vO9v 927v0 LOLI E VNU MINT IT ‘ ; * pg _ va i; — Fae agghow yas he ae tye . | a nage ws a ere a 0 » ¥ - b> - al * , ‘ rs : ee Stee > —— ’ 6 wn erin nititia* has i, ee ~ Ve . a a ome te oe eS re ee Te as SE Pees 7b ~~ * ~ “ - - . : > 7 ) Pe Sst io ta ae oF ee eR ENS Pa am —_—- prey og BY arte! ars ae en a ee eo 1} ape [3 Pet as: ‘) (S04 Patt fh - - i 1 \ as +, moar 1 F Lat 41% _ Sess FARM ACCOUNTING - Bye H* T* SCOVILL ASSISTANT PROFESSOR OF ACCOUNTANCY, UNIVERSITY OF ILLINOIS D. APPLETON AND COMPANY NEW YORK : LONDON 1921 PRINTED IN THE UNITED STATES OF AMERICA —— ra = hoa | 7 ef | ___ Digitized by the Intern t Archive 1 in 2007 with funding from x Microsoft Corporation i ; z 7 ig Ve = a = j ol ¥ a ps = op e) i 1% > Bes http://www.archive.org/details/farmaccountingOOscovu PREFACE From the literature on the subject, nearly all of which has been published during the last five or six years, one might be led to think there was something strange and uncommon about the keeping of records of business trans- actions on the farm. In the last several years, many rec- ord books and bulletins on farm bookkeeping and farm costs have been published. With very few exceptions these bulletins deal with the subject from a purely statis- tical point of view, without involving principles of double entry bookkeeping or the fundamentals of accounting the- ory. Very often they fail to provide for proper correla- tion and interpretation of results after they are obtained. These bulletins have proved to be of considerable value, however, in creating a desire on the part of the farmer for a better knowledge concerning his financial condition and progress. Perhaps the reason the subject is considered in the bulletins from the statistical viewpoint only is found in the fact that double entry bookkeeping has been treated so often in the past as a weird and difficult subject unrelated to anything else, requiring familiarity with a great many rules and the use of a great amount of time to operate. Naturally this would not appeal to the farmer returning from a hard day’s work. It has been the intention, herein, to present the princi- ples of bookkeeping from the common sense viewpoint vil viii | PREFACE only, using a minimum number of rules. In the applica- tion of these principles, agricultural operations and trans- actions are used in three general ways. 1. Showing the financial condition of the farm and the progress it has made without showing the source of loss or gain. 2. Showing the financial condition of the farm and the progress it has made, indicating by properly kept rec- ords why the condition is such; that is, indicating the source of loss or gain in a general way. 8. Showing the financial condition of the farm and the progress it has made, using subsidiary cost records for feed and labor, and distributing other expenses so as to show exact costs of production and thus indicate which branches of farming operations pay, and which do not pay on the farm in question. The arrangement of the subject matter is such that a student who has a working knowledge of bookkeeping might begin with Chapter V. One semester’s course of double entry bookkeeping should be sufficient to prepare one for the more specialized farm accounting chapters that follow. The treatment of some accounting principles herein is not in harmony with the author’s ideas of them as applied to commercial accounting. The different conditions, aims and facilities on the farm warrant the departure in most instances, For example, the titles “Loss and Gain Account” and “Loss and Gain Statement” are used instead of “Profit and Loss,” “Profit and Income,” “Trading and Profit and - PREFACE | ix Loss” or other terms in common use in commercial ac- counting. An expense is not a loss, but a means of mak- ing a profit. It is the profit-making agency of a business. Without expenses one cannot expect to make a _ profit. Nevertheless, this is considered as a distinction not essen- tial to a correct understanding of the interpretation of business transactions in the books of a farm; nor is it es- sential to the formation of correct conclusions to be drawn from the accounts. The term “Loss and Gain” is used as _one which conveys to the average mind the idea of expenses and earnings or income. It is also the one most in har- moriy with the entries in the account—expenses (losses so-called) to the left, incomes or gains to the right. The name of the account then, as written at the head of the allotted space, indicates on which side of the account an item is to appear—losses or expenses under the word Loss, and gains under the word Gain. Of course, the rules of debit and credit might be applied without any such assist- ance, but everything possible should be done to make book- keeping a matter of reasoning rather than a matter of remembering rules. The method of presentation of the principles of account- ing and the art of bookkeeping herein is somewhat unusual. In general, it could be applied in commercial accounting. It has been used by the author in lectures and note form for the past several years. Its use seems partly substan- tiated at least, as two or three elementary texts published during the last year seem to have used a slightly modified form of this method. It is especially applicable in farm accounting. Students of the latter subject ordinarily do x ; PREFACE not have available any higher courses in accountancy in which to study the philosophy or theory of accounts. For that reason, the theory and philosophy are developed along with the methods of analyzing, recording and interpreting transactions. | The logical arrangement of the subject matter in a text of this nature requires special consideration. A study of bookkeeping and accounting is confined to four big branches : 1. The business transactions and adjustments. 2. The accounts involved. 3. The books and records used. 4. The statements and analyses prepared. One might study the subject for years, but he would not reach beyond the four branches mentioned, In a sys- tematic study, it is not possible to study, first, all about the transactions, then all about the accounts, books and statements in the order mentioned. The four must be studied together, first the simple elements of each, and then the more elaborate elements. The use of this process ac- counts for some apparent repetitions in the subject matter which are much more apparent than real. The develop- ment has been along lines which seemed to be most natural and logical. Although the four elements of study mentioned should be codrdinated to a considerable degree, each one of the four is not considered of equal importance in farm ac- counting. In these pages, more emphasis is placed on how and why entries are made to interpret transactions or to make adjustments, and not so much on the forms PREFACE | xi of financial statements. The farmer, after keeping his own accounts, is able to find from the simple Loss and Gain account and the simple Statement of Resources and Liabilities, all the facts desired from financial statements. Any further analytical results can be prepared in the form of special analytical or statistical tables. In a commer- cial business, the financial statements occupy a more promi- nent place because they are largely for the use of people financially interested but who are not familiar with the daily transactions and the accounts. Such people need -more elaborate statements in order to assist them in form- ing opinions as to the progress and condition of the busi- ness. ! From a pedagogical viewpoint the principles of com- parison and correlation used in