay, and they can time their sales and expenditures to get more, or less, net income in a certain year. They can get more of their income in the form of long-term capital gains with breeding and dairy stock and with timber sales, which are taxed at a lower rate than income. With adequate records and in- formation they can compare in advance the effects of different plans on farm profit and on net personal income after income taxes. A tax- payer in the higher percentage brackets may find that one farming plan with long-term capital gains provides him more personal income after taxes than another one which shows a higher profit but no capital gains. Providing the valid data to make these advance plans and budgets is a valuable contribution of the more costly system of records and accounts required. True Farm Profit The main purpose of all farm records and accounts is to compute the profit of the farm business each year for income tax reporting and man- agement purposes. Almost any simple system, even that of checkbook and business papers, can be made to serve the first purpose. The income tax farm schedule, 1020F, designed to compute the net farm profit according to tax regulations, seldom shows the true earnings of the farm business and provides little information which is helpful to the manager in increasing profits. Where income tax reporting is on a cash receipts and disbursements basis, a separate profit calculation on an accrual basis using inventories of products, supplies, and livestock, is essential to learning the true profit. Furthermore, differences in handling depreciation and capital gains for income tax purposes call for a different true operat- ing profit statement. This true profit statement for the farm business as a whole is the first requirement in farm accounting and management. The better and more complete the system of records and accounts is, the more accurate will be this profit statement and the more easily it can be computed. Tools of Management Records and accounts are diagnostic tools of management and are useful to the farmer in three main ways: as indicators of business success; as service tools in operating the business and providing needed informa- tion; and as instruments for locating weak points. An annual statement of income, expense, and profit or loss for the farm business as a whole is always needed. Also needed are occasional financial or net worth statements showing the economic condition of the business. Accurate records have a variety of uses in matters such as the following: 1. Preparation of income tax farm schedule and personal returns. 2. Reporting labor costs for compensation insurance. 3. Figuring social security taxes on employees, and reporting and remitting such taxes. 4. Looking up miscellaneous information. 5. Dividing income, costs, and profit in joint operations. 6. Obtaining gasoline tax refunds. 7. Obtaining credit. Efficient management calls for many additional records, and most of these are incorporated in enterprise accounting. Chapter 2 BASIC PRINCIPLES IN FARM ACCOUNTING A farmer's transactions may include four main categories: personal living, farm operation, capital items, and other business undertakings not connected with the farm. One of the first considerations is to decide what is to be covered by the accounting system — the farming business only, for instance, or all the other business and personal affairs of the owner. Unit of Account What the farm accounting system handles is called the accounting unit and this will vary with the ownership and organization of the farm business. With individual or single family ownership it is com- monly an advantage for the accounting to handle all of the personal and business affairs of the owner. The farming business is handled in separate income, expense, and profit and loss accounts; personal and other affairs are handled in other accounts. Assets and liabilities include all of the property and debts of the owner and the balance sheet or financial statement shows his total net worth, of which the farm is usually the major part. For a partnership, the accounting system handles the farming and business affairs of the partnership only; other business or personal affairs may be handled by the same accountant in separate accounting units or sets of books. With a farming corporation the unit of account is the affairs of the corporation; it would not include the personal business affairs of the individual stockholders even in instances when one or more live on the farm as employees. The corporation might have business activities other than a single farm or farming business with several farms, but handling these by separate accounts or enterprises will not be difficult by enterprise accounting methods. Personal Affairs When an owner or manager lives on the farm some intermingling of personal and farm business affairs is unavoidable. Bills may include both personal and farm business items. The electric bill may be partly for a personal dwelling and partly for one or more farm uses of elec- tric ity. Hence, it is basic to accurate farm accounting that correct separa- tion be made between personal or non-farm items, and farming Operations. These personal non-farm items may be handled in the farm accounting system but should be segregated into different accounts or columns in the cash record. In a full accounting system, drawing accounts for owners or resident managers would be charged with payments to, or on behalf of, owners or employees, and credited for money or services furnished the farming business. For good management reasons this financial relationship of an owner to the farm business is one that should be watched carefully. This becomes even more important in the pres- ervation of equity and harmony among the owners when more than one family is involved. Capital Items Capital is property and may exist in the form of cash, real estate, or equipment and livestock. A purchase of a tractor for use over the years is a capital transaction. Likewise, obtaining a loan and repayment of a debt are capital items; they do not enter directly into farming operations. A payment on a loan may be part principal or capital, while the interest is a current operating cost. Accurate separation of capital and farm operating items is essential in arriving at a true profit figure for the year's farming operation. Much has been said and written about what constitutes capital outlay and what constitutes current operating expense. When in doubt, consult the rules and options in the latest "Farmer's Tax Guide," a publication of the Internal Revenue Service. A large expenditure for an improvement, or for a piece of equipment usable for a number of years, is termed a capital outlay. Its cost is spread over the years of use by a charge called depreciation. Some improve- ments, such as original land leveling to make irrigation possible, are permanent and not subject to depreciation. Small equipment having short-term usefulness may be considered as current expense in order to avoid minutiae of details in listing and depreciating minor items. Major repairs pr rebuildings which increase the expected life or usefulness of machines or buildings should be considered as capital outlay and de- preciated over the new remaining life of the item. Minor repairs, which merely maintain the usefulness and expected life of buildings or machines, are considered as current expense. The cost of planting an orchard or vineyard is a capital outlay, and its subsequent care until bearing may be considered as capital or as operating cost for income tax purposes. In enterprise accounting it is possible to separate costs of orchard development from other farming costs for consideration as a capital expenditure. A larger development cost may then be depreciated over the bearing life of the orchard. Livestock purchased for breeding and productive purposes are usually handled as capital outlay and as depreciable assets over their productive life, and when sold or lost are figured as capital gain or loss. Breeding livestock raised may be handled in a number of ways, however. For in- come tax they are figured as in recent years. For management purposes they are included in inventories and handled as expenses when purchased and income when sold. Poultry would normally not be considered as capital outlay when purchased. Where the accounting unit covers an individual there is no need to distinguish between farm capital and personal capital. The asset accounts, or capital records and inventories, will show the value of farm assets; these are included with other assets and liabilities to show the individual's net worth. The asset and liability accounts for a partnership or corpora- tion show the net worth of the firm, with farm assets and other assets in separate accounts. Farming Operations The principal objective in farm accounting is to learn the true profit or loss from a year's farming operations. This requires that incomes from farming during that year, and the expenses incurred for that production, be accurately determined. Figuring profit for management purposes re- quires the inclusion of inventories, accrued expenses, and income; it also involves realistic valuations in making inventories and valid de- preciation figures. Such a calculation of profit would ordinarily arrive at a different result than the net farm profit for income tax. Income Tax Profit Federal income tax laws and regulations give farmers some options and privileges. It is legitimate and customary to take full advantage of these to maximize income after taxes. Since long-term capital gains are taxed at a lower rate effort is made to obtain as much income as possible from this source, thus reducing the current income and calculated farm profit; there is also a general tendency to use maximum permissible depreciation rates. Farmers may figure profit for reporting on either the cash or accrual basis but may not change the basis without per- mission. On the cash basis, they may prepay next year's expenses and defer income to the following year. Some of these actions minimize taxes in a particular year so farm profit as figured for income tax may be lower than the true profit figured for management purposes. There Table 4. Estimated Development Period, Probable Useful Life, and Usual Depreciation Period of California Crops and Farm Facilities for Straight-line Method of Estimating Depreciation Item Fruit trees and vines: Almond . . . Apple Apricot . . . Boysenberry Cherry . . . . Date Fig Grape Grapefruit . Lemon . . . . Olive Orange Peach Pear Plum Prune Strawberry . Walnut . . . Field and vegetable crops: Atfalfa Asparagus Irrigated pasture Livestock: Work stock, horses and Beef cows Dairy cows Time usually in commercial bearing years 7 10 8 1 10 4 5 5 8 7 5 10 8 10 1 10 Vi > 2-3 2-3 2-3 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 Useful life after commercial bearing Range years 20-40 30-50 20^0 5-15 25-50 15-25 20-40 30-50 10-30 20-45 40-80 25-45 15-25 20-60 20-35 20^0 2-4 30-50 3-4 8-12 4-20 5-20 3-8 3-6 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 Usual 30 40 35 10 40 20 30 40 25 33 50 35 20 40 25 30 2 40 3 10 10 10 5 5 30 40 20 20 15 30 10 10 15 8 15 7 10 20 Common rate of depreciation per cent 3 3 3 10 3 5 3 3 4 3 2 3 5 3 4 3 50 3 33 10 10 10 20 20 3 3 5 5 7 3 10 10 15 7 15 10 5 may be years when income tax profit is more than the true profit. Over a period of years, however, total profit will be approximately the same. Management needs to know the true profit each year in making decisions and changes in farming plans for the years ahead. Depreciation Modern farming involves a considerable investment in equipment and improvements which, because of wear and obsolescence, must ultimately be replaced. For income tax purposes, several methods of handling depreciation are described and illustrated in the "Farmer's Tax Guide." For management purposes and for figuring remaining values for financial statements, a realistic estimated life and ultimate salvage value is best, and is generally satisfactory for income tax computations also. Every case is different, however, and is greatly influenced by man- agement's future pla-ns and goals. Fast write-off of facilities may be an advantage in some cases but a disadvantage in others. Table 4 shows some average development periods and probable useful life for farm assets. Useful life of equipment can vary widely with hours of annual use. 10. /55Z ' : : ' ~ cr EQUIPMENT AND DEPRECIATION CLASSIFICATION Clu&jtnrfk&LJ. JyucAds-. ~17h&/vra/ >3 t > OH Cescriot ion Age rfhen iicqM Oate of Post Dr. Entry ffef ■ Debit Date of Post r z . oc Credit Cr. Entry Ref . E s t imat ed Life Date Determi ned Deprec. Rate Amt-per & Prior Deprec. RW J '5S &M 3£ T Pic/hta/ ti s /o 56* m 15 ISO \^IQZ \ r S7 ~Ford '/zT N 3o 6 ± 00 J5 '5LQ_ PIC 3 '34- CAzv~ '4.T ij_A 7 56 /o '10 ii.o Pti4- ! 4- rh z / S/_ J^cmS Z ^Sfrnfoeattfe. rack ¥'- / 5f 2 /D 2O0 111 r 6 Ca&erptiUa4y 5D6 Vc»# <$- 11Q. c 15 ,%£'. SO±Cl T4 i X77X:. TO 9 NtM- l rio 7 HtllL d A L£ 7 r 7)&t1td- i-i ten V Ob u li&L lAL 5 '£a &l^ tts. m?±L \ :c &2^C_ ?15_ l A Figure 1 (continued) THE BOOKKEEPING FORMS . . . shown in this publication are, for the most part, simplified adaptations of standard forms developed by manufacturers of accounting systems. Users of this book may wish to rule their own forms or purchase the manufactured products which are on sale at many office supply or stationery stores. The names and addresses used on the forms shown are purely fictitious and are to provide examples only. depreciation taken that year. Blank lines would be left above the group total for entering additional items as acquired. When facilities for additional years are exhausted a new record is started; this record should include items still in use even though fully depreciated or depreciated to salvage value. Farm account books usually contain such a record. Figure 1 presents such a record with sample entries on a commercial accounting form. Depreciation is usually figured annually near the end of the year and charged as a farming expense at that time. It can, however, be figured and charged monthly in any farming business where monthly profit and financial statements are considered essential. When a new item is acquired, depreciation on it would begin in the same month. The value of this procedure would have to justify the additional clerical work required. Valuation of Assets This may be an important problem in setting up initial records or asset accounts in a farm accounting system. It is also important in acquiring and transferring property and in forming or dissolving part- nerships and corporations. Assets are valued at cost when acquired and this, with some adjustments over the years, remains the basis of the property for depreciation and figuring gain or loss in a sale or casualty loss. When a farm is acquired the purchase price must be properly spread over all assets acquired, such as land, buildings, irrigation facilities, fruit trees, equipment, and, perhaps, growing crops and livestock. The current book value on depreciable assets is this original cost, or some other basis less depreciation taken. When real estate and other facilities were acquired many years ago at lower prices, and facilities were largely depreciated, current book values may be unrealistically low. The annual balance sheet based on these asset account values might reflect a total valuation which is less than half of the current conservative market or realizable value of the land, improvements, and equipment covered. In securing credit a financial statement may need to be based on current appraised values. Inventories Where farm products, supplies, or livestock of substantial value are on hand at the beginning and end of the year, an inventory in which they are listed by quantity and value is essential to figuring the true profit for the year. Taking the inventory involves measuring or count- ing the number of tons or of animals, and this in itself furnishes useful information. A value must then be determined per unit such as the ton or the animal. Method of value determination should be consistent from year to year. The following valuation policies are recommended as re- sulting in the most valid profit figures over the years. Purchased feed and supplies are valued at cost delivered to the farm. Farm-produced feed held for use and not for sale is valued at "farm value" at the time it was harvested and stored. Farm products being held for sale are valued at current farm value at inventory time. Livestock almost ready for sale would be valued at current farm value. Other farm animals are valued at lower farm values in line with their market expectations. Basic breeding stock, such as beef or dairy cows, is carried at an average farm value per head at approximately the salvage value of such stock when sold. This value is kept about the same from year to year in order to avoid unrealized profits or losses due to changes in valuation. Products in Marketing Channels There may be a lapse in time between the delivery or consignment of a crop in a regular marketing channel and the receipt of an exact settlement. This is of little consequence unless it delays a financial state- ment or a necessary calculation of profit. A probable value can usually be estimated and included in the inventory or accounts receivable. Vari- ance of final settlement from estimated value can be adjusted later, if it is of consequence. Growing Crops Regardless of the record year chosen, at the end of that year there may be work which has been done toward a crop to be harvested and sold the following year. This can be ignored in accounting for the farm business as a whole when acreage and work done are about the same each year. When there are big differences it is well to estimate the cost 10 of this work each year and handle it as prepaid expense in figuring profit on an accrual basis. In enterprise accounting these are carried from one fiscal year to the next as uncompleted enterprises. Revolving Funds, Patronage Dividends, and Final Payments If a farmer belongs to a cooperative he will probably have some re- volving capital in the association, and will probably receive patronage dividends and final settlement in one year on a previous year's business. For income tax figures follow the suggestions in the "Farmer's Tax Guide." There may be cases in which profit for management purposes may need to be adjusted by considering the revolving fund capital with- held, patronage dividends earned, and final settlement as part of the income of that year even though the amounts may not be known until later and not actually received for several years. By the same token, such funds received in any one year may need to be considered as income from one or more previous years. Accrual Adjustments In figuring yearly profit on an accrual basis it is necessary to con- sider as income and expenses only those items that apply to that year. It is usual in simple self-kept records, however, to record a receipt or expenditure as applying to the year in which it is received or paid. At the end of each year items are examined and adjustments can be made for prepaid expense and accrued income; in a full accounting system this is handled by regular accounting procedures and ledger accounts. Expenses prepaid in a previous year are carried in, and those paid during a year toward business of the following year are carried over. ACCOUNTING FOR THE FARM BUSINESS AS A WHOLE An adequate set of financial and supplemental records for the farm business as a whole is basic to any commercial farming. Such records are essential in financing, managing, and operating any business; they are also the starting point for enterprise accounting. Objectives Accounting for the farm business as a whole should provide for the following: 1. Income tax returns — schedule 1040 F on a cash or accrual basis and sometimes material for the personal return 1040, schedule D capital gains and the reporting of self-employment income and social security taxes. 2. A true profit or loss statement for management purposes on an inventory or accrual basis. 3. Periodic net worth or financial statements as needed. 4. Accumulations of current income and expenses by desired segrega- tions with monthly totals for use in budgeting and financial management. 5. Convenient reference records of previous transactions, production, prices, etc. 6. Records of investment, contributions and withdrawals by the owner or several owners. 7. Records for deducting and remitting Social Security Tax on employees. 8. Records for obtaining refunds on state and federal gasoline taxes. 9. Yield and production information on the main crops and live- stock. Essential Records To achieve the above objectives the following records are needed: 1. Cash received, with segregation by columns or accounts so that the amount from each product or of each kind may be obtained readily each month and for the year. 2. Cash paid, with segregation by categories in columns or accounts so that monthly and annual totals can be readily obtained. 3. Time cards or books on individual employees for accurate pay- ment of wages. 4. Social Security payroll records showing Social Security Tax deduc- tions and individual employee records showing earnings and deductions to date. 5. Capital and depreciation records listing all large depreciable items individually and showing current values and depreciation for the year. 6. Inventories of livestock, feed, unsold crops, and supplies at proper valuations annually at least, and at other times as needed. 7. Harvest and yield records on all crops, preferably by fields. 8. Production and mortality records on livestock and poultry. 