Accounting Final
The balance sheet's relationship of assets to liabilities and equity can also be expressed by the equation:
Assets = Liabilities + Equity < THE ACCOUNTING EQUATION >
Going concern:
the business is expected to exist indefinitely and thus, financial record keeping should reflect this.
What is in a Journal Entry?
the date of the transaction, the accounts involved, the debits and credits, and the amounts involved.
Interest Payable
= a liability account recording the amount of outstanding interest owed to lenders on loans.
We will use a four step process to managing and understanding accrual adjustments:
1.Calculate the change from beginning of the year (BOY) to the end of the year (EOY) in the relevant account. Differences will be recorded in various "Change in ..." accounts (see the Chart of Accounts in Appendix C). 2.Prepare the proper journal entry. 3.Present the impact to the Income Statement. 4.Present the impact to the Balance Sheet.
Transactions Analysis and has three steps:
1.A financial transaction occurs. 2.Determine which accounts (at least two) are affected, 3.For each account, determine if the balance increased or decreased.
records revenue only when cash is received and records expenses only when cash is paid. It is relatively simple to use and is allowed for farm operations and small businesses. Most of what we have done in the course so far has used this system.
Cash Basis Accounting
What system does not report inventory?
Cash basis
When Receiving the loan what should the accounts with debits and credits look like?
Debit the Cash account (an asset) for the amount received Credit the appropriate Notes Payable account (a liability) to show the increased amount owed to outsiders.
How do you record revenue activities?
Debit the Cash account for the increase in money received. Credit the appropriate revenue account (e.g., Cash Crop Sales, Crop Insurance Proceeds, etc.) to show the increase in money received or earned.
When making a loan payment what should the accounts look like?
Debit the Notes Payable account associated with the loan for the amount of principal being paid to show a decrease in the liability account Debit the Interest Expense account (an expense) for the amount of interest being paid Credit the Cash account (an asset) for the total amount of interest and principal being paid.
To record payroll tax expenses you need to
Debit the Payroll Tax Expense account for the employer's share of the payroll taxes (an increase). Credit the Cash account to show the taxes paid (a decrease).
When you forward the employee's payroll tax expense to the IRS you need to
Debit the Taxes Payable for the taxes deducted from the employee's paycheck when the taxes are paid (a decrease). Credit the Cash account for the amount of cash used to pay the taxes (a decrease).
Paying an employee involves
Debit the Wages Expense account for the gross amount of wages for each employee (an increase). Credit the Taxes Payable account (a liability) for the amount of the employee's tax obligations/withholding (an increase). Credit the Cash account (an asset) for actual cash paid to the employee (a decrease).
How do you record the purchase of an assets or assets
Debit the accounts for the assets being purchased (an increase). Credit the cash account for the amount included in the sale (a decrease) Credit the appropriate liability account for the amount financed by the seller, if necessary (an increase).
How are expenses recorded?
Debit the appropriate expense account for the input, supply, or service being purchased (an increase). Credit the Cash account for the amount paid to show the decrease in money.
Points to record during the sale of an asset
Debit the asset accounts for whatever was received from the sale or trade-in (cash or new asset) to show assets increase. Credit the asset account for the old asset being sold or exchanged (a decrease). Debit the Accumulated Depreciation account for the old asset's depreciation. Credit the Cash account for any money paid by the seller ( a decrease). Really only applies during trade-in transactions. Credit the appropriate Gain/Loss account if a gain occurs, debit the account if a loss occurs.
What are example procedures to record the investment by the owners go like this:
Debits to the accounts of the assets that are contributed (e.g., cash, land, furniture, etc.). Credit to Accumulated Depreciation for the amount of depreciation on the assets (if necessary). Credit to equity accounts (usually Retained Capital, exceptions noted below) to indicate the increase in owner equity.
Ledger
Every account a business has for keeping track of its transactions collected in a document
What does "Two sides to every account." and a.k.a. "Two sides to every transaction."
Every account has two types of events (increases and decreases) - and - Every transaction has at least two components. - (debit and credit)
A group called the_________________(FFSC) develops and publishes a set of recommendations in an attempt to standardized accounting procedures for farmers.
Farm Financial Standards Council
The standardization of financial accounting rules and procedures are developed by a group called the _____________ (FASB)
Financial Accounting Standards Board
These recommendations are called the____________ (FGAP) or the "Guidelines."
Financial Guidelines for Agricultural Producers
What was received > What was given up ......
GAIN occurs
These accounting standards are called the_________ (GAAP). GAAP provides the basic standardized system for financial accounting in the United States.
Generally Accepted Accounting Principles
What are the 4 financial statements?