the development of prin- ciples herein should prove quite helpful. In all cases where there are two or more methods of per- forming a certain process the illustrations of these methods employ the same set of data. In this way it is plainly brought out that any differences in results, or form of re- sults, are caused by the difference in method rather than the difference in data. The author recently had occasion to examine a text on commercial arithmetic. It was no- ticed in the discussion of two ways of calculating interest that one set of data was used in illustrating one method and another set in illustrating the other method. As a result, the student trying to absorb the principles for the first time, very probably would not know whether the dif- ference in results was caused by the difference in method or in the original data. xii PREFACE Some attention is also given in these pages to a discus- sion of the interpretation of results. An intelligent in- terpretation of results, leading to constructive criticism, is one of the most important factors in the success of any accounting system. This interpretation and criticism is materially strengthened by the use of percentages and tabulated results in various forms. The use of mixed accounts and the Cash-journal are two principles advocated herein that should prove of ma- terial benefit to any one interested in recording farm trans- actions. They afford a simplicity of operation not equaled by the use of the more highly specialized accounts and books of original entry. The natural increase in live stock and the uncertainty of crop results from a given expendi- ture of raw materials and labor have no common counter- part in commercial accounting. They therefore require accounts to meet the conditions. Carefully prepared review questions on the subject- matter of the book are grouped by chapters after the Ap- pendices. They are inserted primarily as a guide to study. By following these questions one may be materially assisted in recognizing the essential points in each chapter. There are numerous Illustrative Problems following the Review Questions. These problems are carefully graded by chapters and have been prepared with the idea of af- fording practical application of the principles in connec- tion with each chapter. When used as a text, the problems for a given chapter should be worked immediately after completing a study of the chapter. Definitions are not presented as the primary basis for PREFACE xiii performing various accounting operations. The logical reason is brought out for each step taken. However, definitions or important statements of fact are presented occasionally as a means of summarizing logical conclusions. Such definitions or important statements of conclusion are shown in italics. It is quite common for a farmer to say that he has no time for keeping accounts. As economic conditions are causing more intensive farming, higher land values and higher rents, it will not be possible much longer to farm in the extensive fashion that has characterized United. States farming in the past. It will become necessary to plant those crops, or raise those animals, or use such fer- tilizer or rotation of crops as prove most valuable under the conditions. A knowledge of what pays best can be most accurately determined by keeping proper accounts. When economic conditions have so changed as to make it necessary to keep accounts on the farm, the farmer who says he doesn’t have time to keep them will be about as well off as if he told the elevator owner to destroy the grain check, as he didn’t have time to call for it. In either case he is undoubtedly not getting all that he should from the operation of the farm. The difference is that in one case he knows just how much he is losing (the amount of the grain check); in the other case he does not know how much he is losing. The changing economic conditions are very well illus- trated in a quotation from Dean Eugene Davenport! of 1 Annals of American Academy, Vol. XL, pp. 45-50. xiv PREFACE the College of Agriculture of the University of Illinois, part of which follows: “Agriculture has passed through two definite stages of development and is now entering upon a third. “The first stage was called the self-sufficing system. Each family produced enough to keep itself until the next harvest. “The second stage was called the money-making stage. It arose about the time of the Civil War, when some states became wealthy from the production of wheat. The West- ern States created wealthy farmers who bought land for $1 or $2 an acre, and robbed the soil of its elements to make money. This land is worth now from $100 to $250 per acre. This exhaustive money-making period caused the rise of the third period. . “The third stage is called the scientific stage. It is scientific as to the feeding of animals, fertilizing (replen- ishing) the soil, dairying, sanitation, marketing, manage- ment, organization. Chemistry was the first science to come to the aid of agriculture; economics is the latest. “Now, however, when the public domain is practically exhausted, competition for land will raise its price, food values must go up, for the farmer must realize income on his capital as well as on labor, and his business is gradu- ally assuming the form of other capitalized industries.” A feature of farm accounting that is often overlooked is that of dealing with the investment of money after it is earned. A discussion is given herein, of the ways of in- vesting in safe but profitable income-producing assets. This is considered as being of essential economic impor- PREFACE | - tance to the farmer and his community since the past has demonstrated that many farmers who made a profit from the soil did not know how to conserve nor properly utilize their newly earned resources. Other topics having a somewhat direct bearing on the business affairs of the farm are presented in more or less detailed manner, e.g., financing the farm, preparing the federal income tax schedule, borrowing under the Rural Credits Law, household accounts analyzed, calculation of interest, the use of common business papers and other points. It is not intended that the forms presented in this book shall be used without first understanding the principles back of their use. An intelligent use of the books and rec- ords described will only follow a careful study of the principles. Simplicity, clearness and accuracy constitute the framework upon which we have endeavored to construct farm accounts. For assistance in obtaining practical data for some of the problems, and for participation in intelligent and helpful discussions on farm accounts, I wish to express my appreciation of the work of Mr. F. A. Pearson of the Dairy Husbandry, and Professor W. F. Handschin and Mr. J. B. Andrews of the Animal Husbandry departments of the College of Agriculture of the University of Illinois. I appreciate, also, the able assistance rendered by my col- league, Mr. A. C. Littleton, in examining and offering suggestions on the manuscript. I LE my CHAPTER CONTENTS I. BOooKKEEPING AND BUSINESS TRANSACTIONS . Accounting and Bookkeeping; Books of Account; The Essentials of a Transaction; The Use of Ac- counting Information; Statement of Resources and Liabilities; Comparison of Statements; Loss and Gain Statement; Analysis of the Financial Statements ; Miastrative ebay sa Review Ques- tions. IT. Tuer Lepger The Importance of the “yea in Mastic ; Bookkeeping Abbreviations; Business Transac- tion; Value; Property; Capital; Account; Debits and Credits; Ledger; Accounts Illustrated ; Analy- sis of the