9. Gasoline use on the farm for obtaining refunds of gasoline taxes paid. 10. Business papers such as statements, vouchers, sales slips, cancelled checks. (These are valuable records and should be kept on file for five years. ) 11 Accounting Period The cycle in farming is usually a year and accordingly the profit statement for the farm as a whole is for a 1 2-month period. The calendar year is usually chosen as the fiscal or accounting year and is satisfactory for most farms where crops are largely produced and sold within the year. Where most of the planting is in one year and harvesting is in the next, a more useful accounting period would start after one year's harvest and before production activities for the next — on July or August first for a California grain farm, for example. Profit statements oftener than once a year are of little value to man- agement. An exception would be a dairy or chicken egg farm where production and feed buying are uniform through the year. Here, a monthly statement showing net income as a difference between current income and expenses would have significance to management. On most farms a listing of monthly totals by category, and perhaps for the year to date, are helpful in current financial management and in making forward budgets and securing credit. In all farm accounting it is advisable to make entries for transactions as they occur and to check them for accuracy and completeness at the end of each month. This can be done as a preliminary to monthly totals and statements. In a full accounting system, a trial balance should be made at the end of each month — that statement is important and should be recorded for future reference. Farm Record Books For the single-owner farm with owner-kept records a special Farm Record Book can suffice. Many record books are available; some are provided by the State Colleges of Agriculture, or agricultural service businesses, and others are available in stationery stores. But not all of them are adequate. To be adequate, a book should contain most of the records previously mentioned. The records of cash receipts and payments are most important. Each book should have a total column and distribution columns for accumulating the desirable segregations by kind, including personal, capital, farm income, and expense items. Farm record books with no continuous cash records but with different pages or sections for entering the several categories are difficult to check for accuracy and completeness and are not recommended. Most farm record or account books contain space for monthly totals, a capital and depreciation record, inventories, and forms for financial and profit statements. When well kept they serve as a basis of enterprise accounting by means of the supplemental records and work sheets described in Chapter 4. Such books are sometimes of inadequate size and capacity for a larger - farm with many transactions and are not recommended for the large farmer with other business interests. These books are not suited to joint opera- tions involving more than one owner. Such special farm record books are sometimes called single entry systems because an item is entered only once with no offsetting debit or credit or posting to ledger accounts in another book, as in double- entry accounting explained below. Cash records recommended above which have a total column and distribution columns involve a double entry. An item placed in the total paid column is a credit to cash or the checking account, and when also placed in the proper expense column or columns it is a debit to those accounts. Such a record is convenient for checking accuracy and completeness. The total received and paid columns are checked for completeness with the bank state- ment. The total of the totals of all distribution columns in the record of cash paid should equal the total of the cash paid column for the month or period checked. Most farm record books contain instructions for checking accuracy and completeness. Figure 4 illustrates some entries in the California Farm Record Book. This cash record is one in which receipts and payments are entered consecutively in a single double-page record, which could be called a cash journal. Using Commercial Accounting Forms A financial record system can be kept on selected commercial ac- counting forms in an accountant's binder. Many special forms are avail- able and the same results can be attained as with a special farm record book. Records of cash received and of cash paid, with distribution columns or a combined cash journal adequate for the business, can be selected. Sheets for a depreciation record, payroll record, and in- ventory are obtainable. The 11 by 14 inch page size provides more adequate column widths and numbers of columns for a larger business than do the smaller farm record books. The small farmer will find commercial forms more difficult to use than a special farm record book because suitable forms have to be selected and labeled with many column headings, and no instructions are available. Double-Entry Accounting Double-entry bookkeeping is the basic procedure used in business when accuracy and honesty must be proved. 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 1? to one account and a credit to another. There is 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 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 to show account bal- ances to date. Since this system uses technical accounting procedures and is usually done by trained accountants, standard commercial loose-leaf forms and binders are usually used; they are selected to fit the needs of the business and the preferences of the accountant or bookkeeper. Many forms and rulings are available, including supplemental 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. Double-entry accounting is recommended when more than one individual is concerned in the ownership and when the relation of each to the business must be shown accurately and the profits fairly divided. This system is also needed by the individual with a large farm and other investments and income, and it is considered necessary in any large business with hired employees involved in the management and handling of funds. It is required for estates and corporations. The main advantages of a full accounting system are: (1) Many more segregations of income and expense are possible in the unlimited number of ledger accounts. ( 2 ) Credit transactions and inventories may be handled more systematically and profit for a year on the accrual basis may be more accurately determined. ( 3 ) Complete accuracy is assured. The accounting can be proven accurate and can readily be audited by a public accountant. The disadvantages of this system are that technical training is needed and a greater amount of clerical work is required. 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 disadvantage of keeping records off the farm is that they are not readily available for reference when mak- ing decisions. The farmer who hires someone to keep this system of accounting may obtain better managerial help from it than has been usual in the past if he wants and is willing 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 particular year. BUSINESS METHODS Commercial farming is a business with the general objective of maximum profit over the years. Good business methods in handling funds and people facilitate accurate accounting. They also promote diligence, honesty, and better service on the part of employees and people with whom there are business transactions. Checking Account Most farm accounting is done in terms of cash received and paid. Receipts are usually few in number, large in amount and usually by check. Hence, it is usual to deposit all receipts in the farm checking account and to make all payments by check. Thus the farm cash account parallels the bank account and can be checked with it to assure com- pleteness and accuracy. Duplicate deposit slips and cancelled checks furnish another set of papers or records for reference. Cash Occasionally, it is necessary to accept a small amount of cash for something sold, or it is convenient to make a small expenditure in cash. With most farms these events are rare and can be handled without any petty cash fund. Most people have personal pocket cash from which they can make an expenditure, receiving a sales slip, or receipt, which is turned in later for reimbursement. With this method a sales slip should be made for anything sold; it is turned in with the money to be deposited or for a charge to be made to the person pocketing the money. Where there are many cash sales at the farm, safe methods of holding the cash for accounting and deposit are essential. Accounts Receivable and Payable It is not usual for farmers to set up accounts for money owed, or owing, for a short time; examples are routine charge accounts that are paid monthly, or deliveries of farm products for which payment is expected soon. The first entry for such transactions is made when cash is received or paid. Where such accounts are not settled in full each month, the farm books should show each transaction as made, and should give an up to date record of debits, credits, and balances as a 13 check on the other party; this also enables the manager to know the balance at any time and to manage his funds accordingly. The few noncash transactions that need recording on the farm books can be handled in a cash or general journal. Even though no accounts receiv- able or payable are carried in the books there will usually be some debts or credits outstanding at the end of the year. Invoices or state- ments covering amounts owed, or receipts for products delivered, will usually be on hand. These can be taken into account in profit and financial statements. There are some farming businesses where several individual ac- counts payable or receivable are needed. Where purchases are made on credit from a number of dealers and accounts with each are desired, transactions are immediately recorded in a special journal or voucher register and individual dealer accounts are also credited at once. When payments on account are made they are listed in the check record and charged to the proper accounts. When a firm has a number of regular customers and makes frequent sales it is advisable to have an accounts receivable or customer's ledger to show all transactions. Listing these purchases, sales, and payments in special journals and simultaneously posting them to accounts receivable and payable is a common machine-accounting operation, as mentioned in Chapter 7. Business Papers Usually, every transaction of a farm business should result in a sub- stantiating invoice, statement, or sales slip. There are also door-delivery slips which may be checked later with settlement statements for produce. Farmers are usually inclined to trust firms with whom they deal, and while it is true that errors seldom occur it should be a rule to examine every piece of paper and to check entries pertaining to the deal and file them for future reference. Statements covering farm products sold usually contain considerable data on quality, price, and marketing cost deductions that are seldom carried into the farm books. Hence, these statements become valuable supplemental records and should be assembled by firm or product, filed, and kept for perhaps live years. Any sale to an individual where there will be no statement received should be covered by a sales slip which carries the name of the buyer, the item sold, its quantity, quality, and unit price, and the amount of the sale. If paid for on delivery that fact is indicated and signed for by the seller. This slip is made in duplicate, with the first copy being given to the buyer and the carbon kept for proper entry. This is essential not only for correct accounting but also for accurate quantity in- formation on production and sales. Sales or delivery slips and bills paid also carry important quantity and price information which is seldom carried into books and accounts. These items can be assembled by kind and added to obtain information — such as the total pounds of concentrates bought annually — which aids in analyzing an enterprise. These readily available records are essential in analyzing input quantities, prices, costs, and production efficiency; regrettably, most farmers make insuffkent use of them. Office and Equipment Despite good intentions and efforts many ventures fail because of inadequate bookkeeping facilities, and so it is necessary to mention the importance of an adequate office and of essential equipment for conducting the business and the accounting of the farm. For the individual farm operator whose record keeping is done by himself or his wife, a small office room reserved for business affairs only is suggested. It should be well heated and lighted and should have an outside entrance. Minimum furniture should be an office-type desk and chair, an extra chair or two, and a filing cabinet for business papers and reference material. Even the simplest of record systems involve so much adding and cross-adding that an adding machine is essential to getting the job done. If enterprise accounting and analysis is to be attempted a calculating machine would be better. An extension telephone would be desirable. For the larger farm business, a separate farm office building on the farmstead court is usually advisable and justified. If the business warrants it, a full time clerk-bookkeeper should be employed. Desks for the clerk and manager, and adequate filing cabinets are a necessity. A fireproof cabinet or safe for important record books and documents is recommended, as the cost of reconstructing and replacing such records after a fire could exceed the cost of the cabinet. A telephone, calculating machine, and typewriter will be needed. Even if the final accounting is done off the farm an office on the farm is needed to assemble and prepare the information and to pay local bills and employees. Timeliness Prompt handling of mail and business affairs not only facilitates better management but in the long run actually takes less time. Incom- 14 ing mail should be read and acted on each day by mailing replies or checks in payment of bills; entries should be made at once for all receipts and payments. This can be done at intervals during the day — or in the evening, if done by the manager or operator. Prompt handling of business affairs stimulates better performance by the farm staff, promotes better service from the firms dealt with, and eliminates the danger of getting so far behind with the work that things arc- forgotten and opportunities are lost. A few days after the end of each month records are checked for accuracy and completeness, the bank statement and checkbook are checked, monthly totals are made, posting is completed, and monthly trial balances and statements are made. With each month's affairs completed and checked monthly the o o o Date Quantity From To Unit Unit Value Total value In Out Bal. In Out Balance *H /6 /Co /Co £.11, (5.17 Isi Cut RM I / 1st Cut Pjk t 2o.ro 13) Vo?3 If 4* /4S Pjk/ S*&L &> $ £*MUSUj 7-%.oo /oft io*n- y* %o /fS 7-1 G> f n,/3,n %M cut RAt 11, So Z%glc f3xS IS &*4c*t ' F. 76 So&i \„ t*£ff* T .»t> US" l*#Z (j CONTINUOUS INVENTORY RECORD Figure 2 15 year-end procedures and completion of annual statements and income rax returns are greatly facilitated. Office Clerk Having someone in the office at all times can be quite valuable for any large farm business. Few farmers and managers realize the amount of time lost by employees, callers, and deliverymen when there is no one in the office to take calls, locate the manager, convey in- formation, and sign for deliveries. The right person for the job can do the accounting and the office secretarial work, and could also serve as an assistant manager for business affairs. He can run errands and perhaps can pinch hit on various farm jobs. He can also do enterprise accounting and keep books for the farm business as a whole. Continuous Inventories Keeping a continuous or running inventory on livestock, on some categories of feed, and on some supplies, is often useful. It promotes better decisions in managing livestock and supplies, shows up losses or thefts, and provides for more accurate charges for materials in enterprise accounting. In simple farm accounting for the farm business as a whole the continuous inventory need not be handled in the ac- counting system unless needed for monthly statements. A single sheet or card may be used for each category with units added as obtained by purchase, harvest, or transfer, and deducted as used, lost, or sold. Knowing the number of young birds and laying hens on a chicken egg farm is indispensable in figuring production and mortality. Exact knowl- edge of the kind of stock on a ranch and the number in each age group is essential information. Accurate figures on the bags of com- mercial fertilizer in a warehouse or the tons of hay in a storage pile are additional examples of useful running inventories. Occasional counts to verify the number on hand are suggested; they should be accurately made for the annual inventory used in figuring profit and in the financial statement. Figure 2 shows a sample of a continuous inventory sheet for a manager's field notebook with entries for hay in and out of a storage pile. Chapter 3 ENTERPRISE ACCOUNTING— WHAT IT IS AND HOW IT IS DONE Farm enterprise accounting furnishes, in detail, income, costs, and profit for each separate crop and kind of livestock in a diversified farm business. It is similar to cost accounting in manufacturing, and is sometimes called cost accounting when applied to farming. The author prefers to call it enterprise accounting because its procedures are slightly different and because it stresses profit in the individual enterprises of the farm rather than stressing the cost of processes and products. Enterprise accounting makes possible the enterprise approach in farm management, facilitates the most profitable combination of crop and livestock enterprises by size and kind, and promotes the operation of each enterprise for maximum profit. The usual type of farm accounting for the farm business as a whole shows only the total profit or loss from all enterprises; it does not show which ones are making a profit or a loss. Without such information it is difficult to change enterprises to a more profitable combination, and it is also difficult to analyze each enterprise in order to maximize its contribution to total farm profit. What Is an Enterprise? An enterprise is a single crop or kind of livestock produced for a profit-making purpose. A crop enterprise starts with preparation of the land and proceeds through cultural operations, harvesting and marketing. It may be completed in a few months or two years; it may start and end at any time of a fiscal year, with the following crop being a new enterprise. Each year is a separate enterprise with perennial crops such as orchards, alfalfa, or asparagus. Livestock enterprises — dairy, beef, or poultry — may be continuous, with each year figured as a separate enterprise. A livestock-feeding enterprise may start with the purchase of feeder livestock and continue until the same animals are sold a few months to a year or more later. Why Several Enterprises? Large commercial farms usually operate a number of enterprises in order to make best use of available resources. A large farm commonly contains several soil and land types with differences in uses adapted 16 to each. On a farm there could be, for instance, some rough, hilly land suited only to grazing and timber. There could also be some tillable land suitable only to dry-farmed grain and some irrigated valley land that could be used for a wide range of high-value crops. Logically, a number of crop enterprises would be necessary to use the various soil types. Even on the good valley land it is usually necessary to grow crops in proper rotation in order to avoid damage from pests and diseases, maintain tilth and productivity, and thus obtain high yields. Two crops a year are feasible in some climatic zones. It is seldom feasible or wise to grow a single crop only. Some crops incur less risk of loss from crop failure or low price than others do. With several crops it is possible to spread work and use of irrigation water and equipment and attain a better overall use of resources. Natural pasture can be harvested by livestock only, and some forage crops are more profitable if marketed through a livestock enterprise than if sold off the farm. Hence, a number of enterprises are usually conducted on any large farm and enterprise accounting, which develops information on each, is a valuable aid to management. Enterprise accounting is justified only as an aid to management and can be very detailed or rather simple. The objective is to develop information which can be used by management as simply and cheaply as possible. Careful thought should be given to what the enterprises are and how minutely they should be broken down to smaller, separate enterprises; for example, separate fields of a single crop such as alfalfa can be separate enterprises — or all alfalfa on the farm can be a single enterprise. Consider a specialized dairy farm on which some feed is grown as pasturage, hay, and silage. This farm may be considered as a single enter- prise for selling only milk and dairy cattle. But the dairy cows are really one enterprise; the feed crops and pastures are sometimes con- sidered as a single feed-growing enterprise. The feed produced is charged to the dairy and credited to the feed-growing enterprise. Costs incurred are divided between the dairy and crops. When profit statements on the two are made they will show how much profit is contributed by each enterprise. The dairy enterprise can be analyzed and studied to improve its profit. If the feed production is not profitable, a change to other crops, and perhaps even to buying the feed is indicated. It would be much better if every feed crop — the alfalfa, the irrigated pasture, and the corn silage — were handled as a separate enterprise. Intelligent changes could then be made as indicated and trial plans and budgets could be drawn up for a more profitable future. If the dairy enterprise could not be made profitable, it could be discontinued and a change made to cash crops. The Enterprise Cycle An enterprise cycle from production through marketing may not fit the calendar or fiscal year of the farm business. In California, land preparation for barley usually begins in one year and the crop is harvested the next. If a fallow year is involved it takes two years to get a single crop. Accordingly, the enterprise account is opened when work begins and is carried over until the enterprise is closed the next or the following year. Thus there could be a I960 barley enterprise and a separate 1961 barley enterprise in the books at the same time. Some enterprises continue a few months only; a fall lettuce crop can follow a spring lettuce crop, with both being completed within a year. In a continuous livestock enterprise, a year corresponding to the fiscal year of the business is the best cycle. A dairy, beef, or swine enter- prise account opens on the first day of the year with an inventory of stock and feed on hand, and is closed at the end of the year with another inventory. It may be sometimes desirable to break a livestock enterprise into two or more phases. In a dairy enterprise, the milking herd is some- times considered one enterprise, and the raising of heifer calves for replacement purposes is regarded as another. This involves additional detailed records and troublesome allocations of feed and other costs so seldom contribute enough valuable information to be justifiable. On a cattle ranch with a herd of beef cows a single enterprise would usually be adequate; the addition of a feed lot would justify a feed lot enterprise; the feeder cattle would be charged to this at farm value when they leave the beef enterprise to be fed for market. A feed lot enterprise might also handle additional purchased cattle in several groups, each group being considered a separate enterprise. Each account would start when the animals come in, each account would receive appropriate costs during feeding, and each would be closed when the animals are sold. Development Costs The development of a capital asset, such as a non-bearing orchard, should be handled as an enterprise in order to receive its share of current costs during the development period. Each year the accumu- lated costs are charged to an asset account as a capital investment. When the orchard reaches commercial bearing the cost of growing the 17 trees can be spread as depreciation over the productive life of the orchard. Handling such a development project as an enterprise is also necessary in order to absorb costs not chargeable to other enterprises. Although enterprise accounting has as its main purpose the analysis and selection of enterprises, it also has valuable side effects on the farm business as the following list shows: 1. Procedures involved in keeping labor and machine use records as a basis of allocating costs to enterprises improve administration. 2. Honesty and diligence of employees is increased. 3. Supplies and fuel are more carefully handled and their use recorded. 