Income Statement Statement of Owner Equity Balance Sheet Statement of Cash Flows
What is interest? How is it calculated?
Interest is the cost of borrowing money calculated by multiplying the principal balance on a loan by the interest rate and adjusting for time.
What was received < What was given up
LOSS occurs
financing activities by owners include:
Non-Farm Income (money earned elsewhere, say from a part-time job, that is used in the farm business Debit the Cash account (an asset)Credit the Non-Farm Income account (an equity) Owner Withdrawals (money from the farm business used for non-farm business, personal reasons)Debit the Owner Withdrawals account (an equity; equity is decreasing in this case)Credit the Cash account (an asset) Other Capital Contributions/Gifts/Inheritances (e.g., an inheritance or gift received from a parent that will be used in the farm business)Debit the appropriate asset accounts Credit the Other Capital Contributions/Gifts/Inheritances account (an equity)
Purchased inventories are:
Purchased feed for use in the operation Purchased feed for resale Purchased crops for resale Purchased market livestock (feeders) for resale
Raised inventories are:
Raised feed for use in the operation Raised feed for sale Raised crops for sale Raised market livestock for sale
What is unique about the cull of breeding livestock?
The transactions is handled just the sale of any farm capital asset (see the previous page in this module), but has its own account: Gains/Losses on Sale of Culled Breeding Livestock and it is included with operating revenues on the Income Statement.
What are the three characteristics of financial statements
Understandable (recognizable format, unbiased values, follows rules and guidelines) Reliable (numbers are verifiable and are as accurate and complete as possible) Relevant (information is timely and useful for decision-makers)
Current Assets are
cash, items that can be quickly converted to cash (e.g., accounts receivable), or items that will be used up within a year (e.g., prepaid expenses, inventories).
The Income Statement
a measure of performance, evaluating a farm's profitability over a specific time period (usually a year). It is the primary financial statement that summarizes the operating activities (mostly revenues and expenses) although some gains and losses from investing and financing activities may show up here as well. Its primary purpose is to provide a calculation for the level of net income for the year.
Farmers who borrow money sign what is called ______
a promissory note (a promise to pay back the loan, plus interest).
Retained Capital is
a record that summarizes all remaining equity (i.e., non-valuation equity) transactions. It includes net income, owner withdrawals, non-farm income, and gifts and inheritances.
Required by GAAP, the ___________________reports revenue when it is earned, whether the cash is received or not, and expenses whether the cash has been paid or not. It is a more complicated system requiring more transactions to be recorded, but is considered a more accurate system for recording the implications of a business's financial activities.
accrual basis system
The FFSC recommends the ________________. In this approach, the farm accountant makes certain adjustments at the end of the year prior to preparing financial statements. Why is this necessary?
accrual-adjusted approach It allows the farm accountant to use the simplicity of the cash-basis system during the year and then make accrual-adjustments before they are prepare the statements
Investing
activities involves the buying and selling of assets. This usually includes items such as land, buildings, equipment, etc.
A trial balance lists
all the accounts with their debit or credit balance.
Liabilities are
amounts of money owed to outside parties that have not been paid back. Liabilities can be designated into two categories: current and non-current.
Interest Expense =
an expense account recording the cash paid to lenders for the interest portion of loan payments.
Accounting is
an information system about an economic entity that is used by farm/ranch managers and owners and by agricultural lenders.
Revenue accounts
are records of the amount of money earned by the farm operation from the production or sale of farm products.
Expense accounts
are records of the costs incurred by the farm for the year. By far the most common transaction for a farm. Expenses related to operating activities make up the majority of these tranasactions (e.g., wages expense, electricity, fertilizer, purchased feed). However, some expenses are related to financing (e.g., change in interest payable) and investing (e.g., gain/loss on sale of capital assets) activities.
Non-current Assets are
assets used by a business that are expected to last more than year (e.g., land, buildings, breeding livestock, fruit trees).
Owner Withdrawals is an equity account which typically has a debit balance (it is subtracted from the overall equity value). Accumulated Depreciation is an asset account which typically has a credit balance (it is subtracted from the overall asset value). These go against normal which is "The normal balance for Assets and Expenses are debits" and "The normal balance for Liabilities, Equities, and Revenues are credits" What are Accumulated Depreciation and owner withdrawals an example of?
contra accounts
Current Liabilities are
debts that are due within one year. These include items such as unpaid bills (i.e., accounts payable), taxes owed (i.e., taxes payable), outstanding interest on debt (i.e., interest payable), and short-term loans (i.e., notes payable due within one year).
Non-current Liabilities are
debts that will take longer that one year to pay off. Typically these are long term loans (e.g., notes payable, non-current) and leases.