Entries; An Account in Balance; No Subtractions in Accounts; Reasoning out Debits and Credits; Interpretation of Accounts; Debit and Credit Balances; Statements Prepared from Ledger Accounts; Illustrative Problems; Review Questions. III. Svusprvision or Caprra, Account : a . Reason for Subdividing Capital Account; A ‘Coni: parison of the Two Methods; Expense hod Income Accounts; Nominal Asscotie: Loss and Gain Ac- count ; patie or Closing Entries; Closing Loss and Gain into Proprietor’s Capital; Comparison of Results; Balance Brought Down; Classification of Accounts; Illustrative Problems; Review Ques- tions. xvii PAGE 13 38 XViil CONTENTS CHAPTER TV. THe Terau BALANCE . ; A * ‘ ; ; Explanation of Trial Balance Terms; Purpose of the Trial Balance; Trial Balance Proves What? Time of Taking a Trial Balance; Procedure in Taking a Trial Balance; Finding the Balance of an Account; Listing the Balance in the Trial Bal- ance; Adding and Proving the Trial Balance; Trial Balance Details Illustrated; Trial Balance Before and After Closing; Preparation of State- ments from Trial Balance; Relation between Trial Balance and Financial Statements; Two Methods" of Preparing Financial Statements; Illustrative Problems; Review Questions. V. Booxs or OriaginaL ENTRY . ‘ 5 “ ‘ The Ledger as an Only Book of Entry; Five Rea- sons for Using Books of Original Entry; Posting; Characteristics of Specifie Books of Original En- try; Simple Journal; Simple Journal Entries Il- lustrated; Ledger Accounts Posted from Journal Entries; Posting from Simple Journal; Simple Cash Book; Posting from Simple Cash Book; The Cash Journal; Posting from the Cash Journal; Optional Form for Cash Journal; Preventing and Finding Errors; Precautions for Preventing Er- rors; Common Types of Errors; Rules for Find- ing Errors; Correcting Errors; Finding Errors in the Cash Balance; Reconciling the Cheeking Ac- count; Errors on Cheek Stubs; Illustrative Prob- lems; Review Questions. VI. Specran Accounts AND ENTRIES .- > P ‘ Hired Man; Notes Receivable; Notes Payable; Notes Receivable and Payable Distinguished; Land and Buildings; Land; Buildings; Mixed Ae- counts in a Trading Business; Mixed Accounts on the Farm; Horses; Swine; Cattle; Poultry; _——_—— CONTENTS xix CHAPTER | PAGE Sheep; Equipment; Farm Crops; Household; La- bor; Board of Laborers; Labor of the Farmer’s _ Family; Feed; Fertilizer; Inventories; Inventory Entries in Accounts; Natural Increase in- Live- stock; Taking and Recording the Inventory ; Livestock Inventory in Accounts; Miscellaneous Supplies Inventory in Accounts; Depreciation ; Recording Depreciation in Accounts; Diminishing Value and Straight Line Depreciation; Building Depreciation; General Theory of Depreciation : Closing Journal Entry; Illustrative Problems ; Review Questions. VII. Sprctan Accounts ann Enrrtes (Continued) . 175 Fair Exhibits; Consignments; Auctions; Fire Loss; Death of Livestock; Market Gardening; Crops Sold Under Contract ; Orchards; Woodland ; Bees; Partnership; Opening Entry of a Partner- ship; Closing Entries of a Partnership; Interest on Partner’s Net Capital; Partners’ Drawing Ac- counts; Partnership Legal Difficulties; Dissolution of Partnership; Share Rent; Effect of Share Rental on Accounts; Inventory Record in Share Rental; Cash Rent; Operation of More Than One Farm; Form of Increased or Decreased Wealth; Profit as Farmer and as Individual; Illustrative Problems; Review Questions. VIII. Cosr Accounting . ; J ‘ F . 218 Definition; Cost and General Accounting Com- pared; Use of Cost Data; Purpose of a Cost Sys- tem; Finding Profit of Each Productive Element; Basis of Constructive Criticism; Fixing Prices, Theoretically; General Scheme of Operation; La- bor Records; Monthly Labor Record; Yearly La- bor Record; Debits and Credits in Labor Record; Daily Labor Record; Hourly Cost of Labor; XX. CHAPTER CONTENTS Horse Labor Record; Tractor Hours; Exchange Labor Account; Exchange Labor Balance; Re- cording Exchange Labor; Exchange Labor for Horses; Feed Record; Debits and Credits in Feed Record; Review Questions. IX. Cost AccountING (Continued) The Farm Plot; Field Accounts—General ; Field Accounts—Contents; Operation of Field Ac- counts; Operation of Crop Accounts; Silage Ac- count; Fodder; Seed Account; The Household and Farm Products; Milk, Eggs; Garden; Pasture; By-Products; Rent Distribution; Equipment Ex- pense; Work Horses and Other Horses; Deferred Charges; Manure; Extraordinary Losses and Gains; Interest as an Element of Cost; Labor In- come and Capital Income; Interest on Land; In- terest on Buildings; Rent versus Interest; Interest on Mortgaged Property; Interest on Livestock; Interest on Working Capital; The Process of Clos- ing; Interest and General Expense; General Plan of Closing; Detailed Procedure in Closing; Modi- fications of Cost System; After the Books are Closed; Illustrative Problems; Review Questions. X. INTERPRETATION OF Cost ACCOUNTS . Importance of Correct Interpretation ; takes In- comes of Landlord Operators; Incomes Received by Farm Tenants; Incomes Received by Absentee Landlords; Variation in the Profits of Absentee Landlords; Meaning of Cost; Meaning of Profit; Reading a Loss and Gain Account; Analysis and Comparison of Results; Comparative Analysis of Crop Account; Preparation of the Comparative Analysis; Comparison of Several Crops; Com- parative Crop Production and Costs; Compara- tive Production of All Crops; Comparison of CONTENTS xxi CHAPTER PAGER Fields; Comparison of Livestock; Preparation of Livestock Analysis; Analysis of Animal Products ; Accounts as a Guide to Management; Altering Present Policies; A Guide in Handling Labor; Tests of Labor and Horse Labor Efficiency ; Mis- cellaneous Questions of Policy; Initiating New Projects; Illustrative Problems; Review Ques- tions. APPENDIX A. Prices AND Rates Usep on THE Faru - 389 Interdepartmental Transactions; Departmental Cost Method Used; Fictitious Profits; Pricing In- ventories; Pricing Commodities Fed to Live- stock; Livestock Kept for Profit; Livestock Kept for Work; Pricing Farm Products Consumed by Household; Rate of Interest on Investment; Cal- culation of Wages; Feed Record Calculations. BIBLIOGRAPHY : eS Classified List of Books and Bulletins on Subjects Allied to Farm Accounting. FARM ACCOUNTING CHAPTER I BOOKKEEPING AND BUSINESS TRANSACTIONS Accounting and Bookkeeping.—The art of classifying and recording business transactions and facts systemati- cally is called bookkeeping. Accounting is that branch of practical science which treats of the methods of classify- ing and recording business transactions so that the facts they exhibit shall be shown in their proper relations. It is seen from the definitions that bookkeeping and ac- counting deal with the interpretation of business transac- tions. Books of Account.—Business transactions interpreted according to accounting principles are recorded in a per- manent written form in books of account. Such books are usually ruled with horizontal lines in blue; and with vertical lines in blue or red. The vertical rulings are made to provide columns for recording values of transactions in dollars and cents. In interpreting and recording a transaction, it is not necessary that all the details be shown. It is expected, however, that all the essential points will be shown. For example, Mr. Arnold buys a horse of Mr. White, and pays him $150 in eash. This is a business transaction. It might be that the completion of the sale involves several offers and counter offers, and several affirmative or negative state- 1 1) eo ae 2 FARM ACCOUNTING ments concerning the qualities of the horse. From the bookkeeping and accounting point of view what are the essentials and what are the non-essentials of this transac- tion? Which facts concerning the transaction are to be interpreted and which are not to be interpreted in the books of account of Mr. Arnold? The Essentials of a Transaction.