4. Current production and use records can be made available in a few minutes. Accounting for the farm business as a whole can attain some of these ends but cannot provide enough information for making the many correct decisions necessary in operating and administering a large and diversified business. Large Business with Several Farms and Departments Successful firms often grow and become involved in allied agricul- tural service businesses. A packing or processing plant may be added, farm service and contract work for others may be performed, or several farms may be operated. A farm shop may grow and manu- facture special equipment for sale to others. The business may be divided into several departments while it continues to operate as one firm with one unit of account and accounting system. In such a case the techniques of enterprise accounting are absolutely essential. Full enterprise or cost accounting on each farm, and in each side line or associated business, may not be necessary or feasible, but the procedures of alloting incomes and costs to the separate farms and departments, or units of the total business, are the same as in enterprise accounting lor a single large farm having several crop and livestock enterprises. HOW ENTERPRISE ACCOUNTING IS DONE Basically, enterprise accounting involves the allocation of all in- comes and expenses to the several enterprises in the farm business. There is no single best way in which this may be done easily and with accuracy. Bcause every farm is different the methods used will be de- termined by the nature of the business and the factors of where, and by whom, records are kept. In its simplest form, each income received would be credited at once to the proper enterprise in a column or a ledger account or its equivalent. Each expenditure would be allocated to an enterprise on some valid basis. This is illustrated in simple cases by a farmer who divides each expense at the time it is made and enters the amounts in enterprise columns in his record of cash paid. He has to know what use was or will be made of labor, materials, or other items for which he is paying. Such a method, laborious and of questionable accuracy at best, becomes impossible when more than a few enterprises are involved. The best method of enterprise accounting is a combination of making some direct charges and credits to enterprises and charging many expense items to accounts for the farm business as a whole, from which they are later transferred to the enterprise expense accounts. This process will be explained here now, and again later, at which time it will be illustrated by two methods — by supplemental work sheets and by formal accounting procedures. Income Crediting the income received from the sale of farm products to the proper enterprise account usually presents no problem. A question might arise about an additional payment on a crop from a previous year's enterprise. A completed enterprise statement for management purposes only can always be revised. The important point is to make certain that income is credited to the correct enterprise, and for the correct year, so that it may be compared with production expenses. Where there are several fields or enterprises of a single crop, care must be taken to preserve the identity of the products marketed from each. Expenses In enterprise accounting, each category of expense will have its own best method of handling. It is customary for first entries of a transaction to show the expense by categories, such as labor, fuel and oil, electric power, etc. Accounting for the farm business as a whole ends with annual totals of each expense category listed in the profit statement. Enterprise accounting takes these categories and allocates them to enter- prises — some currently, some monthly, and others at the end of the accounting year. Where an expense is clearly and entirely for a single enterprise it is best charged directly to that enterprise at the time. 18 Many recurring items, however, are best accumulated for some time and then charged in a single entry. Labor Keeping a record of hours worked and work done by each worker is one of the important steps in enterprise accounting. Labor and payroll records are a means of computing the wages due as well as a basis for distributing labor costs over enterprises, and perhaps operations within an enterprise. Some payments of wages are for work done in a single enterprise while others may cover work in several. It is often desirable to keep time records and to figure labor costs by operations within crop enterprises to discover opportunities for savings. Operations are single jobs: planting, hoeing, irrigating, and all work done to accomplish a single purpose, such as land preparation — which itself might be a total of disking, plowing, harrowing, etc. It is well to keep the number of operations handled separately to the minimum most helpful in analyzing costs. A saving in clerical work can be made by keeping time spent by operations in the initial records but figuring and allocating only the total labor cost for each enterprise. Then, when an analysis by operation is desired, it is possible to go back to the original labor records and compile data for a more detailed break- down. This process may also be desirable for different fields of a single enterprise, particularly where there is an opportunity for comparing costs by different methods of performing an operation. Time Cards A time card on each worker is used to show time by enterprises. The card may cover a day, a week, a pay period of a half of a month or two weeks, or a month. Standard time cards have been published and sold for this purpose, but most farmers prefer to have cards or sheets designed and printed to fit the enterprises and the administrative and accounting procedures of the particular farm. A well designed time card can serve several purposes: it can provide for the calculation of wages due and the allocation of labor costs to enterprises and opera- tions, and it can show use of equipment, irrigation water, and charges for cash advances, meals, and other perquisites. Time cards on workers are best kept by supervisory personnel. Some trusted and unsupervised workers could be allowed to keep their own cards, although this might introduce inaccurate or dishonest reporting. At worst, poor time records can make accurate cost allocations im- possible. It is advisable for supervisory personnel to keep a time card which will furnish the basis for allocation of management and super- vision costs; these costs should also be charged to enterprises. Labor performed by the farmer or a working foreman must be charged to appropriate enterprises and operations as well as hired labor, so it should also be reported on time cards. A single time card can cover a large crew working at a single operation in a single enterprise. Names are written in under the job and the hours (or units of work if it is a piece rate job) are tallied each day opposite each man. If enterprise accounting is done on the farm, daily time slips are sometimes kept during the day and the data transferred to each worker's time sheet in the evening. The best system for saving clerical time would be to use a pay-period sheet, or time card, that could be carried in a small binder by supervisory personnel. When a worker is transferred the card is also transferred; when employment is terminated the card is taken to the office for final payment. At the end of each pay period all cards are turned in for preparation of the pay checks. A twice-a-month pay period is a good compromise — it involves fewer pieces of paper than weekly pay, and meets the need of workers for pay oftener than once a month. Shown below is a sample time card that is usable for either the first or second half of the month. It is 5V2 by %Vl inches in size and fits a standard three-ring binder of that size. Such a binder would also contain other field records and coding information. Notice that on this time card each job on each field is listed on a separate line. The sample entries shown are listed as they would be on the dairy farm used as an illustration in Chapter 4. If not enough lines are available a second card can be used. At the end of the pay period the card is checked for accuracy and completeness; the total hours for all days should equal the totals for all lines. Appropriate rates are then used for figuring the amounts in the last column. When enterprise accounting is used, employees usually are paid by the hour; if pay is by the month, the amount due can be divided by hours worked to get a rate for making the extensions for that pay period. In some cases this rate is higher than the actual wage rate in order to include the cost of perquisites, compensation and social security insurance, and undistributed labor. Some road work, sick leave with pay, vacations, etc., cannot be immediately charged to enterprises and is therefore held as undistributed labor to be divided at the end of the year among enterprises and service units in proportion to labor already charged. As workmen are paid, the expenditure is immediately entered and charged to a labor column or payroll account. Each completed time 19 card is listed on a work sheer, or in a payroll record, and the separate amounts for jobs and enterprises are inserted in proper columns. After the employees have been listed, totals are made and charged to enter- prises. Monthly totals are suggested, in order that accounts and cost data can be kept timely and available for use. Service Units In modern farming, various machines are used to perform work and these require outlays for fuel, oil, and repairs. It is not possible to allocate such costs to enterprises individually as they are incurred. These machines are operated to perform work for the enterprises and FARM WORKER'S BIMONTHLY TIME CARD University of California, Agricultural Extension Service O O ,6 __^, si Pay period ending.. ..//..^./.L?../... Name ^J. f/- // A St. * 6 /o l./S // s'o JUL^J&Jfaj/ /4 A 7k / s r s /s- J7 2X ^/I'^^ti Cn. 'ckJ^~ n 9 %/> & V £ C, i s 1 S 3y 3? /o ~?Wcw ^. /5~ A r% •^ y y y /& /f Vt> Steffi £ CS 3t 4 9 9 s 27 3/ or y Undistributed labor / / S f 7r Total ? // 9 9 JO JO f 9 ? s 7 7 7 ? ? /z& /yy 90 Deductions or advances Figure 3 20 not, ordinarily, to earn a profit. This work should be charged to the enterprises at cost. Expenses on the machines are charged to them and they are credited for the work done. A service unit is a convenient device for keeping costs on the items covered and for transferring them later to the productive enterprises on the basis of work done. Service units can be few or many; one service unit can cover a single machine, a large group of similar machines, or even all farming machinery on the farm. This last method is usually recommended, as it saves time and simplifies procedures. Farm Machinery Tractors, trucks, and all farm machinery would constitute the Farm Machinery Service unit. An account, or group of accounts, would be charged with all expenses on farm machinery including shop ex- pense, labor, depreciation, and taxes on equipment. A table of appro- priate hourly rates should be developed so that the total of all hourly charges for work done will equal the total costs for fuel, repairs, depreciation, and other costs for the year. Work by each machine is charged to enterprises at an appropriate rate. This rate also will usually include the implement used; for example, the rate for a 20-horsepower wheel tractor might be estimated at $1.30 an hour, while the 40-horse- power crawler tractor could be charged at $2.10 an hour and a two- ton truck at $2. These rates do not include the operator of the ma- chine, whose time is charged to enterprises through the labor records. There is little chance that total charges made for all work in a year at these estimated rates would equal the total of all costs in the service- unit. If any sizable adjustment is needed it can easily be made by increasing or reducing all charges by an appropriate percentage. Table 5 illustrates the method used in estimating suitable rates. Most farms need several additional service units to receive and hold expenses until they can be allocated to enterprises on a final, valid basis. Following are a few that are common to most farms: Irrigation Water This is a useful service unit on an irrigated farm, h receives all costs of obtaining water and delivering it to fields, but not of applying it, which is crop labor. Water is charged to enterprises on the basis of the quantity used. As some crops use considerably more water than others it would not be logical to spread water costs over enterprises on a straight acreage basis. This procedure of recording water use by crops also promotes more efficient use of water and results in lower costs and better production. Employee Housing When the farm business provides housing or board for employees, a service unit is used for the purpose of accumulating costs for pro- Table 5. Sarr pie Rates for Charging Mac nine Work in E nterprise Accounting ViT pickup 2T truck Wheel tractors Gasoline Diesel 40hp Diesel crawlers 20hp 30hp 40hp 40hp 60hp Original cost dollars $2,200.00 144.00 120.00 30.00 $3,500.00 233.00 150.00 50.00 $2,800.00 187.00 15.00 15.00 $3,400.00 227.00 20.00 20.00 $5,000.00 333.00 30.00 30.00 $5,500.00 367.00 35.00 35.00 S 10,000.00 667.00 55.00 40.00 515,000.00 1,000.00 80.00 Fixed costs: Minimum depreciation, 15 years 60.00 Subtotal — Overhead costs $ 294.00 0.37 .60 .45 $ 433.00 0.54 .80 .65 $ 217.00 0.28 .50 .35 $ 267.00 0.33 .60 .40 $ 393.00 0.49 .75 .50 $ 437.00 0.54 .65 .55 S 762.00 0.95 .65 .95 S 1,140.00 Cost per hour, 800 hours: 1.42 1.20 Repairs and service 1.50 1.42 1.99 1.13 .20 1.33 .30 1.74 .40 1.74 .40 2.55 .50 4.12 Added cost for drawn equipment .90 Total hourly rate ( rounded ) $ 1.40 $ 2.00 $ 1.30 $ 1.60 $ 2.10 $ 2.10 S 3.00 5 5.00 The above shows how appropriate rates per hour are estimated for use in charging machine work to enterprises. Interest on investment, which is not often used in private enterprise accounting, has not been included but can be included if wanted. The above sample rates are for illustration only and calculated using actual costs and expected hours of annual use. 21 viding these perquisites. This unit would receive all expenses paid on behalf of the employees covered, including electricity, depreciation, and taxes and insurance on the buildings used. Information on such costs is vital to good personnel management. Accumulated costs in this unit can be allocated to enterprises along with labor costs in proportion thereto or on some other valid basis. Management Managerial and office expenses are best handled in a separate service unit. Costs charged to this unit would be managerial and clerical salaries, office supplies, telephone, travel expenses, association dues, and charges for use of automobiles. Total costs in this unit would usually be charged to enterprises and other service units at the end of the year on the basis of the estimated time spent, or in proportion to total enterprise costs. Some large companies allocate these costs at the end of each month. Other Service Units Additional service units can be included as needed. A feed mill and warehouse and a feed lot would be handled as service units where they are used on a large ranch. A large specialized machine, such as a combine or sprayer, would best be handled as a separate service unit if used for outside work and particularly if jointly owned with some- one else. Handling Service Units In enterprise accounting, service units are charged with costs in a manner similar to enterprises. They differ from enterprises in that they are operated to perform services at cost rather than to earn a profit. All service unit costs are allocated to enterprises — some monthly and some at the end of the year. Cost allocation to enterprises is on the basis of work done, services furnished, or quantity of water or other material supplied to the enterprises. Service units are included along with enterprises in records or work sheets where labor and other costs are distributed. For example a worker's time card shows work in several enterprises and could also show work at repairing a tractor or irriga- tion pipe. Hence, a labor record would need columns for service units as well as enterprises. Service units may also be coded or numbered with the enterprises. Materials Materials such as fertilizers, weed sprays, etc., may be purchased as needed, or for future use in several enterprises. If used immediately the material is promptly charged to the enterprise. If purchased for future use the cost is charged to an inventory, and this account would be credited as the material is used, at which time it is charged to the several enterprises. General Expense of Overhead Costs The farm business as a whole incurs rather large occasional costs which may at first seem difficult to allocate to enterprises. In fact, some companies make no attempt to do so, and their enterprise statements show only income over direct or variable costs which are readily chargeable to enterprises. This may be misleading in comparing earn- ings. In some instances these charges may be allocated as a group total on an equally invalid acreage basis. In one case observed the "overhead costs" of $75 an acre were charged to all crops — intensive and exten- sive. This charge was more than the income of a low-cost crop such as irrigated pasture, but it was only a fraction of the total costs in an intensive crop such as lettuce. Any overhead cost has a valid basis on which it can be allocated to enterprises. Property taxes, which are based largely on land but partly on buildings, equipment, and the owner's residence, can properly be allocated to enterprises, service units, and the owner's personal affairs in proportion to the assessed value for tax purposes of the property used by each. A more valid basis would be in proportion to the book values of the assets. Fire insurance on buildings can be allocated on the use of the buildings and their insured values. Interest on a loan or mortgage is more properly considered a cost of capital for the entire farm business, rather than the specific purpose or asset on which the loan is obtained. Its proper allocation would therefore be in proportion to the total capital involved in all enter- prises and service units. By using sound reasoning a valid basis of allocation can be found for any overhead expense, but it is impractical to charge such items to enterprise and service units at the time they are made. Generally, it is more convenient to charge them to suitable expense accounts for the farm as a whole as they are incurred during the year. Each kind is then allocated to enterprises and service units at the end of the accounting year. In some large companies, however, an attempt is made to make these allocations monthly on the basis of previous experience and a predetermined monthly average. This is of doubtful 22 validity at best, because the basis for allocation will vary with the kind of expenses paid from month to month. Also, active enterprises change during the year; some are completed and some new ones are started. Depreciation This is the portion of the original cost of buildings, equipment, or orchard trees, chargeable to each year of operation in order to absorb the cost of such facilities in operating costs over their useful lives. Methods of figuring depreciation and claiming it as a deductible expense in income tax reporting are quite generally known, or are available in Bureau of Internal Revenue publications. From a management stand- point these methods are probably so near to the facts that no different calculation need be made. Occasionally, previous accounting to minimize income taxes, or failure to capitalize development costs, may result in unrealistic remaining values and depreciation which might make re- calculation for management purposes appropriate. This is illustrated by a case in which the development cost of an orchard was originally handled as a current expense with the result that little depreciation was allowable later. With no value or depreciation on the trees this orchard enterprise statement would show a different profit or loss than it should. Regardless of how the calculation of depreciation is made on the many assets involved, charges should be made to enterprises in propor- tion to the use made of the different assets and not as a lump sum figure on a flat acreage basis. This is not difficult to do, and it will be even easier if the buildings, improvements, and equipment are grouped on an enterprise and service unit basis. Depreciation on tractors and farm machinery would be charged to the Farm Machinery service unit and would be included in the charges to enterprises for machine use. Even though depreciable assets are not grouped they can be listed individually on a work sheet and the depreciation on each can be distributed to columns for the several enterprises and service units. On a dairy farm, depreciation on special dairy buildings and equipment would be charged entirely to the dairy enterprise. Irrigation wells, pumps, pipelines, etc., would be charged to the irrigation service unit to be included in charges for irrigation water to enterprises. In large farm businesses using a complete accounting system, de- preciation may be charged at the end of each month. On smaller farms, and wherever enterprise accounting is an informal supplement, it would be more practical to charge depreciation at the end of the year just before enterprise statements are made. Inter-enterprise Charges and Credits In cases where one enterprise uses the product of another the product should be charged to one and credited to the other; this is best done at the end of each month when memory is fresh and data are more readily obtainable. An illustration of this is a case where the dairy herd uses pasturage on one or more fields of pasture or crops during a month. The pasturage is figured by quantity in animal unit months, credited to the several fields or enterprises, and charged to the dairy enterprise at the current rate or farm values for such pasture. The same procedure is used for hay or grain from crop enterprises. These inter-enterprise charges and credits should always be made at current farm value. Farm value is the local market value less any marketing and hauling costs. Hay at harvest time may be worth $20 a ton at roadside or storage pile on the farm; this is the value at which it would be charged to the dairy when piled for use at the dairy. Manure with a local value of a dollar a ton in the dairy corral would be credited to the dairy and charged to a crop at this price after it is hauled to the crop. Hauling and distribution in the field would be a crop expense. When a crop is harvested or stored it could be charged, until dis- posed of, to an inventory account at current farm value. Later, as it is used, it is charged to the using enterprise at the original farm value and credited to the inventory account. When part of the crop is sold it would be credited to the inventory at the original farm value and any price difference charged, or credited, to the producing enterprise. Owners' Affairs One or more owners' affairs are sometimes handled in the farm financial records. In such instances dwellings are involved, as well as personal withdrawals and contributions of cash. Personal bills may be paid from farm funds. Some bills paid from farm funds must be divided between the farm business and the owner's home; honest and valid accounting requires the accurate segregation of personal affairs — telephone, property taxes, etc. — from the farm business. This is usually done in any accounting system by charging personal portions or items to the owner's personal account. In enterprise accounting it is best done by listing the owner along with enterprises and service accounts on any work sheets used for allocating costs. Timing Reports to Serve Management Final enterprise statements can be most easily and accurately made after the close of the record year when all costs are in and properly 23 distributed to enterprises. However, information may be needed at any time for important decisions on marketing or crop selection. Thus it is advisable to bring all enterprise accounts up to date for direct costs and allocations of labor and service unit charges at the end of each month. Management would then know latest cost data while realizing that some overhead costs and adjustments would come later. This knowledge would be helpful in deciding on future expenditures, or on marketing or abandoning the crop. Some crop cycles will end during the year and statements can be made and analyzed at any time even though costs to be allocated at the end of the year may need to be estimated. Monthly completion of most of the accounting facilitates it and spreads it throughout the year when data needed may be obtained and checked. In formal accounting it is customary to complete all entries and post them to ledger accounts at the end of each month, proving accuracy by a trial balance