This way of recording transactions (with at least one account being debited and one account being credited for each transaction) is called _________
double-entry accounting.
Separate entity:
each economic entity must maintain their own financial records. The quote " Don't mix business with pleasure" exemplifies this concept.
The Statement of Cash Flows
examines a farm's cash management activities for a specific time period. It only looks at cash transactions and is somehow like do and end-of-the-year balancing of the checkbook. It also examines all three financial activity transactions, albeit on the ones involving cash.
Purchases of inputs, supplies, services, and taxes, purchases of feeder animals (those to be raised solely to be sold later as market livestock) and feedstuffs are all known as ________in farm accounting
expenses
Accrued expenses are
expenses that have been incurred but for which payment has yet to be issued. An example would be an electric bill for $1,200 received on December 15, 2020, but the farmer does not plan on paying until its due date of January 5, 2021.
Accrued revenue is
income that has been earned but for which the cash has yet to be received. An example would be selling $50,000 in crop products (e.g., tomatoes) to a processor, but the farmer has not yet received the payment.
How does the account increase or decrease in relationship to debit and credit- Liabilities:
increases are on the credit side, decreases are on the debit side;
How does the account increase or decrease in relationship to debit and credit- Revenues and gains/losses:
increases are on the credit side, decreases are on the debit side;
How does the account increase or decrease in relationship to debit and credit-Equities:
increases are on the credit side, decreases are on the debit side;
How does the account increase or decrease in relationship to debit and credit- Assets:
increases are on the debit side, decreases are on the credit side;
How does the account increase or decrease in relationship to debit and credit -Expenses:
increases are one the debit side, decreases are on the credit side.
Financing activities
involves capital being provided to the farm business. The capital can either by provided by the owners (in the form of money or contributed personal assets) or from borrowed money.
Operating activities
involves the day-to-day activities of producing and selling crops and livestock.
The Chart of Accounts
is a list of the accounts relevant to that particular business. It should be viewed as a Table of Contents for the ledger
The Balance Sheet
is a measure of financial position and it summarizes the financing and investing activities of the business. In a sense, it also includes the results of the operating activities because net income is incorporated into owner's equity. It examines the relative value of a farm's assets, liabilities, and equities. Assets represent the total value of the business. Liabilities represent the amount of money owed to debt holders. Equity represents the value of the assets the owners own free and clear of liabilities. This is also known as net worth. In a nutshell, the Balance Sheet compares what you owe (liabilities) to what you own (equity).
Assets are
items purchased by the farm business and expected to earn money for the farm. These are items the farms owns are are entitled to. Assets can be designated into two categories: current and non-current.
Where are transactions recorded?
journal
revenue- expenses=
net income(profit)
Once an accountant has recorded the journal entry, they need to update the appropriate accounts in the ledger. This is a process called
posting
There are eight types of inventory that are recognized by the FFSC and they can be subdivided into two broad classifications:
purchased inventory and raised inventory.
accounts are
records of the activities involving all financial statement items
Financial position
refers to a farm's financial state at a specified point in time. This usually means the relative value of a farm's assets, liabilities, and equities. (on balance sheet)
Financial performance
refers to how well a farm's uses their resources to earn a profit over a specified period of time. This usually means compares the level of revenues to the level of expenses. (on Income statement)
Revenue recognition and matching:
refers to timing of financial transactions and that all financial records need to be recorded.
The Statement of Owner Equity
reports on the financing activities of the owner (a.k.a. owner financing). This involves any investment the owners provide from their own resources (cash or personal assets) and cash the owners withdraw from the business for personal use, and how profits are managed. This also includes the net income from the business as it does belong to the owners. If they choose to keep some for personal use, it would be called an owner's withdrawal. If they choose to reinvest back the profits into the business, it would be called retained capital (or retained earnings).
Adjusted Trial Balance is
simply a trial balance that includes all of the accounts used by the farm business during the year, including the accounts needed for adjusting journal entries. The purpose remains the same: to see if there are any errors in the journal and/or ledger.
Full disclosure:
the economic entity provides all information necessary to verify and clarify the financial information.
Each account contains
the name of the account (Cash in this case) date for transactions, an explanation or description column, a debit column and a credit column (more on that soon) a balance column. Some include a reference column for journal entry reference.
Revenues be generated from
the sale of farm products and services crop insurance claims (if the farm insured their crop) from participating in certain government programs.
Equity represents
the value of the farm operation to the owners. It can be determined by subtracting liabilities from assets (Equity = Assets - Liabilities). Equity for farm accounting can be designated in two categories: valuation equity and retained capital. However, we're not going to deal with valuation equity in AGBS31.