—One of the most es- sential elements of the transaction in question is the value, in this case $150. Another is the form in which the value was measured, namely, horse and cash. In a correct in- terpretation of the transaction mentioned, then, we should ‘at least show that cash and a horse were involved to the extent of $150. We should record the date on which the transaction occurred. We might find it desirable also to show the name of Mr. White, and also the specific name of the horse for future reference. Our interpretation on the books of account need not state anything concerning the offers and counter offers nor the statements made concerning the qualities of the animal. They are con- sidered as non-essentials for the purpose of bookkeeping records. The exact form that this interpretation of the transac- tion should assume on the books of account will be discussed when we have investigated the use to be made of the trans- actions after they are recorded. The Use of Accounting Information.—If a man could remember all of his business transactions during a year and the values concerned, he would not need to keep any written record of them, unless it might be for the bene- fit of those who succeeded him, or for comparison of one year’s results with another. It is quite natural, then, from our knowledge of the memory possessed by the average man, to assume that one who indulges in business transactions should keep a rec- ord of them, if he wishes to classify them in any way or BOOKKEEPING—BUSINESS TRANSACTIONS 38 find the aggregate of his transactions for any particular purpose. The most general reasons for one’s wanting ag- gregate figures concerning his business are: 1. To show his true financial worth at any time. 2. To show whether he is the possessor of more or less wealth now than at some definite former time, and what form this increase or decrease assumes. 3. To show what elements have contributed to this in- crease or decrease in wealth. ? Statement of Resources and Liabilities—The aggregate of business transactions that shows the financial worth on a given date is called a Statement of Resources and Liabilities or Balance Sheet. It contains a list of the Resources and a list of the Liabilities with the money values of each indicated. A resource is anything of value owned by or owing to a given indwidual. It is better defined as property or right to property. For example, Mr. Arnold’s resources of $5000 might consist of cash $1000, horses $1600, cattle $1100, and equipment valued at $800, all of which would be classed as property, and a debt owing to him by Mr. Bell for $500, which might be called Arnold’s right to property in Bell’s possession. At law this $500 owing from Bell is considered as Personal property of the type known as choses (things) in action. Resources are often called As- sets. Some attempt has been made to distinguish between the two terms, but they may be used interchangeably. A liability is an amount which is owed to someone. It might be called the right of someone else to property of the indwidual whose records show the liability. For example, Mr. Arnold’s liabilities of $1000 might consist of a mort- gage on the equipment for $700 and a note payable to the bank for $300, which Mr. Arnold is expected to pay in 30 days. These are known as mortgages payable and ee Oe a le 4 - FARM ACCOUNTING notes payable respectively. Both of these represent the right of someone else to property of Mr. Arnold. The difference between the amounts of the resources and liabilities is the finamcial worth or net worth of the tndi- vidwal or organized business. Net Worth is sometimes bet- ter known as Capital or Net Capital. In the case just cited, Mr. Arnold with resources of $5000 and liabilities of $1000 would have a net worth or capital of $4000 ($5000—1000). His statement of Resources and Liabilities would appear as in Illustration 1 at the time his resources and liabilities bore the values mentioned. ILLUSTRATION 1 STATEMENT OF RESOURCES AND LIABILITIES Frepsruary 29, 1916—Mr. ArRNoLp Resources CE EEE. Sere ae eye, $1,000 Geme by Mr. Bell... occ.ccies cas consvvice cscs seca 500 I si a9.» 5 8,7 Rot ehentrec ene: 8 o's 8'9 ass 4 ee 1,600 OOM ocnNO% o diwdm canta Eee 0 ob bieehs bRa eh 6 ne r 1 ,100 SPURNED oiccuc.. a casera ees vinte te eeeeeececeeseeess 800 Titel TOGO, Co eiico!5) polo ds ic ca on npn aaeeee $5,000 Liabilities Macrame Davyable. =. 6). os0% fetes scans: oc Une $700 UO DOGRINO Ss 2060s sok vee cpa es dea eae 300 Lotal LiahiiGes .... 6635 cs a occcice st came 1,000 Net Resources. «... 5 25.siebe ness $4,000 (Net Worth or Mr. Arnold’s Net Capital) . The statement is sometimes presented in another form, as in Illustration 2. oe Resources BOOBUlE Sk Ati a,0,0 ahd Equipment........... Resources $1,000 500 1,600 1,100 800 $5,000 —— ILLUSTRATION 2 STATEMENT OF RESOURCES AND LIABILITIES Frspruary 29, 1916—Mr. ARNOLD Liabilities Mortgage payable. ... Note payable........ Net Capital (or Mr. Arnold’s Capital)... ILLUSTRATION 3 STATEMENT OF RESOURCES AND LIABILITIES PREPARED FROM APPRAISAL, FEBRUARY, 28, 1917—Mr. ARNOLD Liabilities To outsiders (none) Arnold’s capital a/c... BOOKKEEPING—BUSINESS TRANSACTIONS 5 Comparison of Statements.—The second of the three rea- sons for wanting aggregate figures, as already enumerated on page 3, can be briefly illustrated by assuming that a Statement of Resources and Liabilities as compiled from Mr. Arnold’s records, appeared one year later, February 28, 1917, as in Illustration 3. $5,000 - $5,000 We see from a comparison of the net capital of Mr. “rnold February 29, 1916, with his net capital February 6 FARM ACCOUNTING 28, 1917, as shown in Illustrations 2 and 3, that he is worth $1000 more on the latter date than on the former. Upon closer examination of the two statements we no- tice that the resources are exactly the same in every de- tail, while the liabilities of $1000 at February 29, 1916, do not exist at February 28, 1917. Evidently, Mr. Arnold during the year has paid off the $700 mortgage on the equipment and the $300 loan at the bank. How, then, do his resources remain the same? He probably paid the two obligations in cash. Why, then, is the cash balance the same at the end of the second year as it is at the end of the first? Is it not probably due to the fact that Mr. Arnold, as a result of his farming operations during the year, received $1000 in cash over and above his expendi- tures for labor and other items, which $1000 he used to pay off his existing liabilities amounting to $1000? In other words, did he not make $1000 profit? This is the most natural assumption as to what the transactions were which resulted in the decrease of the liabilities at February 28, 1917, compared with February 29, 1916, without caus- ing a change in the resources at the two dates mentioned. A change in the resources occurred during the year, per- haps several times, but the statement of resources and liabilities does not show the changes or progress during the year. It shows only the conditions at the close of a year. Comparing it with the close of the preceding year we see that the Net Worth is $1000 greater. If we are to form a general idea of what changes took place during the year to cause the $1000 increase in Net Worth, as reflected in the Statement of Resources and Liabilities, it will be necessary to have further details concerning the operation of Mr. Arnold’s business. This brings us to the third reason, mentioned for want- ing certain aggregate results of the year’s operations BOOKKEEPING—BUSINESS TRANSACTIONS 7 shown in money values, namely to show what elements have contributed to this increase or decrease in wealth. Loss and Gain Statement.