in which the sum of all debit balances in ledger accounts equals the sum of all credit balances. It is also cus- tomary for the accounting staff to furnish management with statements of charges and credits for the month, for the year to date, and, some- times, for the previous year. In farming, where a cycle is a year and seasons and enterprises are different in different years, these monthly comparisons are of little significance or value. They may have use, how- ever, in financial management or in obtaining operating credit. It is therefore suggested that accounting and certain cost allocations and inter- enterprise and service unit charges and credits be brought up to date and checked at the end of each month. Formal reports need not be compiled each month, but significant ones could be compiled regularly at certain specified times or stages of an enterprise, and others could be prepared only when needed by management. The farmer doing his own bookkeeping should try and keep his records up to date and make some of the allocations on his work sheets at the end of each month while details are fresh in his mind. As soon as an enterprise cycle is complete or the crop is sold he will want to make an informal profit statement and analysis to see how he came out on that crop. He can revise this later, if need be. Methods Although there are many variations in enterprise accounting methods, the subject can perhaps best be considered in two ways. One methcxl would be to use informal work sheets to supplement any •■I system for the farm business as a whole. The other way would 24 be to use formal accounting methods involving debits and credits, either within the accounting system for the farm as a whole, or in a supple- mentary system with separate special journals and reports and a separate ledger of accounts. The first method will best serve the small business of ten enterprises or less, while the formal accounting procedures will be needed in larger businesses having many enterprises. It is also possible to apply limited enterprise accounting to part of the business by either one of the methods mentioned. DESIGNING THE SYSTEM TO FIT THE BUSINESS The most important step in enterprise accounting is to design the process to fit both the business and the personnel available. The objective is to develop information needed in making decisions essential to reach- ing maximum potential earnings. Procedures chosen must be suited to the time and ability of the persons who will employ them. The first step is to consider the farm and its enterprises and to visualize what is wanted. The job of designing a good system usually involves the joint efforts of the owner or manager of the farm, his accounting advisor, and perhaps a third person, such as a farm management consultant, who has broad experience with the ends to be attained, the methods available, and their adaptation to the circumstances. Many farm managers do not appreciate what accounting can do, and many highly competent business accountants are not familiar enough with farming to come up with the best way to attain what is wanted. Several cases have been observed in which systems designed by accountants have been discarded because they were too detailed or costly, or did not provide the needed informa- tion in a usable form. List the Enterprises The first step in setting up the system is to list separate crop and livestock enterprises. It is necessary to decide whether all fields of one crop should be one enterprise or whether each field should have its own profit statement. An accurate map of the farm showing correct acreages by fields is essential. After deciding on a list of the separate enterprises, carefully record the size of each, what it includes, and when it begins and ends. Adopt the Service Units The next step is to consider how equipment and other facilities may be grouped into a minimum number of service units so as to facilitate accurate calculation of costs and the allocation of these costs to enterprises. Coding It is suggested that a coding or numbering system be devised and used to identify enterprises, service units, equipment, fields, operations, etc. The code can be simple, using letters and figures where work is done by hand. For a large business with many enterprises where part or all the work is done by machines, a number system of several digits is needed. One digit may be needed for the farm, two for the crop or livestock enterprise, two or four for the field number, one for the operation, one or two for the expense category, etc. Field Records The next step is to consider the field records needed in obtaining essential information and getting it to the bookkeeper. A farm worker's time card is a good point at which to start; such cards will be needed on any farm where any degree of enterprise accounting is used. Here we must consider whether the time card should also show work done by separate operations and fields within enterprises. We must also decide whether it should show the use of machinery and irrigation water, or only the man's actual labor. If the worker's time cards can be de- pended upon to furnish data on machinery and irrigation water use, time cards for each piece of machinery might not be needed. Decision must be made as to how, and by whom, the use of pasture and feed by a livestock enterprise will be kept and reported. Special forms for this will be needed particularly if the accounting is done off the farm. As a rule, the man in charge of a cattle enterprise will have to keep current counts and records on each group of animals in order that proper monthly inventory and feed use reports can be made. Accounting System The next step is to decide if the present accounting system should be changed to include enterprise accounting, or if it should be left "as is" and the enterprise accounting done in a supplementary way. It may frequently be best to leave the accounting system for the farm business as a whole, just as it is for continuation of uniform income tax reporting and comparable total farm earning statements over the years. When this is the case, a supplemental accounting system is designed or a set of informal work sheets may be used. The Personnel Now we must consider the people — from owner or board of directors, to manager, assistant manager, office clerks, bookkeeper, foremen, etc. — who will play a part in doing the job. Making a chart of staff and their responsibilities will be helpful, and it would be advisable to meet them and size up their abilities. Naturally, a head cowboy who figures or writes with difficulty will not be expected to keep time cards for the men under him or to render correct livestock counts and inventories and reports of pasture and feed use; some other staff member may have to do the job with his help. A chart of personnel responsibilities may also show a gap which has to be filled — as when there is no irrigation foreman, for example. Someone must be delegated to keep track of water use by observation and from the time cards of the irrigators. It may be discovered that the supervisory staff is overworked and can't keep the field records and make the reports needed for enterprise ac- counting. In this event, enterprise accounting must be given up or new personnel added. Write It Up After the above steps have been taken the procedures should be rediscussed and then written down. The code for enterprises and service units is first tested against the list of fields, enterprises, operations, equip- ment, and list of accounts in the accounting system. Then the field records and reports, time cards, etc., are drawn up, along with an ex- planation and set of instructions and a designation of responsible per- sonnel. The accounting system with its chart or list of accounts is recorded and a summary made of the accounting procedures. Samples are drawn up for special journals or work sheets, such as the payroll record used in allocating labor costs. A set of suggestions for allocating overhead costs is prepared. A convenient timing for certain allocations and closing procedures is specified. The procedure of making the final enterprise statements and analysis should also be recorded. The above are rather abstract specifications. The following are illus- trations of specific cases and of decisions resulting from them. Farmer A, intelligent, hard working, keeps his financial records in a Farmers' Income Tax Record Book. He grows several row crops on 250 acres of rented land. This year he grew 50 acres of spring spinach, and this was followed by 50 acres of fall broccoli; he also grew 75 acres of sugar beets, and 75 acres of canning tomatoes — full year crops. The other 50 acres grew a crop of spring lettuce and a fall crop of carrots. 25 Farmer A, whose enterprises are the above six crops, wants to know the costs and profit on each of his crops and hopes to do the calculations himself. He pays cash rent which covers land and the irrigation system, two farm-worker cabins, and a machinery shed. He lives in town and drives out to the farm in his pickup to work and supervise. Farmer A owns a large tractor, two wheel tractors, various implements, and also hires some machinery work done. He has two regular hands who live on the ranch and he hires other labor as needed. After discussion with his advisor it was decided that Farmer A would keep on with his cash record for the farm business as a whole. A coding system by enterprises for special work entered in the labor and contract work columns was decided upon. Farmer A will also keep monthly time cards on himself and his two men. His tractors, farm machinery, and pickup would be a Farm Machinery Service Unit, costs on which he would allocate to enterprises on the basis of hours of use shown on his three time cards. He will use a columnar work sheet to distribute all labor costs at the end of each month, and will use another distribution sheet for other total farm costs, some currently and some at the end of the year. Farmer A will allocate his rent on a per-acre basis, giving each half-year crop a half-year's rent. He will have a record sheet or account for each crop on which he would accumulate direct and allocated costs as he gets the figures; he will complete his enterprise statement at the end of the year when he figures his total farm profit. This work sheet method is further explained and illustrated by a dairy farm ex- ample in Chapter 4. Farm B is a very large diversified farm owned by a wealthy man who has other businesses and interests. He lives in a city where the accounting for Farm B is done; the farm's records are separate from his personal and other affairs. After discussion with his manager and accountants it was decided that enterprise accounting would be used and would be done in a supplemental ledger. Time cards and about ten other field reports would be sent in monthly from the ranch. Labor, irrigation, harvestings, etc., would be entered by fields, but all fields of a single crop would be one enterprise. There would be sixteen crop enterprises, three livestock enterprises, and service units for farm ma- chinery, irrigation water, employees housing, and management. Methods or procedures to be followed are about as illustrated in Chapter 5. Farm C is a growing, complicated business involving a large dairy farm and a retail milk delivery. Its several owners have just decided to divide their assets and form two companies with overlapping but different ownerships. One company will be the retail milk business with its processing plant, office and delivery trucks. The other will be the dairy farm with a herd of several hundred cows and several feed crops and pastures on owned and rented land. The owners of the farming business want enterprise accounting so they can be accurately guided in feed production policy. Their enterprises will be corn silage, alfalfa hay, irrigated pasture, and the dairy. Service units will be farm machinery, management, and employee housing. It was decided that irrigation water costs would not necessitate an irrigation service unit but could be allocated directly to enterprises on an acreage basis. Farmer D is a fruit grower with 33 acres of bearing walnuts and 22 acres of bearing French prunes who is planting 10 acres of Imperial prunes, and 7 acres of French prunes to complete his farm development. He lives on the farm and does some work on it. He hires a full-time man who is provided with a home on the place. Farmer D and his accountant, who keeps a full accounting system in town on the total farm business, have investigated the advantages of enterprise accounting and have agreed that enterprise accounts for the bearing walnuts and prunes, and for the development costs on the 17 acres of new planting would be desirable. However, they feel that keeping formal time cards and allocation sheets would be unwanted work for them. They hope to estimate a cost breakdown on an acre basis and make profit statements on prunes and walnuts. This can be done, but it will not be as accurate as full enterprise accounting. Farm £ is a fair sized dairy farm operated by a young couple. The wife is a trained bookkeeper and had been keeping separate costs and income for the dairy as one enterprise and for the feed crops of silage, alfalfa, and Sudan pasture as the other. They had not found this too helpful, however, so they considered using full enterprise accounting with each feed crop a separate enterprise. This would necessitate time cards and allocation sheets. As bookkeeper, the wife will use additional ledger accounts, and will make journal entries for inter-enterprise charges and credits and for transferring allocated costs to enterprises from the total farm expense accounts where costs are accumulated by kind. The young couple will find that knowing their different crop costs will help them know how far to go in producing forage on high rent land as their herd increases. This will be full enterprise account- ing within a formal accounting system; it could be done equally well with supplemental records and work sheets, as explained below. 26 Farm F, a large egg-producing business, has been formed and its owners are interested in the most useful records for management. Re- placements are raised on the farm in a separate section and by a separate employee. To consider this a separate enterprise would be helpful to management and could be easily done. The important records on the laying flock will be the daily production and mortality records for each large unit, house, or brood of layers. This involves a count of eggs from each house daily and a running inventory of hens on hand. To avoid large errors and to learn processing losses, eggs gathered are combined for all groups and compared with those sold for delivery periods. Enterprise statements for each house would be of little value but could be estimated for comparing houses having different methods or broods. The management of Farm G, a large wholesale nursery producing over 200 different kinds of ornamental plants, would like to know the production costs of some of its products. The nursery uses green- houses, lath houses, nursery yards, and farm fields. Because of the many products in a small area and frequent shifts of work by employees full enterprise or cost accounting for all products is obviously impractical. The business is departmentalized for Administration, Production, and Selling. Service units can be used to develop standard operation and service costs and can be appropriately combined to build up the total production costs of an occasional batch of a crop or product. This system can help to produce valid cost estimates or calculations which will aid management in making decisions on how much of what to grow and what prices to charge for products. Chapter 4 ENTERPRISE ACCOUNTING BY SUPPLEMENTAL WORK SHEETS Valid income cost and profit figures for a small number of enter- prises may be developed by supplemental work sheets and time and quantity records. These records and work sheets are used as supplements to any satisfactory system of financial records for the farm business as a whole. Such a method is designed principally for making allocations and statements at the end of the year when annual totals from the income and expense segregations become available for the purpose. Columnar work sheets are used at that time to distribute these several categories of expense to enterprises and service units. Current supple- mental records must be kept during the year to provide a basis for allocating labor and farm machinery costs and for making charges and credits between enterprises. This supplemental work-sheet method is best adapted to a small farm business where the number of enterprises and service units does not exceed the number of columns convenient to use on a columnar work sheet — not over 20. It is a method well suited to the farmer who keeps his own financial records and who wishes to make his own enter- prise statements and analyses. It can be used as a supplement to a special farm record book which provides annual column totals for a number of categories of income and expense, and which also includes inventories and a depreciation record. It can also be used as a supplement to a full accounting system in which needed totals are provided by ledger income and expense accounts. Although final allocations and the resulting statements are not made until the end of the year, some of the work, such as allocating labor costs and recording machine time by enterprises, should be done at the end of each month. If livestock are involved a continuous record of numbers and of pasture and feed use is necessary. This information must be recorded and checked monthly. As harvesting progresses, field and crop yields should also be recorded. This method of enterprise accounting by work sheets will usually be supplementary to a farm record book in which the cash records contain some columns for segregating several kinds of income and expense for the farm business as a whole. Some changes can be made in column headings to facilitate the allocation of costs to enterprises later, but it is not feasible to have expense columns for each enterprise and service unit. Hence, entries in the cash records will be made by type of expense as previously segregated and used in the farm's income tax schedule. It is virtually impossible to divide many of the individual expense payments over enterprises at the time they are made, and even if it were possible it would involve laborious calculations each time a payment is made. Thus it is better to accumulate all the year's ex- 27 pcnse of a certain kind and to make a single allocation at the end of the year when the information needed for a valid allocation is available. Correct annual allocation of expenses to enterprises requires separate yearly totals for each category having a different basis of allocation. These categories should be listed at the start of the year and provision made to obtain them by columns or by coding items where more than one category is placed in a single column. There seldom are enough columns for everything wanted, so it is customary to have several columns, each of which contains more than one kind of item that occurs infrequently. The different kinds are coded by letter abbreviations at the time the entry is made so that two or three separate totals may be easily made for a single column when wanted. Monthly totals are recom- mended for management purposes. Some books contain sections for entering monthly totals from the columns in the cash records; these facilitate the making of annual totals after the twelfth month has been entered. The categories of farm income and expense needed for enterprise allocations at the end of the year will, of course, vary with the farm, but a fairly uniform list will be suited to many farms. A crop farm will not need provision for livestock items. A crop and livestock farm will need the most segregations. Records The following is a general list of segregations needed for such a farm. The number of expense segregations needed for enterprise ac- counting probably exceeds the number of columns available in the farm record book or other form used for recording cash paid. Hence, some categories are grouped into a single column, as usually done in a farm record book and in the farm schedule for income tax. Column headings printed in the book can be changed if needed. 1. Total Received — For all receipts. This will ordinarily be the same as bank deposits and the monthly total should equal the sum of the monthly totals of the distribution columns 2 to 8. 2. Capital — For receipts from capital items sold, money bor- rowed, etc. 3. Non-farm or Personal — For non-farm incomes or personal funds contributed or deposited in the farm bank account. 1 Livestock Sold — Different kinds wanted separately can be coded. 5. Livestock Products Sold — Milk, wool, eggs, etc. — can be coded. 6. Crops Sold — Code by enterprise if necessary. 7. Miscellaneous — For other incomes not included in 2 to 6 above. 8. Total Paid — All payments would be listed here and would usually be by check, so could be checked with the checkbook to insure ac- curacy. The total of this column should equal the total of all the follow- ing distribution columns to insure that all items were distributed. 9. Non-farm or Personal — For withdrawals from farm funds for personal or home use and family portion of all bills paid. 10. Farm Labor — For all wage payments to hired labor and for the remittance of that portion of the social security tax withheld from employees. The annual total of this column will serve as a check on the total hired labor costs allocated in the payroll record. 11. Feed — This would ordinarily include all purchased feed, but it is advisable to obtain separate totals for different types. This can be done by coding — c for concentrates, h for hay, etc. 12. Seeds and Plants — Code different items so they can readily be picked out for inclusion in crop enterprise costs. 13. Supplies — A considerable variety of items may be entered here or it can be labeled for items for a specific enterprise such as dairy supplies. 14. Repairs — This title could be modified to include mainly the repairs and supplies chargeable to the Farm Machinery Service Unit. Other repairs, if entered here, could be coded for separate handling. 15. Fertilizers and Crop Supplies — In addition to fertilizers, pest control and other materials could be included here with enough in the explanation section or in column coding to help charge items to the proper enterprises. 1 6. Oil and Gasoline — Include here all payments for gasoline, diesel fuel, and lubricants for both farm and personal use. Division can be estimated later. Do not include fuel for the home or a livestock or poultry enterprise. 17. Taxes, Insurance, and Interest — These and any other overhead items are placed in this column and separated later by coding. 18. Water, Electricity, Telephone — This column would include the farm expense portion of these utility bills with the home or personal portion separated at time of payment and charged in column 9. Alloca- tion at end of year would be helped by coding. 19. Farm Automobile — This could be used for all expenses of a farm and family automobile to be divided later in proportion to use. 28 20. An extra column to be headed for any other category such as contract work, rent, etc. 21. Livestock Bought — Code by kind. 22. Capital Outlay — For all capital outlays, payments on debts, etc. Supplemental Records In addition to the financial records listed above, some records must be kept currently to provide for accurate enterprise allocations and inter-enterprise charges and credits at the end of the year. Certain of these records are important in analyzing the enterprises and for other management decisions; they should be brought up to date and checked at the end of each month. Those usually needed on a crop and livestock farm, such as a dairy farm with feed crops and pastures, are: 1. Time Cards — A time card showing the distribution of time by enterprises for each person who works in more than one enterprise or service unit. (See Figure 2 on page 15 for a suggested semi-monthly time card. ) 2. Payroll or Labor Record — A multicolumnar record for entering the summary of the above time cards for each pay period. Columns should be provided to show total earnings, social security taxes with- held, and the distribution of labor cost to each enterprise and service unit affected. A few columns can be saved by using a miscellaneous column and coding service units or enterprises seldom charged. This record is illustrated in Figure 5 on page 34. 