—If Mr. Arnold had kept records in only a comparatively brief form, we might be _able to present some aggregate figures to show how the $1000 increase arose. We should prepare for this purpose a Loss and Gain Statement from the figures at our dis- posal in Mr. Arnold’s records. Such a statement would show the expenses incurred in running the farm and the incomes derived from the sale of farm products. We shall assume in this case, that Mr. Arnold’s records con- tained sufficient information. for the preparation of a Loss and Gain Statement as in Illustration 4. The State- ment of Resources and Lnabilities and the Loss and Gain Statement when used collectively are known as Financial Statements. ILLUSTRATION 4 Loss AND GAIN STATEMENT PREPARED FROM IMAGINARY DATA FOR THE YEAR ENDING FEBRUARY 28, 1917—Mr. ARNOLD Expenses and Losses Incomes and Gains SEES Nee $400 Milk Sold........... $300 ere 300 Corn Sold........... 1,200 General expenses...... we. "Bats Sold 00225 3%. 400 Balance, gainfor the yr. 1,000 Miscellaneous income. 100 $2,000 $2,000 Analysis of the Financial Statements.—The brief an- alytical statement presented in Illustration 4 shows, in a general way, how Mr. Arnold was enabled to pay off his mortgage and bank loan amounting to $1000, without per- manently decreasing his resources to do it. He sold milk for $300, corn for $1200, oats for $400, and miscellaneous products (probably fruit and garden truck) for $100, mak- 8 FARM ACCOUNTING ing a total of $2000. His expenses were, for rent, $400, for labor $300, and general expenses $300, a total of $1000. If he received cash for all the products sold, and paid cash for all the expenses, it would mean that he received $2000 during the year from farming operations which cost him only $1000. The other $1000 represents profit and was used to pay off his mortgage and bank loan. The Loss and Gain Statement discussed above, shows the elements contributing to the increase in wealth only in a very general way. A more detailed treatment of this is taken up in connection with the subject of Cost Account- ing. Having examined the Statement of Resources and Lia- bilities, and compared one year’s statement with another; and having observed the relation of the Loss and Gain Statement to them, we have seen in a general way what the object is in keeping records of business transactions. Briefly stated, the object in keeping books of account is to furnish the essential facts from which one can find the financial condition of the business at any gwen date, and the progress of the business over a given period of time. The Statement of Resources and Liabilities shows the con- dition, while the Loss and Gain Statement shows the progress. Remembering that these statements are to present facts and results in the aggregate, at least once a year (or oft- ener if desired), we shall try to find out how the records are kept from day to day so that this valuable information may be readily obtainable in a good form that is easily understood. There are two essential points to bear in mind in keep- ing the records during the year: 1. Classification of the transactions. (In what detail are the transactions to be analyzed, BOOKKEEPING—BUSINESS TRANSACTIONS 9 and what information is to be mreorded. concerning each ?) 2. Method of recording transactions. (How is the information to be recorded so that it can be condensed as much as possible and still be specific and easily utilized in preparing the annual state- ments ?) The second of these points (the method of recording transactions) is the one that involves more of the art of bookkeeping and science of accounting. It is discussed in the next chapter on Ledger Accounts, and in the chap- ter on Books of Original Entry. Briefly, the first point, the detail of analysis of trans- actions, involves a decision as to what information is wanted at the close of the year or other time. We might decide that in our Statement of Resources and Liabilities we want to show the value of binders, mowers, plows and other implements separately instead of grouping all of them under the head ‘‘equipment.’’ If we do, it is only necessary so to keep the records throughout the year that this detailed information will be available. Likewise if - we want to show the income from sale of oats and corn separately in the Loss and Gain Statement, we can do so by keeping our records during the year with that idea in mind. ILLUSTRATIVE PROBLEMS The following problems should be prepared on ledger paper in neat form, using Illustration 2 as a guide for Statements of Resources and Liabilities: 1. Mr. Black, on March 1, 1916, has resources as follows: Cash $600, swine $700, poultry $100, horses $1200, equipment $400, and a promissory note signed by Mr. Peck for $200. His only liability is $60 owing to Mr. Thomas, a neighbor who loaned it without security. 10 FARM ACCOUNTING Prepare a Statement of Resources and Liabilities for Mr. Black as of March 1, 1916. 2. On February 28, 1917, Mr. Black’s resources are as follows: Cash $1000, swine $700, poultry $100, horses $1200, equipment $400, and a promissory note signed by Mr. Peck for $200. There are no liabilities to outsiders. Prepare a Statement of Resources and Liabilities for Mr. Black as of February 28, 1917. 3. Referring to problems 1 and 2 above, (a) What was Mr. Black’s net capital or net worth at the beginning of the year, March 1, 1916? (b) How much was it at the close of the year, February 28, 1917? (c) How much better off was Mr. Black’s business at the close of the year than at the beginning? (d) What resources were valued at the same figure at the close as at the beginning? (e) What resources were valued at a ele figure at the close than at the beginning of the year? (f) What change was there in liabilities at the close com- pared with the beginning of the year? (g) State what general conditions or activities during the year probably caused these changes in resources and liabilities. 4. Mr. Weld on March 1, 1916, values his resources as fol- lows: Cash $1000, cattle $900, horses $1400, sheep $600, equip- ment $500, buildings $5000, land $10,000. His liabilities consist only of a mortgage on the land of $1000. Prepare a Statement of Resources and Liabilities for Mr. Weld as of March 1, 1916. 5. On February 28, 1917, Mr. Weld’s resources are as follows: Cash $1000, cattle $900, horses $1400, sheep $600, equipment $800, buildings $5000, land $10,000. He has no liabilities to out- siders. Prepare a Statement of Resources and Liabilities for Mr. Weld as of February 28, 1917. 6. Referring to problems 4 and 5 above, answer the questions concerning Mr. Weld’s business that were asked concerning Mr. Black’s business in problem 3 above. 7 BOOKKEEPING—BUSINESS TRANSACTIONS 11 7. Mr. Smith on March 1, 1916, has property with the follow- ing values: Cash $1200, swine $600, horses $1800, cattle $1000, poultry $60, equipment $700, buildings $4000, and land $12,000. He owes $100 on a promissory note at the bank. Prepare a Statement of Resources and Liabilities for Mr. Smith as of March 1, 1916. 8. On February 28, 1917, Mr. Smith’s resources consist of the following: Cash $1400, swine $600, horses $1800, cattle $1000, poultry $60, equipment $1000, buildings $4000, and land $15,000. His only. liability is a mortgage on real estate of $2000. Prepare a Statement of Resources and Liabilities for Mr. Smith as of February 28, 1917. 9. Referring to problems 7 and 8 above, answer the questions eoncerning Mr. Smith’s business that were asked concerning Mr. Black’s business in problem 3 above. 10. Mr. White finds that his income for the year ending Febru- ary 28, 1917, was derived from the following sources: sale of corn $1400, sale of oats $900, sale of swine $700, miscellaneous sales $200. His expenses were for labor $400, rent $500, general items $700. | (a) Prepare a Loss and Gain Statement for Mr. White’s business for the year ended February 28, 1917. (b) Is Mr. White’s net capital greater or less than at the beginning of the year? How much? 11. The Mr. Smith mentioned in problems 7 and 8 above finds that his income for the year ended February 28, 1917, was derived from the following sources: sale of wheat $700, sale of swine $200, _ sale of milk products $300, sale of corn $800, sale of timothy hay _ $100, sale of fruit and garden truck $100, sale of oats $600. His expenses were for labor $500, interest on mortgage $60, gen- eral items, $640. _ Prepare a Loss and Gain Statement for Mr. Smith for the year ended February 28, 1917. _ 12. Referring to problem 11 above, (a) Is Mr. Smith’s net capital greater or less than at the beginning of the year? (b) How much? (¢) What was Mr. Smith’s total income? 12 ei FARM ACCOUNTING (d) Assuming that this figure represents the amount of eash he received from the sale of the products mentioned, state how that cash was probably used before the close of the year. For this purpose refer to the figures in problems 7 and 8 which indicate that he had only $200 more cash at the close than at the beginning. REVIEW QUESTIONS 1. What is bookkeeping? 2. What is accounting? 3. What are three of the essentials of a business transaction, from a bookkeeping viewpoint? 4. Name three general reasons for wanting aggregate figures concerning business financial operations. 5. What is a Resource? 6. What is a Liability? 7. What is Net Worth? 8. In general what does a Statement of Resources and Lia- bilities contain? In what two general forms may it be prepared? 9. Explain how Mr. Arnold ean pay off Liabilities of $1000 during the year and yet have his Resources at the close of the year valued at the same figure as at the beginning. 10. What is the purpose of a Loss and Gain Statement? What is its relation to a Statement of Resources and Liabili- ties? 11. What is it necessary to do during the year in order to have information available at the close of the year for a Loss and Gain Statement and a Statement of Resources and Liabilities? 12. What two main points are to be considered in keeping a record of business transactions during a year? 13. Why are the Statements illustrated in this chapter shown with the year ending February 28, rather than December 31? CHAPTER II - THE LEDGER The Importance of the Ledger in Accounting.—After it is decided how many details are wanted in the financial statements at the close of the year, or how much special information might be wanted during the year, there might be one of several methods chosen by which to record the transactions that affect the year’s results. They might be recorded: 1. In narrative or diary form without the use of techni- cal bookkeeping abbreviations. 2. Directly in the ledger accounts involved. 3. In a journal, cash book or some other book of original entry, from which they would be posted to the ledger ac- counts. The third method is the one used in practice. It is dis- cussed in the chapter dealing with books of original entry. The second method is taken up later in this chapter, not because of its practical nature (although it might be used where transactions are involved), but beeause of the opportunity it affords for an explanation of debits and credits, capital and income, and a general discussion of accounts which are the basic elements in bookkeeping or accounting. With the use of the journal and cash book, as mentioned under method 3, the ledger accounts are the final resting places of all data collected. All data for _ subsequent use in finding the condition or progress of the business are taken from the ledger. In other words, all essential information goes into the ledger, and all auxiliary 13 14 FARM ACCOUNTING tabulations and statements are prepared glean 4 from the ledger. Books could be kept, transactions recorded, financial statements prepared, constructive criticisms made concern- ing a business, and in fact all essential bookkeeping pur- poses served from the proprietor’s viewpoint without the use of any other book than a ledger. . Accordingly the ledger is used at this time because of the opportunity it affords for presenting the essential prin- ciples and scope of bookkeeping without the use of un- necessary details. The first method of recording business events, which would show the transactions in narrative form as they took place from time to time, might present the informa- tion in some such unscientific way as this, using Mr. Ar- nold’s transactions as summarized on pages 4 and 5. March 1, 1916, I (Mr. Arnold) have $1000 in the bank; Mr. Bell owes me $500; my 12 head of horses are worth $1600; my 20 head of cattle are worth $1100; the equipment is worth © $800; I owe $700 on a mortgage held by Wade & Co., on my equipment; I also owe $300 to the bank on my 90 day note. March 30, paid $300 to bank to redeem note and paid $6 interest. March 31, paid $30 to hired man; and paid $20 for general expenses. April 16, paid $60 for insurance and taxes; and received $40 check for milk sold to creamery. April 30, paid $30 to hired man for April. May 16, received a $60 check for milk sold. May 20, paid $10 for sundry items in town. May 31, paid $30 to the hired man for May. June 16, received a $65 milk check. June 28, sold some fruit and garden truck for $20. June 30, paid hired man $30. July 16, received milk check for $50. July 31, paid for labor, two men, $60. THE LEDGER 15 August 16, received milk check $20. August 18, sold oats for $400. August 31, paid $30 for labor. September 10, paid for general expenses during threshing sea- son, $25. September 16, received milk check $25 and paid $40 for general expenses. September 30, paid $30 for labor for September. October 7, sold some garden truck and fruit for $60. October 16, received milk check, $25. October 31, paid $30 for labor in October and paid $25 for gen- eral expenses. November 16, received milk check for $15. November 18, sold garden truck for $20 cash. November 30, paid $30 for labor in November. December 6, sold corn for $12 cash. \ December 10, paid off the $700 mortgage to Wade and Co., and $42 interest. December 20, paid for sundry items $32. January 31, 1917, paid $20 for sundry items in January. February 20, paid $20 for sundry items in February. February 21, paid rent for year $400. We might say that the notations made above concern- ing the business transactions of Mr. Arnold constituted his record for the year, from which he could make his principal statements, showing his Resources and Liabili- ties and Losses or Gains. It is true that he could take the figures given and pre- pare the statements. In order to do that, however, it would be necessary to perform certain processes of addition and subtraction, which would follow a separation of the trans actions into groups. Bookkeeping Abbreviations.—Just what groups should be formed and what titles these groups should bear are points that involve the principles of bookkeeping and ac- counting. 