3. Farm Machinery Use Record — This is for recording, by enter- prises, the hours of use of each tractor, truck, or other major machines. If the number of machines is not large, the hours of each for each enterprise can be figured from the equipment use shown on the workers' time cards. If a large number of machines and employees is involved, a time card similar to the worker's time card will be needed for each machine. The form of the final record, which shows hours only, can be designed to meet the needs of the farm. Figure 6 (pages 36-37) illus- trates a simple form showing monthly totals for the hours of six machines for five enterprises. 4. Record of Crops Harvested — At the completion of each cutting or harvest, the quantity obtained should be shown by fields and the yield per acre figured. Disposition — whether sold, stored, or delivered to a livestock enterprise — would be shown in tons or units of the product; no special form is suggested for this and recording in the manager's field notebook might be adequate. This type of information is essential to crediting crops to the crop enterprises and in charging feed crops used to livestock enterprises. It is also important to manage- ment and should be recorded at the time when bales, sacks, or loads can actually be counted. 5. Livestock and Production Records — These may include several current records. With a livestock enterprise a running inventory, show- ing the number of head for each age or kind on the first of each month, and also showing additions, death losses, and sales for the month, is essential to sound management and a complete enterprise analysis. Quantity produced, such as number of eggs or pounds of milk, can be- by count or measurement or may be obtained from settlement statements by periods. A dairyman can obtain individual cow production each month from a dairy herd improvement association. All livestock sales should be covered by a statement or sales slip showing number of animals, total weight, and value. Production in pounds of stock is obtained by adding these sales and using inventories of stock on hand. 6. Record of Pasture Use by Livestock — The pasturage obtained in animal unit months from each crop or pasture should be figured and recorded at the end of each month. Such information can be kept in a field notebook by entering the dates that each crop or field was used by each group of animals. Calculations are made at the end of the month and the totals for each enterprise are recorded on a sheet similar to that illustrated in Figure 7 (page 38). This illustration also includes harvested crops hauled to the dairy for future use. Pasturage is best figured in animal unit months ( AUM ) , and these units can be figured for all grazing livestock — beef cattle, dairy cattle, or sheep. An animal unit month is the monthly amount of forage, or its equivalent, required for good growth and production by a mature head of cattle. It is further defined as the equivalent to 0.4 of a ton of hay in feed value, or 400 pounds of total digestible nutrients (TDN). Different feeds contain different percentages of total digestible nutrients; these percentages, and instructions for figuring rations, are available in literature on livestock feeding. Animals of different kinds and ages must be converted to animal units by the following conversion factors which are based on the daily feed requirement of the animal as compared to the 13.2 pounds of TDN assumed for one animal unit. These are rounded approximations but are precise enough for farm management calculations. Feed con- sumption may vary through the seasons but the following data (given as annual averages) are accurate enough for use at any time. 29 Pounds TDN Animal units Cattle - per day per head Cow about 1,000 lbs 13.2 1.0 Bull, mature 13.2 1.0 Calves, 3 months to 1 yr 5.6 0.5 Yearlings, 1 to 2 years 9.0 0.7 Others, per 100 lb. live wt 0.1 Horses: Medium weight, light work av 13.2 1.0 Sheep: Mature ewes and rams 2.5 0.2 Lambs, 4 mo. to year, average 2.0 0.15 There are many variations to be taken into account by the skilled stockman in arriving at the quantity of pasturage. It may be necessary to estimate the quantity on a hay replacement basis in which a ton of hay is considered equivalent to 2.5 animal unit months of pasturage. Milk cows on pasture are usually fed concentrates in the barn and hay in the corral, so an assumption must be made as to the percentage of forage obtained from pasture. Sometimes the animals are grazed only a short time each day, or otherwise don't get full feed from pasture. The number of days of use must also be used. Here is a quick formula for figuring animal unit months for a group of animals: Number of head X number of days X animal units per head X per cent of forage from pasture divided by 30 = animal unit months. Illustration: 48 cows were in a field from May 4 to 10 (6 days) and ob- tained all their feed from the pasture. 48 X 6 X 1.0 X 100% 30 - = 9.6 AUM It is necessary to figure animal unit months separately for each age group or kind of animal from field notes or memory. Animal unit months for different groups are then combined and entered by enter- prises in a record from which annual totals are obtained. Values at which an animal unit month of pasturage is credited to crops and charged to livestock can be set at the end of the year at local average farm values, which are usually known by local livestock growers. Values vary from S7.50 for good irrigated pasture, through $4 for good natural range, to as low as S2 for poorer feed. 7. Continuous Inventories — Where crops or materials are held for future use or sale one or more continuous inventories for a category 30 of feed or supplies on hand may sometimes be desirable. This would show quantities, values, and disposition. Figure 2 (page 15) illustrates this. 8. Other Use Records as Needed — Several additional records, with information recorded at the end of each month, may be needed for accurate enterprise accounting and analysis. Irrigation water use by crop enterprises, manure spread on fields by crop enterprises, and special feed lot records, are examples. Year-End Procedures When the above financial and supplemental records are completed, totaled, and checked, the year-end work leading to enterprise profit or loss statements and analyses can proceed. It will vary in difficulty and in the clerical work required, according to the size and nature of the job, and perhaps with the detail and accuracy desired. On a simple farm with not over ten enterprises and service units it can be done in a day or two by a skilled person using a calculating machine. Enterprise incomes may be picked up from annual totals of cash incomes and feed use by livestock enterprises, and can be entered directly on final enterprise statements. Expenses, however, must be allocated by category on various bases to enterprises and service units. This is done on multicolumnar work sheets. Service unit costs are then allocated to enterprises on the basis of work done or service rendered, as shown by some of the supplemental records listed above. Next, a consolidated summary statement of income expense and profit or loss by enterprises is prepared. Finally, more detailed individual statements are prepared for the enterprises; these statements show per acre or per animal production as well as income, inputs, and costs per acre, per animal and per unit of product. Such data are vital in planning profit-making changes. Work Sheets Several of these are required for allocating expense items. Enough columns for the total and one for each enterprise and service unit are required. There should be a space to name the category and indicate the basis of the allocation. Some allocations will be made in proportion to some other item for which there is a farm total and one for each of the enterprises and service units affected. This basis is usually entered on the work sheet with the category to be allocated. These procedures can be better illustrated than explained verbally, so completed work sheets for our farm example are shown in Figures 10 to 14. The order of procedure and instructions for the several steps are given with the illustration. FARM EXAMPLE The Frank Smith Dairy Farm. Frank and his wife, Anne, are sole owners. They keep their financial records in the California Farm Record Book, and they have decided to do enterprise accounting by supple- mental work sheets. Table 6 shows the six enterprises and five service units needed during 1959. Cash Records Cash incomes and expenses are recorded in the record book in ac- Table 6. Enterprises and Service Units, Frank Smith Dairy Farm, 1959 Code Name of enterprise or service unit Acres What it covers A Alfalfa 72.0 Fields 1, 2, 3, 4 of 18 acres each in first, second, third, and fourth year of alfalfa. B'59 Barley— 1959 42.0 Field 6, 18 acres, fields 14 and 15, 12 acres each in rotation to prepare for alfalfa and irrigated pasture. B'60 Barley— 1960 42.0 Fields 5, 18 acres, fields 12 and 13, 12 acres each. Prepare after corn and irrigated pasture in fall. C Corn silage 18.0 Field 5 spring planted and put in silo in October. P Irrigated pasture 84.0 Fields 7 to 13, 12 acres each in a suc- cession of ages, 1 to 7 years. Total crops 216.0 Fields 1 to 15. D Dairy 3.5 About 130 cows, 1 bull, 131 head heifers. Dairy lots, buildings, and equipment. M Farm machinery 0.5 1 2-plow and 1 3-plow tractor, l x /2- ton truck, forage harvester, feed wagon, all farming equipment, shop and implement shed. E Employees housing 0.5 Three cottages for hired help, water furnished. They pay for own electri- city and fuel. Ir. Irrigation system Well, pump, and pipeline. 1350 gal. per minute. O Overhead and management Office, farm roads, management, and general overhead costs. H Home and personal affairs 0.5 Owner's home, garden, personal af- fairs, and part of farm car. Total farm 221.0 Total farm business and personal dwelling. cordance with instructions and suggestions. However, examination of expense columns suggests some slight changes in column titles or interpretations in order to obtain annual totals which may be more readily allocated at the end of the year. Blank columns in the income- section are labeled. This same procedure would apply to other farm record books or cash records. Figure 4 shows a few entries as made in the Cash Record in the California Farm Record Book. Notice some revision of headings and small letter codes to identify categories of expense wanted as separate totals. Supplemental Records Since Smith participates in the labor and is close to all activities, he needs the minimum of supplemental records, as listed below. With some farmers more field records might be required. Labor Records Time cards will be kept on farm labor and on Smith, who divides his time between labor and management. Figure 2 on page 15 shows a time card for his field hand. A payroll or labor cost distribution record is shown as Figure 5. Notice it is a "homemade" form ruled up on 8 V2 " x 11" paper for a student's three-ring binder. Smith will use a 5 Vi" x 8" binder for time cards and field records. All supplemental records and work sheets will be kept in the larger binder. Machinery Work Record The costs connected with farm machinery constitute a rather large group. Information is wanted on probable costs of each machine in order to determine more accurate costs in crop enterprises and to facilitate decisions regarding equipment. Smith will keep some informal memoranda on the fuel use and repairs of specific machines. He will get the hours of use of the major machines from the time cards of the men using them, and he will enter them in a simple record by machine and enterprise at the end of each month. Figure 6 shows this record. Note that there is only one group of columns for barley although two totals are made — one for the 1959 crop, and one for the I960 crop which begins late in the year. The use of water by crops is recorded along with the machinery- even though irrigation water is a separate service unit. To save time and space, machines each have a code. Costs for each machine and a surcharge to cover the drawn equipment will be estimated at the end of the year when total hours of use are available. These estimated rates 31 DISTRIBUTION OF RECEIPTS CASH RECORD 1 Capital Income 1 2 | Nonfarm Income I s Miscel- laneous Farm Incomes 4 UUfp4 i (ZUtU 4oM 7 Total Received Date EXPLANATION Who What Quantity Ck. No. 8 Total Paid ■1 . |t Ml*, 1 hiAA*. Wlam J&ddJ/j &$. ?7 /#■ So o? U10./L^ C r <^^u, vj(k/ 4* 37 So ct VcO&v tout &. *KJrJBUj&u.&*V* H as? oo 3 Tj/i, rsurd*. (9i>4u4 A***. &+*>. %*JaM. SO 3U 2o 3 Ju)ixh*u 'fyuc. U- Zed ' J$ 'tii full SI / So A> — e /7 So asrz - *lt To 3oo — //? i7 /a ?* /f n So — V /29 Co n So n — <*/o /t "Sk — (po — 5f - ^iL Figure 4 (continued) Manure Used To arrange suitable manure applications by fields and to credit the dairy and charge the crop enterprises, Smith records the quantity as shown in Figure 8. Livestock Record Smith keeps a running inventory of the number of his animals of each age and sex group in order to better manage and analyze his dairy enterprise. He starts with the number at the first of the year and refigures sales and figures to to check has cows tion and Figure 9 it on the first of the month by subtracting death losses and by making additions and transfers. He needs these monthly obtain an accurate average for the year; he uses this average total feed use against normal feed requirements. Smith also tested for production by the Dairy Herd Improvement Associa- he uses this information in his culling and breeding program. shows his annual summary of number of stock. (Text continued on page ; i^ 33 J^^iy/ ^W^T^ - A-aJt-t.- JtJ^C4&^-u-£<-4-^ t i9S"9 DM£ /YAtfB DEOVC 7//y% 77 /AS WORK£0 RME TorAL £AHNW(r£ A~ ALFALPA B 6ARUY o f//f 3. &3 7o /.so // ^/U^-v^ s&*uSfi. /of AS'o ( /(o%,oo) 72. «o fa ^X lo-i- /Z(o /•/S" /4?,9o (ef, 00 Ibafydi&rcL'/SYi *ej fr&rtSL- /■Oo $o. CO Zo. oo Figure 5 34 OC^S-t-t A^lo^C^ ,00 F W 7k Jr. BARLB Y 72. T3 F W Tk Ik CORN S//-/JG £ 72. 73 r- w 7k ir. /$ /z /o o /*//*" ll/ll £ total *77 2^ /3o /?a /*2 //Si 3S 3? 6? Jl n 17 /7 n 2/ n /6/ ?? /?/ is- is- S* /So 'la 7/ o o 4 /a o ^- . Figure 6 End-of-Year Work As soon as all transactions are recorded, cash record totals are made and checked. The capital and depreciation record is brought up to date, depreciation is computed, and group totals are made. Inventories of livestock and feed on hand are made and recorded. The net worth or financial statement is made. The profit statements for the farm as a whole on both the cash and accrual basis, and the income tax farm schedule, can now be made. Enterprise Accounting proceeds as labor cost, machine time, feed use, and other supplemental records kept during the year are completed and 36 totals made. Allocations of income and expenses will be made on multicolumnar work sheets as illustrated in Figures 10 to 14. In making these allocations working to the nearest dollar will be sufficient, and a calculating machine will be necessary. Some of the work will be done by multiplying bases of allocation by a certain factor. As each step is completed it should be checked by adding the items and proving them equal to the total. Order of Procedure Some steps or allocations have to be completed before others can proceed. Order is important and there will be some working back and MAJOR MCHINE USE 6Y £A//F/9PjR/s£ — .. — ,.— .,- PER. P-I#fll(x. PASTURE D/MRX T2 73 F W Tk 7h Tl T3 W TK ///*■ /o ¥ /o S o /3/ 3q /z 2 /2 6 7.//S- /2. 3 /2~ 2/1-8 JO /o <£> ^ Figure 6 (continued) forth among the different work sheets. Below we show you the com- pleted work sheets. The steps are listed by number with brief instruc- tions and comment. Study of the work sheets will be necessary to understand the process fully. 1. Start work sheet 1 with headings for total and for the enter- prises and service units. 2. Enter acres involved as shown in Figure 10. These data will be used only in figuring land value in the investment which follows. 3. Enter the investment by asset groups from the capital and depreciation record, using book values as of the beginning of the year. Total the enterprises and service unit columns and prove to the total. 4. Enter depreciation and distribute it. 5. Enter expense segregations from cash record column totals and distribute over enterprises; the basis of distribution varies with the item. Some segregations go entirely to a single service unit or enterprise and some will require referring back to the coding of the original entry — as do seed and fertilizer, for example. County taxes and interest on debt are allocated in proportion to total investment shown near the top of the sheet. 6. Totaling of the items allocated and proof of accuracy is desirable and is shown in the illustration; the total of these allocations is of no (.Text continued on page 41) 37 RECORD of PASTURE and fE£b ose.d BY DAIRY /N AN/MAL UN IT A?OA/Ttf and 7gh£ oF FtEb HAWF^TC-D O tfohirH A-ALFAIFA B-/3ARLEY JRR . PAST- CQRN SILAGE- /\UM T.MAY AUM rzrR Auti HAY To MS 3**- /o 47- t*. / 3t> TflaA. 6o CLf*- 3o /a o ntc^ U /6a /% (Zu^i ■ %l V2- /4q /3o //o Pot. 3o 7-o 3 o 20 3&Q Total ?o $97 63 *Z 9£>e /7- 36Q SE.PT- fiA 5 9Z-P Y *35- Figure 7 38 KBcoRb OF MANURE HfiiULtb TO Fl BLD5 o Month ALFALFA BARLEY JR. PA $T COKN $/L/\6£ ToTfiL /OA/S Ho, /ONS F/ELD /Vb. Ton 5 TOA/S flew- , * /f /f 7^6- /? /3£ /£ 2V 3Y 9 a/9 &/W-, / //X o2/ /33 / 2£> 33 (o 2-07 Way / /e& 23 /Xf 4 3-8 BS~ 7 3- of Q<*ujl / /&3 2l /z? .5" 2$ 3t> 7 2ot> r 31 3%. /* <2 OS" Tlctf. / //D /.T /2S~ /£> £6" 3/ /% ?-o¥ A^ / //% /£ /^/ /J 2.6 32. // £// fo?fU. /2 /2?7 £63 /C&o /of 323 Y/o /3o 3LS-V7- A^ / /£>£ X2. /3o 9 Z7 3Y H ZL/Z- APluP t&isuy*f &£*A. Z V / / Figure 9 40 further use, however, as the separate items are to be taken for ad- ditional steps and statements. 7. Prepare work sheet 2 as in Figure 11. 8. Enter on work sheet 2 the labor cost distribution from the com- pleted "Labor Cost Distribution" record illustrated in Figure 5. This includes charges for the operator's actual labor, so differs from the hired labor cost in Column 10. 9. Allocate undistributed labor from one of the columns of the labor record in proportion to the labor previously charged. 10. Allocate the total of workmen's compensation and social security insurance in proportion to the direct labor costs. This may not exactly follow the original determination of costs which apply to hired labor only, but it is valid enough and avoids keeping separate hired and operator labor records. 11. Start work sheet 3, part (a), as shown in Figure 12. This is a single sheet for recording total costs on the Employee's Housing Service Unit. Applicable costs are picked up from work sheet 1, totals are made, and costs per house a month are figured. This is important information for management. 12. On work sheet 2, enter the total employee's housing cost, allocating it to enterprises as shown. Since two houses are used entirely for dairy workers, -A is charged to the dairy. The other third is spread over the crop enterprises in proportion to the direct labor charged above. Make totals. 13. On work sheet 3, part (b), complete the Irrigation Water Service Unit costs as shown, using costs from work sheet 1 and labor from work sheet 2. Figure costs in detail per hour of pump operation and per acre foot of water. 14. Return to work sheet 2 and enter hours of irrigation water use by enterprises from the Farm Machine use record illustrated in Figure 6. Calculate costs for each enterprise, using the hourly rate. By using this rate to four decimal points as a multiplier in the keyboard of a calculating machine, and by multiplying hours for each enterprise, this is a rapid and accurate allocation. 15. Prepare work sheet 4, section (a), as shown in Figure 13. This first part contains a total column and a column for each major machine on which separate costs and hourly rates are to be calculated or esti- mated. Enter the book value of the individual machines for use as a basis of allocating taxes and interest charged to the Farm Machinery Unit. The value and the depreciation shown for these machines is obtained from the listing in the depreciation record. 16. Enter the depreciation of other farm machinery and of the shop, and distribute this over major machines on the basis of usage. For example, depreciation on the mower, rake, and light tillage equip- ment used with Tractor 2, plus a part of the shop and implement shed depreciation, is placed in the T2 column. 17. Pick up other costs as shown from work sheet 1 and labor from work sheet 2. Allocate these totals to the different machines. This is done from memory, from repair bills, and from records or estimates of gasoline and oil use. Note that these items are shown in two sections — the fixed or overhead costs, and operating costs. Total all costs for each major machine. 18. Enter total hours of use for each major machine from the machine use record in Figure 6, and figure total cost per hour. Costs per hour may be figured in detail by item on another cost analysis sheet if desired. 19. Prepare part b in the lower section of work sheet 4 with enterprise and remaining open service unit columns as shown. Enter hours of each machine use for each enterprise and service unit from the machine use record. Figure the costs for each machine for each enterprise at the appropriate hourly rates. These charges for separate machines are totaled, although costs by machine are available here for use in detailed enterprise statements to be made later. 20. Prepare work sheet 5 as shown in Figure 14. This is a summary of incomes, expenses, and profit by enterprises. All expenses except the management unit have now been allocated to enterprises on previous work sheets. The cash record and the records of feed and manure charges and credits provide the information for the enterprise incomes or credits in the first section of this sheet 5. Figure total incomes for each enterprise. 21. Return to work sheet 2 and assemble the costs allocated to the management service unit. Smith decides that an allowance for his management should be included. He calculates that a suitable salary would be $6,000 a year, of which $1,728 is to be charged as labor. This leaves $4,272 to be charged as management. This step is optional but it tends to make enterprise profit comparisons more valid after the value of management has been charged to the enterprises on a fair basis. This could be estimated on either the basis of the time and trouble, or in proportion to total income or total costs. In work sheet 2, the total cost of overhead or administration is shown allocated in pro- portion to income. All expense allocations have now been completed. (Text continued on page 47) 41 Figure 10 42 WORK SHttr / DO ^/ CCcC9-C-^lc^u~ , AUHt*^t''i*£t<^f—' Cd. k/^Oh^. r%W-\o) y^ttixjuj/ - 6b*£ -^ti&,>C&sf ■Y7¥oo ^&dJ! '^■iLz^&M-e-toj ■XISS'5-0 *-- 3&ooo a/00 — dkiuu aut^ " 7a-u^ /Qi^r^i &v-J /•^-tU^c£^*tt cut /7YS- ■^Isi^ty&AJuc-t*^ -"SZ-^tf^Tv"*-^ /03?> yS^^Cj , j^„e*». 6//f ^c^5.«^«y a?o Ta^yu. -yu dc. ^eui.'U-f y -fb.H_snA ilrf-T_ 23*8 C&£Ll /&1I&L £ji>-<€&s^ 53X(e s cy-/ucw£vtv/ ^. ~ -Ju.M-4t.-t- 03/ 7b) l7«. fflit*( -m '&jf 2 /( &A O /a _^W L> c*<&j? _^^ (b^ -/^^td Cp/¥ /bO l(cO /3 A^zoty -a^/i/i^ijij <*- /d&c-L+f &ft~p /£L/i l/c(> /# /2tjfoUsC4 Y KU^lA^M Fa^L^x. "Vli-G^A 7S 02c/ c^u.J -^2et^c?-&L- &■<£**£ Q,¥o£, Vo% aw — ^lxjl -^*c<), fj^^Litlt.'u^ .^t.<£ H'-e.