16 FARM ACCOUNTING The recording of the transactions named above, and in fact the recording of any business transactions accord- ing to bookkeeping methods, involves a knowledge of the abbreviations used in bookkeeping. 3 A baseball game is reported for a newspaper by a pres- entation of the box score. The box score is merely an ab- breviated way of stating the essential facts in the ball game. Essential, here, refers to those facts that are most likely to be used for reference in the future in compiling fielding and batting averages. One cannot readily inter- pret the essential features of the ball game from the box score, unless he is familiar with the abbreviations used in showing the number of hits, runs, errors, assists, and put- outs. We are confronted every day with the use of abbrevia- tions in some way or other for the purpose of presenting facts in a brief but intelligible manner. They are used in the preparation of railroad time tables, market quota- tions, and other common ways. Bookkeeping abbreviations involve the systematic in- terpretation of business transactions in the books of ac- count. Such interpretation is founded on the fact that every business transaction has a double effect, which needs recording. For example, if Mr. Arnold pays cash for some horses, he decreases his property in the form of eash and increases it in the form of horses. The bookkeeping ab- breviations, then, must show this twofold effect, in order to present the facts properly. Before illustrating or discussing the bookkeeping ab- breviations, it is advisable to find out what is meant by some of the terms used in this connection. Business Transaction._A business transaction is @ negotiation between two or more persons which affects the value of the property of either or both. Usually some- thing of value is given by each party to the negotiation, THE LEDGER 17 but this is not necessary. If Mr. Arnold gives $10 to a beggar, it is a business transaction even though the beg- gar does not give anything of value in exchange for the money. Value.—Anything that has worth, purchasing power, or exchangeable utility is said to have value. Thus, prop- erty, uses and services have value. Uses are best repre- | sented in bookkeeping by interest on money. Services are best represented by wages or salaries earned. Property.— Anything that a person owns is his property. Legally, property is divided into two classes (1) real and (2) personal. Real property consists of real estate, includ- ing any attachments thereto, as buildings, fences, trees and crops which grow up from year to-year without re- planting. Personal property includes all other possessions of man. It is generally divided into two classes, (a) corporeal and (b) imcorporeal. The corporeal includes all movable, tangible property, while the incorporeal is best represented by a legal right to property, known as choses (things) in action. Thus when Mr. Bell owes Mr. Arnold $500, Mr. Arnold is said to possess personal property worth $500. His property in this case is not tangible. It is incorporeal. In bookkeeping, this type of incorporeal property is listed under the name of the individual who owes it, rather than under a_ general title of property or in- . corporeal property. Accounts Receivable is the gen- eral title given to such incorporeal property in books of account. CapitalCapital is the difference between the resources and the liabilities of an individual. In a business enter- prise capital is the difference between the resources and liabilities to those not owning the business. In other words, it is the property belonging to the owners of the business 18 FARM ACCOUNTING with no claims whatever against it. The economist defines capital as ‘‘wealth used in the further production of wealth.’’ He, therefore, considers all of the resources as capital regardless of the claims against them by outside parties. It is the common practice in bookkeeping to show the capital under various headings to signify the nature of ’ the property, horses, cattle, cash, etc. Under another head- ing, however, is shown the net total of all the capital. This latter heading is usually called the proprietor’s capital ac- count, meaning that it shows the capital invested by the proprietor or owner—the property which is available for his personal use after debts to all outside parties have been It should be borne in mind that the true capital of a business is its net resources. The capital account of the proprietor merely represents net capital in the aggre- gate. Account.—An account’ is the exhibit of the bookkeep- ing effects resulting from transactions involving a particu- lar person, thing, or class of things. The name of that person, thing, or class of things is written at the top of the account. Debits and Credits.—It is customary to divide the ac- count into two equal parts by means of a perpendicular line, the left hand part being known as the debit side and the right hand part as the credit side. All items on the debit side are known as debits and all items on the credit side as credits. ‘‘Debit’’ is used interchangeably with ‘é charge.”’ An account is not complete unless the date of each item is shown, together with such other data as conditions re- quire—such as the folios of pages from which the items are posted, and explanations of particulars bearing upon * Bentley’s “The Science of Accounts,” ee THE LEDGER 19 those items sufficient to make the entry clear. Illustra- tion 5 shows an account called Mr. Arnold’s Capital. Ledger.—The book in which the accounts of a business are kept ts called a ledger. The ledger is ruled in such a way as to permit the accounts to be shown according to the principles stated above. It is divided into two parts by a perpendicular line. A column in which to express values in dollars and cents is provided at the extreme right of each half of the page. Date columns, explanation col- umns and reference columns are also provided in the usual ledger page. One or more pages of the ledger may be re- served for each account; or more than one account may be placed on a single page. Entries in the ledger should be made in ink, the term ‘‘entry’’ meaning the recording of debits and credits for a transaction. Accounts Illustrated.—The point has now been reached where an illustration of some of the ledger accounts should be studied. The ledger accounts illustrated on the pages immediately following have been created from the series of transactions of Mr. Arnold given on pages 14 and 15. The accounts also illustrate some of the universal bookkeep- ing abbreviations in use, and illustrate the second of the three methods of recording transactions referred to at the beginning of this chapter, namely, recording them in the ledger accounts direct. Unless these abbreviations are studied and fixed logi- cally in mind one cannot expect to be able to create ledger accounts intelligently from business transactions. An ef- fort should be made to trace each transaction into the ac- counts, remembering that each one is shown in its twofold effect upon the values of the business. In other words, each transaction has an entry on the left side of one ac- count and on the right side of another account. The dates ean be used advantageously in tracing the transactions into the accounts. ILLUSTRATION 5 LepGer AccouNTs WITH PRopRIETOR’s CAPITAL, PROPERTY AND LIABILITIES Desir! Mr. Arnold’s Capital Crepitt 1916 1916 Mar. 30 General expense Mar. 1 Capital invested $4,000 (Interest).... $6] Apr. 16 Milk.......... 40 Mar. 31 Hired man’s labor 30} May 16 Milk.......... 60 Mar. 31 General expense... 