-o^-A 3*7 C<^*^Ce — «k) \Z<^c4-c*.'«-*'' -e^Z-L- J. 3-c '%j£Ui"J~ /x^l^L .0/97? * ^.^iT S3-C4 1/% */S — C^U^ -C*i-4 -*j-£C _xZ«>* ^t-K CVt) av tffj. J-..- ix &!&c'£Zc L< jti fft*-x~ ^6-a-£-x<-*-^ /eg li J^ti^vu O^dr: '/l- }kjt *-*ii-e-~u-aLJL 3/r 3.0 Ct^u^Ct-e e-T" -ii^-<~A , 6«t^- / s~c oo (cOO ■y*o o Coco /<2 rco /too (.3.50 /O 9&oo // 7SC -V7S-0 / a S~e o 3.1-cp &7fO /air Go 3c o 3oc /o35 •a 'Xo 69S~ /v r3 'fa"- /co /CO / 7 So / S^i Sec /o'3i 3^0 ■Yoo j/k^o ^ 5¥ /VO I/O G ^ 7S-1* 3-K 808 /2£2. &c *f &<. y? /CO */&,? 777 /3/ S3 /Yo as- 7S a/o r 63 70 /io ■¥* *r /IS fit /3?7 XiL £<^v~n-~ C*rf-*A t&^3 '7? ^/s C&iJttZi -AjUi *026>/ &&wi ___j&£_~ S(o s C ^d *&£7 '- ^&&J ^&jLn W /1Z9V Coc^>. .^. Jec /L>. ■ te'x (,) a&tndL 72(> /OS" 9 // &7i*/&£c~>4>t£ S 7s/rU4L*i* + lyX Jfa. 7i fliUA+f S/o 7L & & j£tli> Ji&r*. c#$--tis — o o Figure 1 1 o o ^r^^Ltr^ f -4t?a£l<- f a^ C-C ~7-fa**t> , ID J>- 2- c p 2) ~7%*uA O 7o¥ /V93 ?n'o SL /? /9 3? 2S*> / — 3s- 7S 9 V3X 3S-*g ZMo 7 4 7c 6/279 Figure 11 (continued) 45 &o(?f< St/a&T 3 (4) <^y6£<>^e&f' (/A****** - SaU^^o y^- ^^t^c 36 T^c-u^e. . frc*™^^ % 6£*«-- %^Ua4£L soJuUct 1, c/f ' ^UtTajP IdJj/ jUe^ - CZoij> ^iLj (wl 3 syu fobu/^u* 'Sf) '/$ Z* ti zv.J.x w_ l£BL /too 3o 72. ~£pl4SL4 /Lt^oyi s&Us.e /¥ P*r/k, 33 &L Y7 /-f /(, 3/ oi 01 or vr u 01 Figure 12 46 O O 22. On sheet 5, complete the calculation of total costs and profit by enterprises. As a convenience, and because 1958 costs on the 1959 barley enterprise were not available, the 1959 costs toward the I960 barley crop were used in total expense, acreage being the same. In con- tinuous enterprise accounting previous year's costs on the 1959 crop would be carried in and the 1959 costs on the next year's crops would be carried on to the following year. Notice that a column for total crops and a column for the total farm business have been inserted. The total farm column is a sum of the crops and dairy for "off farm" ex- penses and income, but inter-enterprise charges and credits for feed, straw, and manure were omitted. Total farm profit equals the sum of the enterprise profits, as total expenses are the same and "off farm" income is the same. This statement is useful as a preliminary one and as a check on the over-all accuracy of the allocations. 23. For additional check on profit calculation, compare the total profit with the Income Tax Farm Schedule figures as shown in the last column. In this case reporting for income tax was on the same inventory basis used in figuring enterprise profits. The difference be- tween the two profit figures is largely accounted for by the $6,000 of operator's labor and management charged in enterprise accounting. An additional small difference lies in allocations between the farm business and home. This calculation also shows how expenses appear when charged to enterprises through a service unit on the basis of use rather than as precise shares of total farm business expense segregations. The latter procedure would have required many more clerical calculations. Showing gasoline, oil, farm machinery repairs, depreciation, and other costs on farm machinery by enterprises would require going back to the cost calculations for each machine on work sheet 4, working out each item of expense on an hourly basis, and re-combining them by category. This detail would have little significance. After Enterprise Accounting is Completed The completion of work sheet 5 or statement 1 finishes the work of enterprise accounting. All costs and income have been allocated and are shown in summary form. Notice that profit as a per cent return on the direct investment in enterprises was inserted on the bottom of this sheet. Total investment in the farm business is greater than the total for the enterprises because of the service units. It is immediately apparent that growing crops, particularly irrigated pasture and silage as feed for the dairy when charged to the dairy at farm value, is not as profitable a use of capital as the dairy itself at the land values assumed. Farm-grown feeds at farm values, however, make the dairy more profitable than it would be if more of the forage were purchased at market prices. This opens up a whole series of possible changes and calculated budgets designed to find a better or more profit- able plan — a plan perhaps involving more cows and some purchased hay. The first step, however, is to obtain more detailed statements on enterprises, with inputs and costs per acre and per cow computed. Enterprise Statements The main goal in enterprise accounting is the detailed enterprise statement and the analysis of the enterprise it makes possible. Merely obtaining enterprise profits or losses, as in the summary in Figure 14, is not enough. The enterprise statement should include considerable detail on quantities and prices of both production and inputs. Income and costs should appear in total and per producing unit (acre or head, etc. ) and per unit of product ( hundredweight, ton, dozen, etc. ) . Much of this additional detail is available in vouchers, or in statements and other business papers. Obtaining such data and entering them in the statement makes for more useful records and preserves valuable in- formation for future reference and comparison. A separate statement on each enterprise should be made. Shown here are two samples, the dairy enterprise in Figure 15 and the alfalfa enterprise in Figure 16. Enterprise Analysis The analysis of an enterprise is a careful examination of all the profit-determining factors which follow: 1. Yield per acre or production per animal. 2. Prices received as resulting from quality, method of sale, etc. 3. Inputs and costs as determined for individual items and cate- gories. All these items are displayed in the enterprise statement made possible by enterprise accounting procedures. Comparisons are made with similar statements for previous years and with all current informa- tion available from other sources. The Agricultural Extension Service of the University of California currently has available at local offices a considerable number of detailed sample schedules of inputs and costs for many enterprises. These can serve as standards of comparison, item by item. Variations from such standards will be numerous and will likely disclose profitable changes which could be made. For example, the Dairy Enterprise Statement in Figure 15 shows sale of 9,880 pounds of milk per cow, a smaller quantity than for (Text continued on page 52 ) 47 7 nnr kJtsHj%*£s Asi^jJiLs — jjs*X^ &xl& jJkui id+Mi \tHidtryititJt. 1 31 3a 37 — 3b 21* — l^sdy-t- t»-x -"//A -L -/0-btU 1 t 7, X X X <~LaJc t 3Ajul*4, Uvul- . f t£-e. ■ GjuuZ. / %\6 l -bO no £utr.~h€aJ- frvt'¥U*ivtJ.lAJr**\-Oup' y-Xot. (O-Xt 400 'bVO 1 CO S7 OCkiA. >y&A+ljJKZ + frd -^uMs*» i>-/ 7*4. ill- -tC X L,L> X 91 11 if>) OUtoJiJJur^^ r{ ifritoi^ £>*JB'\t4j& fa& 3*t*l A e> Id c P /0aJ*tf o H ~Un>. QM^x. bajdittf »"1 G&*hn 'CO c.jutw /^Lotiote nit. Hryti Tz !5>-P-- i^J.tX^L *£j-USU, 1001 yn of 19 (S3 200 GUX 1X4 /? 11 191 7? GO C^uA4A-jL*Xi*4>'u*e-£> tl- 7S?<* llXf 29<4 -ix IIS 3}'i 2 L57H ?su 404 4s II 154 SIp I7L> : f?4\ia/- Ho^vuxii hvt> ■ loZ no 11 — MS 10 . — ^^zV^A-JwrfiAjaAjAtQ tX- 9 9 SO (,0S 311 SI i 5S 30 *• _ fuzcUrr^y oJaU^t^ *£+fo 7o7<4 XH9 n a . — 3X 7 10^ ^*"vnc * las/tiLy 6ma/> C&vt 1L.1 17Z. J?/ -==! ■3+&d #? r /t t 194 HXb USl 3 7Z 37/ 48 Figure 13 xv^£ JXuts- — — — A 72 A S- '5-9 6a*Jllsf- e-'uo e C. A>da^ /rA 1 P f%A fatal /SouirxAjr 4/ih**. AtM. *fr QjurriK^hc/ iTUlk. fe v 4-^x4^ t/n^t^o Pup 1200 1200 iXOO -d«L. C- *-{ <2iuAa'W*(uut/. l-(aMjUcL-k) Ouja*Ls iV.l£>3l 412 OUd^uh 1^ &*JL ^i*W. /-taj^-io lQanju4"/<3 Mt*u i,+o t&ajjuf 'iuoTiS) $ ? 2??0 Z??o 'BeLAt* t^uz^i. ~&Ljf IQo^ujs- 1 1 '"3 AUtA6> tl-FO blf 472 1200 9Z47 8**& ^A&uiMrjj (QvuhAf m.T@ i/2 504 so 4 £ud -&&1 7-OA/w- ImA, tL*JLM*jaijf4ii L&UJU r 20934 aM^i 4>c >vnu7^tUjku*jAuY C+^r. "fitl*. UU &. 0 XlO 14? 2%llo 2XIU T$ xsiuou-M&t*^ LiMJuuf-h &LSJOL. 101 IfO IMH 412. * VmnSlAlA, i 4&JUd'4o UtoJKUf-J/LA-rn tlmX. 20U /^CLrtxAjLCiti. S6~0 SfO ss~o 1 UjHAiS. (iJcUUUf- AdtLJzfibM; Z\o^> \, I\ajl$- tU/sXbi Cta&s -tu.J,- 2. izrq (.5 in IIS lUi,t 3334 3334 3 331 Ai/uMfU'-^t ( 4^Jxtf- d I 11% 4/5" m ?3I llllo mi 3511 4tW 151 " V, hu6MA^yuLe, 360 •2345 nrf " bdsrvi djjXc l?7 19? " ■= '>tfi J ^'7fa*AjLMIAUYfi < J a * J -* A ', OlA*/ **-$,*>& >. Z.0LC 201,5' If d 'j^zkssjaXL+t^ ll?0 n?o 4<\Tlc 31ob It £ lAavi 0-[HaJuiuL & QjL/twtAtdt'Ul&Jy*. loO r 1 20f — - )(,! 43X 141/ 357? S009 Soo<\ /irtMnxfXi'nJ' <3*t*JL ( Lfl3L« J n 'i ~1 (Mjfa' 15-b fe ' ' I fb, CCOfifHs. TsuM± 22 f? 110 7X1 ??4 4353 52? %n 155 IS S~94Z .ZaJmjs-n at. ■ D ( idj^Kl* ooo 2.1 ooo looo 4 7 OOO /o?ooo tsQUOO 20770O fa ^lOLACtJLAfvutdL tVL JUhfct X*UM~<£. fa 3 1 .3 ■x H- 2 I 4 ,0 7 .V 4 L *4sr\Z, 4*>u/: 'Ut* vi.^ Figure 14 49 Frank Smith — Dairy Enterprise Statement and Analysis, 1959 130 Average Cows, 12,840 cwt. of Milk Sold Per cent milk Quantity Total Per cow Av. price Total value Per cow Per cwt. milk Milk sold, Class I. Milk sold, other. . 54 46 6,950 5,890 5.20 3.24 36,140 19,110 Total 100 Cows sold Dead cows sold Small calves sold Increase stock inventory. Manure used on farm . . . 12,840 30 head 2 65 5 432 T 98.8 .23 .02 .50 .04 3.4 4.30 125 1 9.95 1.00 55,250 3,750 2 645 1,200 432 278.00 147.00 425.00 28.85 .02 4.96 9.23 3.32 .30 Total 61,279 471.38 4.77 Expenses: Concentrates bought Hay from farm Silage from farm. . . , Pasture on farm cwt. TDN 2,580 4,090 1,296 4,452 172T 409 T 360 T 1,113 AUM 1.32 3.14 2.77 8.6 69.00 22.50 8.00 7.50 11,830 9,203 2,880 8,347 91.00 70.79 22.15 64.21 Total feed cost. 12,418 Hired labor Operator's labor Cows bought Breeding fees Tractor and truck work Straw from farm Taxes, dairy share Cow testing dues Electricity Fuel for sterilizer , Fire insurance Miscel. other dairy supplies and vet Management and overhead charged to dairy Depreciation, dairy bldg. and eqt Interest paid on farm debts, dairy share. . . 9,552 lbs. 7,367 433 hrs. 2 140 "42 T 56.7 3.3 .02 1.1 "i 1.38 1.50 275 7.00 12.00 32,260 10,185 650 550 980 652 504 111 430 360 300 210 1,396 3,588 1,780 1,377 248.15 78.35 5.00 4.23 7.54 5.01 3.88 5.97 3.31 2.77 2.31 1.61 10.74 27.60 13.69 10.60 2.51 .79 .05 .04 .08 .05 .04 .06 .03 .03 .02 .02 .11 .28 .14 .11 Total expenses Net profit 55,999 5,280 430.76 40.62 4.36 .41 The above statement contains much information on quantities, prices, and cost of great value to management in analyzing the dairy enterprise. Compari- sons can be made to other dairies and other years. It is based on the dairy statement on work sheet 5 in figure 14, but additional information was obtained by going back to original voucher bills and entries in cash book columns. Figure 15 50 Frank Smith — Alfalfa Enterprise Statement, 1959 72 Acres Total, 1 8A Each in 1st, 2nd, 3rd, and 4th Year, Includes Preparation and Planting Cost on 1 8A Yield by fields and cuttings 1st cutting Apr. -May 2nd cutting June 3rd cutting July 4th cutting Aug 5th cutting Sept. -Oct 6th cutting Oct Total tons Yield per acre Field 1 1 st year 18A Field 2 2nd year 18A Field 3 3rd year 18A Field 4 4th year 18A Total alfalfa 72A 20 22 20 21 24 26 26 22 20 16 22 25 22 22 20 21 24 20 20 19 67 95 90 84 80 16 83 134 7.4 111 6.2 104 5.8 432 6.0 Income Costs and Profit — 72 Acres Quantity Av. price Total value Per acre Per ton hay Total Per acre Hay sold to Jones, delivered Hay delivered to Dairy Ent Pasturage used by Dairy Ent 35 T 397 T 90AUM .5 5.5 22.50 22.50 7.50 787 8,933 675 10.93 124.07 9.38 1.56 Total yield and income 432 T 6 T hay 10,395 144.38 24.06 Expenses: Hired labor 1,388 294 19.3 4.1 1.36 1.52 1,894 446 26.31 6.19 4.93 Operator's labor 1.03 Total man labor 1,682 23.4 1.39 2,340 32.50 5.42 T2 -Tractor — harvest, etc 517 224 152 130 130 7.2 3.1 2.1 1.8 1.8 1.28 1.76 2.66 3.00 .70 660 394 404 389 92 9.17 5.47 5.61 5.40 1.28 1.53 T3 -Tractor — harv. & prep Truck — harv .91 .94 Forage harvester — field chop Feed wagon — harv .90 .21 Total machinery cost 1,939 26.93 4.49 Seed for 18A 400 20 T 108 T 395 A. ft. 22 0.37 3.0 5.5 .40 34.00 1.00 3.26 160 578 108 1,289 2.22 8.03 1.50 17.90 .37 Fertilizer for 54A Super Phos Manure 36A Irrigation water 1.34 .25 2.98 Total material cost 2,135 29.65 4.94 County taxes 402 609 712 5.58 8.46 9.89 .93 Management and overhead 1.41 Interest on farm debt 1.65 Total overhead 1,723 23.93 3.99 Total all costs 8,137 2,258 113.01 31.37 18.84 Net profit 5.22 This statement contains considerable useful quantity and cost information enabling management to make input and cost comparisons to discover opportunities to improve profit through improving yields or reducing costs. It is based largely on previous work sheets, but with some going back to other records for yields and quantities. Figure 16 51 some other dairies in the area as shown by the published reports of the local dairy herd improvement association. Only 54 per cent of the milk was sold at the Class I price. A larger quota or a better contract would obviously be helpful. A comparison of the several inputs and costs of this dairy with the information and sample schedule in a recent publication (Circular 417, "California Dairy Farm Manage- ment") discloses few differences of significance. Feed use, including concentrates, is about in line and labor costs are the same. The logical deduction from this is that consideration should be given to the effects on profit of a change in size. A larger number of cows would spread fixed or overhead costs over more production and could reduce costs per cow; having fewer cows might result in higher production per cow and a higher per cent of Class I sales. Any changes contemplated, however, should be tested with a budget calculation and comparison. A change in procedure or in materials used can be reflected in a future budget which would show the effect on profit by comparing it with past profit. Farm Business Analysis and Planning Enterprise statements and analyses make possible better analyses of possible changes in the kind and size of enterprises. Assuming that enterprises have been analyzed and changes adopted to make each as profitable as possible, the next step is to compare earnings in the different enterprises to see which ones should be retained, and perhaps expanded, and which ones may be reduced or eliminated. Those enterprises which offer the greatest return for the use of a scarce resource, such as land, appear logical to promote for increased profits. On the Smith Dairy Farm alfalfa showed the best return on investment in land, and irrigated pasture showed the lowest. But any shift in acreage must be considered in its effects on other enterprises and on farm profit as a whole. The pasture, figured at farm value, supplies nutrients more inexpensively than does harvested and delivered hay. An increase in alfalfa would mean a reduction in other crops — irrigated pasture, perhaps. Greater use of hay to replace pasture would probably reduce profit in the dairy, but would it increase or reduce profit for the business as a whole? To determine what would result in such a case, draw up a plan with changes in acreages, and perhaps in the number of cows; then make up a new budget for each enterprise and figure probable profit for the farm as a whole. The whole process of reorganizing the enterprises of a farm is too involved for full presentation here, but it is the information de- veloped by enterprise accounting that makes this process easier and more valid. To illustrate the end product we have made another plan for the Frank Smith Dairy Farm and present a summary as plan 2 in Figure 17. The assumptions are that an increase to 150 cows is feasible with present dairy facilities and feed crop acreage but will reduce Class I sales of milk to 50 per cent of the total. Alfalfa and corn silage are increased, irrigated pasture is reduced, and sudan pasture is inserted as a second crop after barley. Costs for the different sizes of enterprises are figured as they would have been in 1959. Note that charging less pasture and more hay, green chop, and silage to the larger dairy at farm values, with a slightly lower milk price, has resulted in the dairy showing a loss and total crops showing a greater profit than for 1959. Total profit stayed the same with increase in income being offset by the increased expenses of more cows and more harvesting of farm feeds. Thus plan 2 shows no greater profit potential than the present plan, and Frank Smith would no doubt try other plans. Making such a total farm budget for a plan should not be too difficult for the person who has done enterprise accounting by work sheets. With objectives of the plan determined and with completed enterprise statements showing per acre and per cow inputs and costs, calculation of the budget should take about five hours if a calculating machine is used. It would be time well spent to make certain that a change in the size and combination of enterprises is toward greater potential total profit. Applications of Work Sheet Method This method of making enterprise statements at the end of the year by use of work sheets is both feasible and accurate. The addi- tional time required over ordinary accounting for the farm as a whole is not as great as that required by accounting methods discussed in the next chapter. The extra time needed for the labor, farm machinery, and other current records, as per this illustration, need not exceed a few hours a month, perhaps not over 100 hours for the year; allocations on work sheets 1 to 5 would probably take another 20 hours. Enter- prise statements can be made in 1 to 5 hours each, with a total of perhaps 12 hours for those in the illustration. The Frank Smith Dairy Farm example is more complicated than many farm businesses. A fruit or row-crop farm involving no inter- enterprise charges and credits would involve less work. If crops were similar, more allocations could be made on an acre basis and some service units, such as irrigation water, might not be needed. 52 This process is not an easy one. To employ it one must have a real desire for the information, and a determination to put in extra time on the supplemental records throughout the year. However, these records are important in better farming and administration even if they are not used later for enterprise accounting. A calculating machine and ability to use it is almost a necessity, and a rudimentary knowledge of accounting would be helpful, though it is not essential. While this work sheet method of enterprise accounting is best adapted for use by the farmer who keeps his own records, it can be done by an accountant or farm management consultant after the close of the record year, provided that the financial and supplemental records have been properly kept and completed. A public accountant serving farmers could do this for those of his clients who were interested enough to supply the information needed and pay the extra fee necessitated. Work Budget for Plan 2. Frank Smith Dairy Farm. Based on 1959 Prices and Costs Recalculated from Work Sheet 5 Milk sales 14,812 cwt. @ $4.22. . . Dairy stock sales Manure dairy to crops 800 T @ $1 Hay to dairy 356 T @ $22.50 Green chop to dairy 1200 T (§■ $6. Silage to dairy 600 T @ $8 Pasture 888 AUM @ $7.50 Straw to dairy 30 T @ $40 Subtotal crops to dairy Alfalfa hay sold 146 T @ $22.50. . Barley sold 45 T @ $40 Total income and credits Total labor incl. oper. ins., etc Contract combining Farm machine work Fertilizer and seed Manure to crops from dairy Farm feed and straw to dairy Cone, bought 198 T @ $69 Cows purchased 3 @ $275 Miscel. dairy sup. and repairs Irrig. water cost County taxes Interest on debts Fire insurance Electricity and telephone Depreciation Farm overhead and admin Total expense and charges. . . . Profit Investment Earned on investment Alfalfa 108A 7,830 9,600 1,0 i 3 18,443 3,285 21,728 3,600 3,666 1,110 300 1,920 600 1,070 900 12,500 9,228 54,000 17.1 Irrigated pasture 48A 180 3,960 4,140 4,140 948 '244 542 200 954 268 475 250 3,881 259 24,000 1.1 Corn silage 30A 4,800 4,800 4,800 1,300 1304 450 300 324 165 296 282 4,421 379 15,000 2.5 Barley 30A 338 360 698 1,800 2,498 314 311 232 186 130 85« 150 146 1,554 944 8,000* 11.8 Sudan P. after Bar. (30A) 1,350 1,350 1,350 337 158 270 300 80- 146 70 1,361 — 11 7,000' — .1 Total crops 206A 8,010 9,6C0 4,800 6,661 360 29,431 3 285 1,800 34,516 6,499 311 4,938 2,558 800 3,628 1,198 2,137 1,648 23,717 10,799 108,000 10.0 Dairy 1 5 cows $62,506 5,074 800 68,380 12,504 800 29,431 13,662 825 3,584 '890 1,430 210 410 2,000 3,800 69,546 -1,166 76,600 — 1.5 Total farm S62.5C6 5,074 3,285 1,800 72,665 19,003 311 5,738 2,558 13,662 825 3,584 3,628 2,088 3,567 210 410 2.000 63,032 9,633 215,800 ■i.i * Land costs divided between Barley and Sudan pasture which follows in same year. Figure 17 53 sheets for allocating incomes and costs to enterprises at the end of the year can follow any adequate system of financial records — a special farm record and account book, for instance, or a full accounting system with a complete set of ledger accounts. The principles of this method can also be useful in partial enterprise accounting and farm analysis. Where current supplemental records have not been kept it may still be possible to obtain enough information to make a fairly accurate analysis of the principal enterprise. For example, a statement on the dairy enterprise on the Smith Dairy Farm could be prepared by excerpting dairy income and expense items from Smith's record book. Hired milkers' wage records would be available, and Smith could estimate his own time spent on the dairy. A record of concen- trates bought would also be available and Smith would have a fairly good idea of feed crop yields chargeable to the dairy. Such main enter- prise analysis has been done many times by many dairymen, though usually with the help of someone such as an extension agent or man- agement specialist. Making enterprise analyses from work sheets as discussed in this chapter, has two main limitations when compared to accounting methods presented in the next chapter. This method is limited in capacity to approximately 20 enterprises and service units, and it does not provide enterprise incomes and expenses during the year; one must await the completion of work sheets after the end of the year for information on enterprise earnings. However, for most medium-sized businesses with few enterprises this time will usually be soon enough for analysis and planning. Chapter 5 ENTERPRISE ACCOUNTING BY ACCOUNTING PROCEDURES The farming business which uses a full accounting system also needs enterprise accounting as a guide to management and ownership. If several farming and business properties are involved, for example, earnings and development costs for different activities and departments are necessary. This information must be accurate and valid; following the basic principles and procedures of enterprise accounting will supply the necessary data. In a full accounting system some division of income and expenses by properties is usually provided, but without accurate allocation of expenses through payroll and service unit records the results can be inaccurate and misleading. Enterprise accounting can be done by full accounting procedures in either of two ways — within the general ledger accounting system for the business as a whole, or by a supplementary ledger of enterprise and service unit accounts. The nature of the business, the detail and timing desired, and the desirability of continuing the same general ledger accounts and accounting methods for the business as a whole, will affect the choice. ENTERPRISE ACCOUNTING IN GENERAL LEDGER II the farm business is simple and has few or no inter-enterprise charges and credits, the job . ere. TtfWJU £o 2W - /? S'c 37$ - //3 So 7i Sc '/i/ CRZi HJ So o Q/Q> Sl ) /& sc z/or /O j Figure 18 that separate service units are used for the irrigation system on the two farms (52) and (53), and also for the feed lot and mill (53) on the Tramino Ranch and the walnut plant (57) on Valley Farm. These last two service units may also do some custom work for neighbors now and then. Decision is made to continue accounting for the business as a whole with the same general ledger accounts and original books of entry. Bookkeeping will be done by a full time clerk-bookkeeper in the main office and the books for the farm as a whole will be audited annually by a public accountant. The profit statements, as a whole and for income tax reporting, will be on the accrual basis. Inventories of livestock, crops, feed, and supplies on hand will be at "farm value," save that livestock raised are valued by the unit price method used formerly. These values are usually below the farm values needed in enterprise accounting. The chart of general ledger accounts is shown in Table 8 as slightly revised to facilitate enterprise accounting. Note that asset accounts reflect separately the two farms owned. The number of principal accounts shown in Table 8 is kept to a minimum by the use of analysis ledger sheets or sub-accounts; these will provide the different expense segregations needed for different cost allocations in enterprise accounting. Figure 18 shows a 10-column analysis ledger sheet used for general expenses. These categories will accumulate until the end of the year, at which time they will be allocated to enterprise and service units on an appropriate basis. SPECIAL JOURNALS Enterprise accounting will be done by means of special journals and the supplementary enterprise and service unit ledger. Accounting will be brought up to date at the end of each month for income and most expenses, leaving general expenses, administration, and deprecia- tion to be charged at the end of the year. Hence, enterprise account balances will show incomes and most of the expenses to date each month. Enterprise statements for a month and year to date are of no significance in these enterprises, but the data will be available for refer- ence in ledger accounts. As harvest or selling time approaches a pre- liminary statement can be made for any enterprise from the income and expense accounts, including, if desirable, estimates for expenses yet to be charged. The accounting done in the supplementary ledger must be thorough enough to assure accuracy and completeness. A skilled accountant may find several short cuts he can safely take, such as posting certain items to the enterprise and service unit accounts from the original transaction entries at the same time they are posted to the general ledger accounts. It will be safest, however, for most clerks to follow full double-entry procedures, with all postings made from special journal entries with total debits equal to total credits — these proven monthly by a trial balance. The following are the special journals from which items would be posted to enterprise and service unit accounts in the supplementary ledger: 58 General Ledger Transfer Journal A four-column journal to show current incomes and expenses "trans- ferred" from general ledger accounts to accounts in the supplementary ledger. Two columns would be for debits and credits to a general ledger controlling account posted as a net balance at the end of the month as posting is completed; the other columns would show debits and credits to the supplementary ledger accounts. Figure 19 shows a sample form with several entries. T*AN$ ?£& r ° URmAL mo Sctpp/e rr>er> 'a I lecfqe. f o> r Cn Qe neml L etfye r Dr. £r. fftc 7?£/.v €. j&et^c '&Mcs, )7 hLf Jk, Xcflllr*-' dt . '/fa* e<£ o fjllp Ktfjvi ■ fr&cissUSuj'. 7b Sorfey n Oft/ fay O Pol /H U%0 e i9 Go /?-c f.U Co */.& Pu £3-0 g S2 - 7// jnj 2T flat fa Shfo. 2.7o Y9 - 77(2 OLs a^T Cu,//& s?t> &. J.i'O 3oo - T6 Co/* bo to $.00 ■Voo - ?6 ■Voo.- TV-/ %J- Td? -d&i~ 2-0 /.6e> 3Z - /O /61.0c 7~ r ctfH sy Figure 20 time cards for future reference and for special job cost analyses than are carried into enterprise accounts, which usually show only the total labor cost. The degree of fineness in enterprise or field breakdown, and job or operation breakdown of labor cost, is a matter of choice. Time cards kept on file can be sorted and tabulated later for any additional detail wanted, thus avoiding many columns and sub-accounts in the payroll record and enterprise accounts. Farm Machine Time Cards A time card for each farm pickup, truck, tractor, and self-propelled machine is needed to show hours of service or work for each enterprise and service unit. Normally, a monthly time card would be adequate. The farm worker's semi-monthly time card can be used to avoid using another form — use two for a month, or the top and bottom halves for the first and second halves of the month. These cards can have addi- tional values to management other than the main function of enter- prise accounting. They can carry memoranda on mileage, fuel use, repairs, etc. and at the end of the year, they can be sorted and added to get total hours or miles of use. This will help in estimating appropriate hourly cost rates and in making decisions regarding needs and replace- ments of machines. On the Tramino Ranch the farm machinery foreman, who is also mechanic in the shop, would be responsible for these farm-machine time cards, although he could turn some over to regular truck or tractor drivers. At the end of the month he would assemble and check cards for completeness and turn them in for calculation and listing in the farm machinery work journal described above and illustrated in Figure 20. The total cost of all machine work is all that is posted to enterprise 62 o 'i hi. Pe->f XI 3' fir /W 11- 1^> loo £ 00 3-oo /6>.*v /ct k"* ?co &*> /o .to /So /2-T 6 Vot> *>l.e° 2-cc /(f. /be i2. /tf.Ko 7H**> 3-o~l. £hi7- 0./ fid tie, ** Ad?65 2o Joo J^o t>,0 '{ n ?oD /OS s.s jfrd+c '& yZa-. VtAK /at£ / 96o CROP oR PfiooocT &/ST, A/o, dU^UTiTY Dl S POS / 7~ / %2-6 — AS &./£«/ //^S // 31 7S 2£lo8 /2cT /,& Je &£tjl ajr 'f^t^t ^&uJ~ 22 26 Yo — J& 3z.PaJ. a/fy // 32. Vf 3 A3&0 — /9 Si.AJtM // 3 3 2~t fSli SZT 7? £%> /Zhsw— 2» 3iZ AAU - — ai Zk./LX d.tf // ?/ VA 3t£t*Jt 78T A? Jo Ahf&Ldz 2-o /S~£>o — 3.Z tsl. ra&T, &■ /*ty // 3.T zl S?/ A £fT /y £o T<6> 3»uJ7i 9i$> £*a^ 2. 2Z CM — J^UC 7 A$4StA4 7^*^ 2,3 af/^AtM 3* vyy£ — V // 2.£ /yo /z/ r J7r & 6u*Js 3. V *fU4^ 3? VS9X — — . — - Figure 22 on hand at all times. This may partly overlap information in records of crops harvested and livestock feed used, but it is well to have this in- formation available to check or supplement other reports. Note that there is also a space for values; it will be helpful to the bookkeeper to have these values recorded for making proper charges and credits at the time the hay is stored. Pasture Use Records In order to provide livestock enterprises with data on monthly pasture charges and to allot credits to the range or crop enterprise, it is necessary to do some current record keeping on pasture use. These records may be informal notes to supplement data on properly kept livestock lot records illustrated in Figure 23. A special form may be used for each enter- prise, or even separate fields that are pastured, to show the dates and number "on" or "off," the age of stock and the computation of animal unit months. On the Tramino Ranch all range is one enterprise; this includes 12 fields, on each of which management may wish to know the feed obtained in order to make decisions regarding improvements or fertilization needed and to evaluate the results of such treatments. Figure 25 illustrates a suggested form for a pasture-use record for a field or crop enterprise. Examination of the calculations will show the value of such records in making inter-enterprise charges and credits, as well as their usefulness in range and grazing management. 65 o o o DAT £ /9S9 A/d. Cf /J6AD ti/£r/CrtfT z//4K ?so Co*fC. PSD //if ccj SAL //£. PoUvD'i K/no TOVS K/A/d Poo v as TUv /2 7o 1c 7o 3/7/ o **. fct^t ^^r /Uf. /I f\.f$OA.. 410 6 A. 1 /3X C/^ctf Wzi^JlcJ, si+U**M*L /3p/d/. & £***& A? - 3/ SJf &t.1tJ. av V7o# t Soj>. £jd )i c£l£l. C5A1 /OjOOO /Hay /S" 7o &e 7o Scloo jeflftAit CC ^t^tu^J. ai^L /vsxjuJ £36 fjtd&f- ilfolD Jeofail wJ~ / 57 ^6/- /Ctfild 7^4/^ 121 - 6// 73 - -)uf~c No. 31 32 33 34 35 36 58 Inventory 1st of Month of Jan. 1960 and Changes for Month, Tramino Ranch Breeding Herd: Bulls Breeding cows . . 2 yr. heifers. . . . Yearling heifers . Calves Total br. herd . Own stockers: Yearling steers . . Yearling heifers . Total own stock Purchased stockers: Yearling steers . . Yearling heifers . Total purchased Feeders Lot # 1 . . . . Feeders Lot # 2 . . . . Feeders Lot # 3 . . . . Total feeders . . . Horses Total livestock No. Head 25 396 83 85 250 839 166 80 246 297 120 80 200 11 Av. Wt. 1,200 950 800 550 150 590 550 500 1,020 950 Av. Value 250 150 150 100 40 125 100 120 240 215 150 Total Weight 30,000 376,200 66,400 46,750 37,500 556,850 97,940 44,000 143,940 14,850 122,400 76,000 Total Value 6,250 59,400 12,450 8,500 10,000 96,600 20,750 8,000 28,750 35,640 28,800 17,200 46,000 1,660 During Month Died 11 3 i 2 Sold 60 Trans. Add. End Mo. 61 24 393 83 84 309 166 80 297 59 80 11 208,650 Hay Silage Barley Other cone Total feed Fertilizers Spray materials Seed Total crop supply. . . . Gasoline Diesel oil Oils and greases Other farm mach. sup. . . Total farm mach. supplies Grand total inventory. . . Quantity 470 316 240 12 Av. Value 21 7 45 75 Total Value 9,870 2,212 10,800 900 Quantity Used 210 180 60 30 Added End Mo. 30 260 136 12 118T Various Various 75 23,782 8,850 365 870 800 600 21 15 9,885 168 90 60 360 46 76 678 242,995 Figure 24 67 TftbJOfft U$£ RECORD o o o 2>atG 1 M7B OFF f Afo /Jo. - K/t/o oP 5 roc A: TotAl R£Mfi£l<£ /n ,9*~. 77 C^^e & &/, 3/ 2// 2/lf 2f / Jtft, -&t^2*d S3 .7 / 7$> 3// y*> /? A7 £ £ SV V//sr 1/do 7S~ ,S ^jLoAJ^Jf 1-JUjk'U 1* OS'O 7 3o 5-// *?v Z8 .9 ff .7 5¥ /fanu^ d ■&&l /I 9*nL/ / / / Figure 25 68 Bookkeeping Methods The objective in this example is to bring enterprise and service unit accounts for direct costs up to date shortly after the end of each month. Certain overhead costs will be allocated at the end of the year. It would be advantageous to post some current expenditures to enterprise and service unit accounts at the same time they are posted to the general ledger expense accounts. While handling the voucher or bill make the entry in the transfer journal and post to the various accounts affected in order to carry into the supplemental ledger accounts the desired quantity and price data. When all transfer journal entries are completed and posted for the month, the net debit or credit for the general ledger controlling account is posted to that account, No. 70, in the supple- mental ledger. After all time cards for the month are entered in the payroll record or journal, columns are totaled and posted to the enterprise and service unit accounts, with the total so charged credited to the general ledger control. An undistributed labor account is needed to take occasional charges for labor paid for but not chargeable to other accounts — items such as vacations, and sick leave with pay. This accumulation will be allocated at the end of the year in proportion to labor previously charged. When all time cards for farm machinery and truck work are entered in that record, columns are totaled and posted to the accounts affected and the total so charged credited to the farm machinery service unit account. The same thing is then done for the irrigation water charges to enterprises and a credit to the service unit. Field notes will be the basis of entries in this irrigation water use journal. The next step is to record all inter-enterprise and other account entries in enterprise accounting journal 2 above; continuous inventory accounts will probably be needed. Hay or barley harvested and stored for the livestock enterprises will be charged to this inventory account, No. 6, and credited to the enterprise where it was harvested. When hay is withdrawn and delivered to a livestock enterprise it is charged to the proper enterprise and credited to the inventory at the farm value per ton when harvested. If some hay is sold at more or less than the value at which it was originally charged to the inventory any profit or loss is credited or debited to the crop enterprise originally producing the hay. Crop materials ordinarily would be charged directly to the using crop enterprise when acquired; where a quantity, such as fertilizer, is purchased and carried for later use in several enterprises it would have been charged to the inventory. It would be charged to enterprises as used, usually on a first in and first out price basis. Included in these month-end entries in the enterprise journal would be all charges and credits for crops harvested that month, for pasture used, and for any animals transferred from one livestock enterprise to another. Field records on lots of livestock, crops harvested, pasture use, and ordinary debit-credit memos, are the basis of these journal entries. Proving total debits equal to total credits in these special journals is a good check against errors. Posting to the proper accounts is then com- pleted, after which a trial balance should be made of all account balances in the supplementary enterprise and service unit ledger. At about the same time, the physical inventory of livestock, crops, feed, and supplies should be made as illustrated in Figure 24. Ordinarily, this need not be brought into the accounts except as needed at the beginning or end of the year or the enterprise cycle. Livestock enterprises vary as to time of beginning and ending. The breeding herd, enterprise No. 31, is an annual enterprise which coincides with the fiscal or calendar year. Multicolumnar account forms with columns for number of head, total weight, and total value for each age and sex group are recommended for recording inventories, sales and purchases. The end product or objective is shown in Figure 26. This statement is the income side of enterprise 31 and can be calculated per cow or per animal unit. Account 31x, when completed, will contain the costs in detail; these may likewise be calculated and analyzed. By analysis we mean reducing total figures to a per cow or animal unit, and per hundredweight basis, and then comparing these data to other years and standards. Monthly statements showing income and costs to date would have no significance for this enterprise. Enterprise 32, own stockers, and 33, purchased stockers, start with the transfer in and purchase of weaned calves. They go through a period of 9 to 1 1 months on range and irrigated pasture until sold or transferred to a feed lot enterprise to finish for market. The enterprise goes through a year-end without completion, and at that time each enterprise receives its share of the year's overhead costs; it can be completed when finished in the following year after animals are sold or transferred to the next phase. The I960 enterprise may be overlapped by one for the following year, which is a separate account started when another generation of calves are available. Crop enterprises are annual affairs, although for a barley crop it 69 31 Breeding Herd Production and Income, I960, Tramino Ranch Opening inventory 1/1/60: Bulls Breeding cows 2-yr. heifers Yearling heifers Calves ( 1960 crop) Av. price No. head 25 396 83 85 250 Av. weight 1,200 950 800 550 150 Av. value 250 150 150 100 40 Total weight 30,000 376,200 66,400 46,750 37,500 Total value 6,250 59,400 12,450 8,500 10,000 Per cow Per cwt. prod. Total breeding herd. 17.3* 839 556,850 96,600 241.50 Purchases: Bulls Heifer's trans, in. Total Total stock costs or debits. Sales : Bulls Cows Veal calves 2-yr. heifers 800 675 360 135 4,000 4,050 1,800 810 324 11 8,050 2,610 18* 11.3* 25* 20* 850 4 72 4 2 1,260 1,000 250 750 227 112.50 62.50 150 564,900 5,040 72,000 1,000 1,500 99,210 908 8,100 250 300 6.53 248.03 Total sales Transfers to 32 7/60. 12.0* 25* 82 250 450 112.50 79,540 112,500 9,558 28,125 23.90 70.31 Total sales and transfers. Closing inventory: Bulls Breeding cows 2-yr. heifers Yearling heifers for repl... Calves (1961 crop; Total Total credits Net stock production and income. 1960 calf crop* Cows bred for calving Calves raised per 100 cows . 19.6* 332 25 398 90 85 210 1,200 950 800 540 150 250 150 150 100 40 192,040 30,000 378,100 72,000 45,900 31,500 37,683 6,250 59,700 13,500 8,500 8,400 17.3* 17.9* 18.9* 808 1,140 290 557,500 749,540 184,640 96,350 134,033 34,823 339 400 84.8 94.21 240.88 335.09 87.06 18.86 ' < jives are counted 3s to crop The 250 counted on Jan. 1, are those of the I960 crop dropped before Jan 1 Calves sold during the year or transferred to enterprise 32 and on hand as yearling heifers in the closing inventory make up the total of 339. This is more than the net stock production of 290 head because this latter includes a smaller number of 1961 calves by Jan. 1. Figure 26 may be two years from beginning summer fallow until the crop is harvested. Uncompleted crops likewise pass through year-ends. The summer fallow, enterprise 2, is carried as an enterprise until crops are planted, at which time it would be pro-rated and transferred to the < rops planted on that land. In this case the 400 acres in enterprise 2 would probably be planted in the fall to 120 acres of oat and vetch hay and 280 acres of barley. Additional enterprise accounts can be opened at any time. Fruit crops, such as the walnuts, are annual affairs and the same operations usually are performed each year so that the walnut income 70 25, and walnut expense 25x, are closed and the profit is figured at the end of the year. The young apricot enterprise expense account is handled as capital outlay and charged to an asset account annually until trees come into good commercial bearing. As an enterprise is completed a preliminary statement of incomes and expenses should be prepared for management purposes even though final adjustments and overhead charges are not charged until the end of the year. If a valid profit figure is needed, the charges yet to come can be estimated from the previous year by making appropriate ad- justments. At any month's-end, costs to date in expense accounts can be obtained and compared to probable income, using estimated yield and prices, to help make decisions on further inputs or preparations for marketing. Routine monthly reports will not ordinarily be prepared. Year-End Procedures As the end of the fiscal year approaches, preparations and some allocations can begin. Because expense transfers must be made before clearing service unit accounts, they are best cleared in a certain order. Depreciation Just before the end of the year, capital outlay will have been com- pleted so depreciation can then be figured for the year and allocated to service unit and enterprise accounts. Procedures will be similar to those explained in Chapter 4, where enterprise accounting was done on work sheets with the distribution of depreciation illustrated in Figure 10. In this case, we would have a depreciation record listing each item, but with group totals by asset accounts. In the general ledger account- Work Sheet for Allocating General Expense to Enterprises and Service Units, Tramino Ranch, 1960 No. Account Range, Tramino R Fallow land Barley, I960 Oat & vetch hay. . . Vol. pasture Irrigated pasture . . Breeding herd . . . . Own stockers Purchased stockers . Own feeders Purchased feeders . . Alfalfa Alfalfa 1st year. . . . Sugar beets Wilson lease Walnuts Young apricots . . . Irrig. barley Corn Farm mach Irrig. system Tr. R. . Feed lot & mill Empl. housing . . . . Office & admin. . . . Horses Walnut plant Irrig. system Total Total invest. 505-1 Co taxes .01276 of invest. 505-5 Int. .01239 of invest. 505 Ins. prop. Liab. 3 Auto 4 505-7 2 Auto lie. 505-8 Office sup. 504-2 Phone & teleg. 505-9 Ttavel 505-10 Dues subscr. Total general expense 1 2 3 4 5 11 31 32 33 34 35 21 22 23 24 25 26 27 29 51 52 53 54 55 56 57 58 240,000 20,000 15,000 10,500 4,500 46,000 106,350 34,500 36,000 29,000 20,000 54,000 16,000 33,000 38,500 72,000 45,000 15,000 16,500 44,800 20,400 10,200 45,000 6,000 4,400 8,500 30,200 3,062 255 191 134 57 587 1,357 440 459 370 255 689 204 421 491 919 574 191 211 572 260 130 574 77 56 108 385 2,973 248 186 130 56 570 1,317 427 446 359 248 669 198 409 477 892 557 186 204 555 253 126 557 74 54 105 374 150 20 20 10 10 (F 100 (A 860 '35 F 220 L100 F 50 F 10 F 45 210 150 700 270 350 175 1,021,350 13,029 12,650 1,630 Figure 27 210 700 270 500 175 6,035 503 377 264 113 1,157 2,824 887 1,075 739 513 1,358 402 830 968 1,811 1,131 377 415 2,297 513 291 1,351 1,796 120 258 759 29,164 71 ing for the business as a whole, total depreciation for each asset account is charged to depreciation and credited to the appropriate depreciation reserve account. A transfer journal entry is then made in order to credit this amount to the general ledger and to charge it to the appropriate service unit and enterprise accounts. Depreciation for asset account 142 — Buildings and Improvements, Tramino Ranch, will be divided over farm machinery, 51; employees' housing, 54; office and administration, 55; horses, 56; and the breeding herd, 31x. Informal work sheets to arrive at proper journal entries may be needed. Depreciation for asset accounts 143 and 163 go entirely to service units 52 and 58 respectively. Depreciation on 152, 153, and 154 asset accounts goes to the farm machinery service unit, 51. Similar allocations are made of the remaining depreciation and these charges can be posted to the enterprise and service accounts before the end of the year. Inventories The next step is to take, or verify running inventories as of the end of the year. For some items two sets of valuations are involved, one for the general ledger for the business as a whole, and another for enterprise accounting. Appropriate entries are then made to the accounts affected in both the general ledger and supplementary ledger. This process in- cludes accrual adjustments for prepaid expense and unused supplies on hand. General Expense At this point in the procedure it is time to make or complete the transfer of accumulated general expenses from account 505 and any other accounts or subaccounts. Work sheets for making allocations or figuring percentages may be helpful in arriving at the proper entries for the transfer journal. A tabulation of the total investment involved, by enterprises and by service units, is made for use as a basis in allocat- ing county taxes and interest. Taxes can be appropriately and easily allocated to enterprises on the basis of book values of the land and other assets involved or on the value at which these assets were assessed for tax purposes. Interest cost is also appropriately allocated over all the investment rather than being charged to the land and other facilities offered as security for the loan. Figure 27 is a sample illustration of a brief work sheet showing the allocation of several of the general expense items. Notice the values or investment on which the allocation of taxes and interest are based. Other allocations are also made on this sheet, but 72 on an arbitrary basis. Total general expense for each account is shown in the right-hand column. This sheet can be made the basis for a formal entry in the transfer journal, or it can be incorporated therein as part of that journal, with posting made therefrom. Employees' Housing, 54 The employees' housing service unit account now contains most of its costs and its balance can be allocated to the other expense accounts. This is done on another work sheet along with undistributed labor, 59, and compensation insurance, and social security taxes, 505(4). Basis for allocation of these would be in proportion to the labor and salaries already charged. This total for each account could be listed in the first column and the total of the above four categories computed as a single figure in the second column and then posted to the accounts affected as an additional cost of labor. Office and Administration, 55 This important service unit has received many small direct costs during the year as well as its share of administrative salaries and charges for use of automobiles. It has also received its share of depreciation, general expenses, and the extra large charge for employees' housing, compensation insurance, etc., as suggested above. Its accumulated costs should now be spread over enterprise accounts active during the year and over the remaining service unit accounts. There are several fairly appropriate bases for this allocation but none that are perfect. Some of the administrative salaries have already been charged to some of the enterprises; nevertheless, the total expense for this year in each enterprise and service unit account is the best starting point. The first step is to list on a work sheet the charges made up to this point during this year for all the accounts affected, omitting only employees' housing, which was cleared above. The total of these expenses is divided into the total administrative cost to obtain the percentage to use in calculating the amount for each account. After this is done the manager, assistant manager, and bookkeeper inspect and discuss the list and make a few adjustments. Entries are then made and posted. Income is sometimes used as a basis for allocating management costs. This is appropriate where every enterprise has an income proportionate to its costs, but it would not work in this case because some enterprises had no income this year — and it is appropriate to charge management to service units as well as enterprises. Horses, 56 This small service unit covers about 10 saddles horses used entirely for working cattle and inspecting the range and fences on the Tramino Ranch and the Smith Ranch. The unit receives direct expenses and charges for feed and pasture during the year; horses are inventoried, purchases are charged as expense, and sales are credited. At the end of the year this account receives its small share of general expense and depreciation on the horse barn. The net cost or debit balance may be considered entirely chargeable to the cattle enterprises; here, memory of actual usage is combined with judgment in charging 55 per cent to 31x and 25 per cent to 33x. It is well for management to know its total horse costs for the year in order to plan the optimum number and minimize expense. On some ranches having a single cattle enterprise, the saddle horses are considered a part of the cattle enterprise. This saves some bookkeeping but loses significant information on the horses and on the cattle enterprise. Irrigation Systems, 52 and 58 These service units have now received all direct and overhead costs. Water has been charged to enterprises, and also has been credited to these service accounts at rates per acre foot estimated to balance costs for the year; usually these accounts will now show a small credit or debit balance. In closing, figure a percentage adjustment in the credits for water and use it to adjust water charges already made to the enterprise accounts. Farm Machinery, 51 This large and important service unit with all its charges, deprecia- tion, and overhead can now be cleared. It has been credited during the year for major equipment charges made to enterprises and other service units — charges which were made at hourly rates as illustrated in the farm machinery journal in Figure 20. Now, there probably will be a debit or credit balance. Before clearing it is well to examine the validity of hourly rates used for some of the machines. The combine, we note, was used 99 hours to harvest the 328 acres of barley and was charged at $10 an hour. But a recalculation of over- head and operating costs indicates that $12 would have been more correct, so an additional charge of $2 is made to the two barley enter- prises and credited to this account. Similarly, high repair bills on a tracklayer tractor and a truck indicated that an increase in hourly rates for such tractors and trucks would be appropriate. Now, if the remaining balance is less than 1 per cent it can be ignored, as it would affect enterprise accounts very little. If it is larger, adjustments to previous charges should be made to the enterprise accounts and any remaining open service unit accounts. Feed Lot and Mill, 53 This service unit includes corrals, scales, a shelter shed, and a build- ing containing a feed grinder, mixer, and storage bins plus some large grain storage tanks. It was used at different times by all livestock enter- prises, including two batches of feeders carried in from the previous year and .sold early in the year. Feed was charged to livestock as it was fed, at cost or inventory values. A milling charge was made on milled feed and charged to the cattle and credited to this service unit. Labor of feeding and mixing the feed has previously been charged to the cattle and to this service unit. A charge was currently made at 5c a head per day to animals in the lots and this was credited to this feed lot account. With depreciation and general expenses now entered, there is a considerable debit balance to be allocated to using enterprises. A storage charge not previously made to barley for storage from field to use or sale is next made and posted. The remaining balance is cleared to livestock enterprises in proportion to head days of use; this amounts to another 3c a head per day. It is decided to charge 8c a head per day next year. Walnut Plant, 57 This building contains a huller, dehydrators, and storage bins plus storage space for the picking machine, sprayer, and other walnut equip- ment. Since no outside work was done this year the accumulated costs are charged entirely to walnuts, 25x. This account furnishes costs in detail on the walnuts from the time they are received from the orchard until they are loaded in bulk for hauling to market. Costs can be com- pared to charges at commercial plants. A showing of lower costs than outside custom rates justifies this service unit. Enterprise Accounts All service units and convenience clearing accounts have now been cleared to enterprise expense accounts. Enterprise income accounts were credited as income was received, or from harvesting or feed use at the end of each month, and thus are up to date. Some enterprises ended during or at the end of the year and are ready for closing. Formal clear- ing to an enterprise accounting profit and loss account would be appro- 73 priate if full accounting procedures are to be carried out. Because of the carry in and carry out of incompleted enterprises this total profit could be quite different than the profit for the business as a whole. New crop enterprises for next year — barley, oat and vetch hay, and some land preparation for new alfalfa and sugar beets — have some of the costs accumulated, and these accounts are carried over as they are. The young apricot enterprise expenses are transferred out to the general ledger as a development cost or capital outlay. There are two lots of cattle, 34 and 35, in the feed lot and new stocker enterprises 32 and 33 on the range, and these are also carried through. Old stocker enterprises were closed when cattle were transferred to the feed lot in the fall. The breeding herd, 3 1 , closed at the end of the year with crediting the closing inventory and debiting it to next year's enterprise, 31. Some feed and supplies are on hand and carried over in account 60. Some of this carry-over of enterprise expense and materials may be needed or used in the general ledger accounting for the farm as a whole, but this would depend on previous policy. Even under the accrual system of accounting it is not usual to treat work done on next year's crops as prepaid expense. Costs are difficult to determine without enterprise accounting procedures, and the carry in at the beginning of the year and carry out at the end about offset one another. Profit Statement and Analysis — Own Stockers, 32, 1959-60, Tramino Ranch 250 Head In, 244 Head Out, 2.4% Death Loss. 110,350 lb. Net Gain No. head Average weight Total weight Average unit value Total value Per head out Per cwt. gain Animals transferred out: Yrlg. feeder steers to feed lot. . Yrlg. heifers to br. herd 31... Yrlg. feeder heifers to feed lot. 165 6 73 950 675 850 156,750 4,050 62,050 23tf 20^ 21tf 36,052 810 13,030 Total income Less weaner calves transf. in July, 1959. 244 250 450 222,850 112,500 25' «£/ DP I C CC t/G TRACTOR HRS FOREMAN SI6NATURE CROPS OTHER TREES I ? t±j \^1 K±s 7 4 2 TMOUS 4 2 HUNQ5 4 2 UNITS EMPLOYEE NUMBER DIRECT LABOR - TREE FRUIT (DATE) (EMPLOYEE NO.) EMPLOYEE SIGNATURE CKD BY HOURS \ INNER ROW PREPAR. ATM) "I ARANOOM- MCNT HAW. C1H! HAULING S S 3 3 1 4 44414 4 1 55 5 515 5 00000000000000 66 67 68 69 70 71 72 73 74 75 76 77 78 79 11111111111111 22222222222222 33333333333333 44444444444444 55555555555555 80 1 2 3 4 5 «2 DATE DEDUCTION CARD COLS. d REG. NO. MAN NO. EMPLOYEE NAME OEDUCTION NAME H PO L 1 C Y AMT. DEDUCTION AMOUNT ?-, < MO. OAT YR. LU > O _l Q. LU TS 77 88 9 9 1 2 86 77 88 99 J 4 68 77 88 99 5 6 886 7 7 7 888 999 7 8 9 6 7 8 9 10 6 7 8 9 11 6 7 8 12 66 77 88 99 13 14 66666 7 7 7 77 88888 99999 15 16 17 18 19 66666666666666666666 7 7777777777777777777 88888888888888888888 99 9 99 9 99 9 99 99 9 999999 20 21 U 23 24 25 26 27 28 29 30 31 3? 33 34 35 36 37 38 39 6666666666666 7 7 7 7 7 7 7 7 7 7 7 7 7 88 88 8888 88 88 8 9999999999999 40 41 42 43 44 45 46 47 48 49 50 51 52 666 7 7 7 888 999 53 54 55 7 8 9 56 666 7 7 7 888 999 57 58 59 66666 7 7 7 7 7 88888 99999 60 61 62 63 64 666666666666616 66 1 7 7 7 77 7 7 7 77 7 7 7177 7 1 888888888888 8'8 8 8 i 9 99 99 999 9|9 9 9 9i99 9 65 66 67 68 69 70 71 72 73 74 )5 76 77 78 79 M Figure 33 of the original data, in the form of vouchers, time cards, and other reports, from the farm to the accounting office must be complete and must convey correct account numbers and data. Where several busi- nesses are served with the same card equipment a regular time schedule probably will be necessary. Bringing accounts up to date at the end of each month is generally satisfactory for most farm businesses. The proper design of the chart of accounts and the sequence of procedures in farm accounting by punched cards is highly important. Routine operations then can be quickly performed in a few days, with the desired reports prepared for management. Because of the ease with which operations can be done once the data is on the cards there might be a tendency to have too many accounts or too great a fineness of expense and enterprise segregations, thus necessitating longer and more detailed reports. It is well to remember that management can be burdened with too many reports and too much detail having little significance. In punch card accounting, there is danger of allocations of expense segregations being too routine and continuing by automatic calculation month after month even though activity among the enterprises changes. As enterprises are completed and new ones start during the year, the set-up for allocation of certain expense items must be changed to take care of this. A highly competent accountant is needed between the farm manager and the operator of the punch card equipment. He will check the data provided each month, give special instructions for changes in routine procedures, and indicate the reports and statements to be pre- pared. Then, when the results come off the machines on large tabulator sheets or tape, he will select the data wanted and prepare brief usable statements for management. Coding In all machine or punch card accounting a convenient numbering system for accounts is important. In handling punched cards, the sequence of numbers and what they indicate in each position may be affected by the contemplated sequence of operations; this problem would be worked out by the accountant and the advisor developing the machine or card 81 operations. In order to leave more of the card for data and amounts, it would seem desirable to provide the fewest possible numbers in the code or columns for identification and sorting purposes. Several types and colors of cards are usually printed for special purposes, so identifica- tion codes may be different for different types. In enterprise accounting for a large farming business, several farms may be involved; accordingly, the first one or two code numbers would indicate the farm. All enterprises on a particular farm may then be sorted and combined in a statement for that farm. The next two or three numbers would indicate the crop or enterprise. This sorting could provide totals for all fields of that enterprise by farms and for all farms. The next two or three figures might be needed for the number of the field if data and statements for each of several fields of a certain crop are wanted. Where this occurs it takes both the crop and field numbers to cover a single separate enterprise. One or two numbers are then used to indicate jobs or operations involving man and machine work, and, lastly, there would be two columns for indicating other categories of expense. The balance of the card is available to carry quantities and amounts. Time cards, vouchers, and all original business papers must carry correct code numbers for the accounts affected when they come to the machine operator for listing and punching of cards. Supervisory per- sonnel who make out the supplemental records must carry a rather long list of account numbers or codes. They should refer to this list and write the correct numbers legibly to avoid errors, such as charging a job or material to the wrong enterprise. Such an error might not be dis- covered, and hence it would destroy the accuracy of two enterprise accounts and the validity of the final enterprise profit calculations. Some firms using this system have a special clerk to insert or check code numbers. In punch card accounting, every ledger account is carried on a card to which a charge or credit is added or subtracted while a new card is automatically punched to show the up-to-date balance. Hence, a separate- card with proper account numbers, quantitative data, and amount is needed for each charge and credit. It is usually necessary to list all transactions on a journal sheet for reference. Special machines are avail- able to simultaneously make this listing and punch the necessary cards with account numbers, informational data and amounts. After this is done, cards are sorted and totaled and posted to the accounts affected by machine. It is desirable for a large farming business having accounting done in this manner to have one chart of general ledger accounts for the farm business as a whole, with accounts brought up to date and reports prepared monthly. The enterprise accounting would be done with supplementary enterprise and service unit accounts as discussed in Chapter 5. It is possible to use a single card to post the debit and credit to both the general ledger and enterprise accounting ledger ac- counts if account identifications, quantitative data, and amounts do not exceed the capacity of the card. Otherwise, two cards would be needed — one for each set of ledger accounts. They could be made at the same time. Enterprise accounting by punch cards differs from the hand methods described in Chapter 5 in that a separate account or card is needed for every sub-account in an enterprise or service unit account. Analysis ledger sheets which can be used to show several categories of expense where posting is done manually, are eliminated. To obtain debit and credit account balances for the main enterprise and service unit accounts requires running the sub-account cards for each main account in the supplementary enterprise accounting ledger. With punch cards this is a rapid and accurate operation. For the Tramino Ranch example in Chapter 5, the 50 or more main accounts would probably require over 300 sub-accounts. Punch cards can carry quantities as well as values, and the author has seen up to five categories of expense handled sep- arately on a single card. It has been suggested previously that some expenses, such as deprecia- tion, general expenses, and administrative costs, be held in general ledger accounts until complete for the year, at which time a single more valid allocation to service units and enterprises can be made. In large businesses, however, it may be preferable to allocate such items monthly during the year. It is advisable to base such monthly charges for validity on an estimated annual total for each category. A fair allocation of these to current and expected enterprises and service units can be worked out and set up as monthly charges. This will be difficult the first year, but with a year's experience and an estimated budget for a current year the estimated monthly charges can be valid enough for management purposes. Some items can be set up to be allocated automatically on an acreage basis or percentage of other expense. This system of monthly charges for everything permits making statements and analyses as soon as the enterprise cycle ends. Some firms do not allocate these overhead costs to enterprises. This is not recommended, because enterprise income and expense accounts then furnish only an income over direct costs and not a true profit. 82 These overhead costs are, as a group, seldom in proportion to total direct costs or total income in the enterprises, but even this degree of enter- prise accounting is much more helpful to management than none at all. Enterprise accounting by punch cards makes possible the rapid and accurate handling of a large volume of transactions and will reduce clerical time considerably as compared to hand methods. In a large firm embracing several farms and allied businesses, the punch card system can make enterprise accounting feasible where it would be difficult or almost impossible by hand methods. It is an expensive system, however, and requires a large business, as farms go, to justify an installation. The minimum installation necessary to do the entire job would consist of a card punch, a sorter, and an accounting machine plus card files and supplies. These may be purchased or rented at a monthly cost about equivalent to a good accounting clerk's salary. Where the work to be done would require an accountant and three clerks using hand methods, a complete punch card installation could in all probability re- place one, or perhaps two, of the clerks. Service bureaus are now available to do the accounting and data processing at a central office serving several clients. This could be more economical than having all the equipment in the farm office if the volume of business is too small to justify it. Part of the job would be done on the farm with a machine to list the items in journals and punch the cards. The cards would be sent to the service bureau for processing and preparation of new account balances to be returned to the farm. This method would have the disadvantage of all methods where final accounting is done off the farm — namely, the difficulty of referring to the accounts between report periods. When the cards and equipment are at the farm office the cards covering the data wanted can be with- drawn from the files, brought up to date, and tabulated rather quickly. Reference to figures punched on cards can never be as convenient as looking at the actual figures in a ledger account. Punch card accounting has some other disadvantages compared to hand methods. The ease and rapidity of routine operations is a temptation to produce too much detail in too many accounts, thus making the selection and portraying of the significant information more of a job. Operation of the equipment requires a person of training and ability that may not be locally available. Every item in the process must be listed by the proper code numbers which necessitates a long reference list of numbers and increases the chance of errors. Already mentioned is the danger of the allocation of costs to enterprises becoming too fixed or routine with these processes not changed as activities and enterprises change. Hand methods would be preferred in farm enterprise accounting until the volume of work, as measured by the number of accounts and transactions, became large enough to be more economically done by punch card methods. There are large special businesses involving special data processing not related to accounting. A large poultry breeding farm and hatchery, for instance, can use punch cards for the production and other records needed in its breeding program; it can also use them in scheduling operations to supply its many customers on advance orders. The many customers and the resulting statements and accounts receivable of such a business further justify machine methods. Some large growers and shippers of fruits and vegetables operate several farms and packing houses and have many customers and daily shipments, the rapid handling of which is facilitated by mechanical methods. In any large firm the expeditious handling of the payroll with its various allocations and de- ductions and the necessary records of withholding and reporting social security taxes, and in the case of non-farm labor, the withholding of income taxes make machine methods virtually necessary. Enterprise accounting is a worth-while supplement to accounting for the farm business as a whole for any commercial farm business where several enterprises are involved. Its value to administration from day to day and in helping management to realize more profitable methods, equipment and enterprises, will exceed the additional effort and costs involved. For any farm business, there is a way enterprise accounting may be done within the cost limitations of the potential net income available. The nature and size of the business will determine the way it can be done most economically. For the single family farm, the person who keeps the financial records for the farm business as a whole can also keep the necessary supple- mental records to attain the goals of enterprise accounting at the end of the year as explained in Chapter 4. This can be done completely and accurately by work sheets, as illustrated. It can even be done in less detail and still obtain valid and useful information to management. For the larger farm business with a full accounting system, enterprise accounting can be done in a number of ways. If accounting is done in a city office, enterprise accounting can also be done there if supplemental records and information are supplied from the farm. If the business is large enough to justify a full-time bookkeeper on the farm, he can usually do enterprise accounting there. If the additional work is too much for the one person, additional help or time-saving methods and equipment can be used. 83 For the larger firm, in which many enterprises and several farms cases, bring a shift to mechanical methods and punch cards, costing and allied departments require an office staff of two or more to handle more than former hand methods. the business and do the accounting, enterprise accounting is essential „ t , . , , . . , . , . .,... . , ,. ,, i • i i r i • For any rarm business the decision or whether or not to do enterprise it the business is to continue successfully. More clerical help and equip- r ment may be needed, but the additional costs can easily be exceeded by accounting should be based on the appraisal of the potential increased the additional profit resulting from the better decisions and administra- net income as compared to the cost of obtaining the better information, tion made possible. The addition of enterprise accounting may, in some Man's judgment is no better than his information. 84 • *.*.**»_ To obtain additional copies of this manual or a catalog listing other manuals and free publications see your University of California Farm Advisor (offices located in most California counties), or write to: AGRICULTURAL PUBLICATIONS 207 University Hall University of California Berkeley 4, California Orders for 10 or more copies of any one sale publication take a dis- count of 20 per cent off the list price. All manuals are shipped prepaid. All bulk sales are final — no returns for cash or credit are allowed. When ordering, send orders and payment to the above address. Make checks or money orders payable to The Regents of The University of California. an work in Agriculture ami Home Bconomlo*, College of Agriculture, 5M 8, '61 VI ' California, ami United .state-. Department <>t AKrirulture. co-operating. DUtr1but*