20 | June 16 Milk.......... 65 Apr. 16 wesesion (Ins. and pe June 28 Fruit and Gar- BOR) od id oa dip May 20 General expense.. 10 Aug. 16 Milk.......... 20 May 31 Hired man’s labor 30 | aug 18 Oats.......... 400 June 30 Hired man’s labor 30 Sept. 16 Milk.......... 25 July 31 Hired man’s labor 60 Oct. 7 Garden truck Aug. 31 Hired man’s labor 30 and fruit..... 60 Sept. 10 General expense.. 25 | Oot, 16 Milk.......... 25 Sept. 16 Generalexpense.. 40 | Noy 16 Milk.......... 15 Sept. 30 Hired man’s labor 30 Nov. 18 Garden truck... 20 Oct. 31 Hired man’slabor 30 Des? 6 Com 1.200 Oct. 31Generalexpense.. 25| Nov. 30 Hired man’slabor 30 Dec. 10 General expense (Interest). .... 42 Dec. 20 General expense.. 32 1917 Jan. 31 General expense.. 20 Feb. 20 General expense.. 20 Feb. 21 Rent for year.... 400 Feb. 28 Bal. down, Net Capital....... 5,000 $6, $6, 1917 Mar. 1 Bal. brought OWL 5. .cle fa ws $5,000 1 The words “debit” and “credit’”’ are placed on the left and right sides of the account, respectively, for illustrative purposes. at the head of an account in this way. In practice they are seldom written THE LEDGER 21 DEBIT Cash CREDIT 1916 1916 Mar. 10Onhand...... $1,000 Mar. 30 Note pay..... $300 Apr. 16 Milk.......... 40 Mar. 30 Interest...... 6 May 16 Milk.......... 60 Mar. 31 Labor........ 30 June 16 Milk.......... 65 Mar. 31 General #..... 20 June 23 Fruit and Gar- Apr. 16 Ins. and Taxes. 60 den truck.... 20 Apr. 30 Labor........ 30 July 16 Milk.......... 50 May 20 General....... 10 Aug. 16 Milk.......... 20 May 31 Labor........ 30 Aug. 18 Oats.......... 400 June 30 Labor........ 30 Sept. 16 Milk....:..... 25 July 31 Labor........ 60 Oct. 7 Garden truck, | Aug. 31 Labor........ 30 aS 60 Sept. 10 General....... p25) met. 16. Malle)... se 25 Sept. 16 General....... 40 Nov. 16 Milk.......... 15 Sept. 30 Labor........ 30 Nov. 18 Garden truck. . 20 Oct. 31 Labor........ 30 mec, 6.Corn.:...s00 05 1,200 Oct. 31 General....... 25 Nov. 30 Labor. ....... 30 Dec. 10 Mortgage pay. 700 Dec. 10 Interest....... 42 Dec. 20 General....... 32 1917 Jan. 31 General....... 20 Feb. 20 General....... 20 Feb. 21 Rent.........: 400 Feb. 28 Bal. down (on hand)..... 1,000 $3,000 $3,000 1917 Mar. 1 Bal. on hand... $1,000 22 FARM ACCOUNTING Mr. Bell 1916 Mar. 1 Balance due... $500 Horses & 1916 Mar. 1 On hand (12). . $1,600 Cattle 1916 Mar. 1 On hand (20). . $1,100 Equipment 1916 Mar. 1Onhand...... $800 Mortgage Payable 1916 1916 Dec. 10 Cash paid..... $700 Mar. 1 Nat’l Implement — OB ewes $700 Notes Payable 1916 1916 Mar. 30 Cash paid..... $300 Mar. 1 First Nat’l Bk. (90 days)... $300 . THE LEDGER - 28 Analysis of the Entries—Without stating any conven- tional rules, it is essential that the entries in the accounts should be examined further and analyzed in such a way as to lead to the conclusion that they are made in accord- ance with some well defined customs, or principles. Taking up the first transaction presented on March 1, 1916, in Mr. Arnold’s narrative of events as given on pages 14 and 15, we find that Mr. Arnold invests cer- tain properties in the business. In deciding on a way of in- terpreting this transaction in the ledger, we must decide what accounts are affected, and in what way they are af- fected. Obviously, in this transaction, Mr. Arnold’s Capi- tal account is affected because he is contributing capital to the business. Each one of the property accounts would be affected in so far as they designate a specific kind of property invested. Also, the accounts representing lia- bilities to other parties would be involved, since they are considered in the determination of the original capital invested. In brief, this transaction gives rise to the opening entry for the purpose of opening a double entry set of books. It is called double entry because of the twofold effect of each transaction. This is illustrated in the following discussion of entries. The net amount of Mr. Arnold’s investment, $4000, is placed on the right or eredit side of his Capital account and is offset by the entries to the property and liability accounts which make up his investment. The item $1000 is placed on the left or debit side of Cash account, to show cash received into the business. On the left or debit side of Mr. Bell’s account is placed the item of $500 to indi- eate the investment of property which is really a legal right to $500 worth of the property of Mr. Bell. Mr. Bell owes the business $500. Horses, Cattle and Equip- ment accounts have $1600, $1100 and $800 respectively 24 FARM ACCOUNTING placed on the left or debit side to indicate specifie types of property received into the business. On the right hand. or credit side of Mortgage Payable and Notes Payable ac- counts are placed the items of $700 and $300 respectively, to indicate amounts owing by the business. It appears, then, that in opening a set of books, all the resources are placed on the left or debit side of the appro- priate ledger accounts and all liabilities on the right or credit side. The difference is credited to the capital ac- count of the proprietor. This last amount is really a lia- bility of the business to the owner, or the owner’s claim against the property of the business. The claim of the owner is, of course, a secondary claim to be settled after the others have been paid. It should be noticed that in the transaction, just dis- cussed, the sum of the amounts placed on the left or debit side of the various accounts is $5000 ($1000 Cash, $500 Mr. Bell, $1600 Horses, $1100 Cattle, $800 Equipment) and the sum of those placed on the credit side is $5000 ($4000 Ar- nold’s Capital, $700 Mortgage Payable and $300 Notes Pay- able). In other words, the sum of the debits resulting from the transaction is equal to the sum of the credits. This should be true of every transaction recorded in the books. The next transaction of Mr. Arnold’s as given on page 14 is the payment of $300 to redeem his note held by the bank and a payment of $6 for interest thereon. As for the $300 payment, it decreases a resource in the form of cash and decreases a liability in the form of notes payable. Ac- cordingly, the entries should involve these two accounts in such a way as to show a reduction of $300 in each. The bookkeeping form requires these to be made on the credit or right hand side of Cash account and on the left hand or debit side of Notes Payable account. (See pages 21 and 22.) If we were not required to conform to the universal THE LEDGER 25 bookkeeping abbreviations referred to previously, we might have this transaction appear in the two accounts as fol- lows: Cash 1916 Mar. 1Onhand...... $1,000 Mar. 30 Less paid on DGGE. c » ane 300 Balanceonhand.. $700 _ Notes Payable 1916 Mar. 1 First Nat’l Bk. (90 days)... $300 Mar. 30 Less redeemed in Ceauere us: 300 This method gives the same information that is given in the correct ledger accounts, namely, that after paying $300 to redeem the note, there is $700 in cash still in the business; and there is nothing owing on simple promis- sory? notes. However, the work involved in the method just illustrated is the chief objection to its use. It involves an addition or subtraction after each entry, with as many *A Mortgage payable is a promissory note secured by a mortgage. The liability is on the note rather than on the mortgage. They are shown in separate accounts for convenience, 26 FARM ACCOUNTING opportunities for errors in the operations. Under the cor- rect method of creating accounts, the deduction is expressed by placing the amount on the opposite side of the account. Immediately after making the correct entries for this trans- action, the two accounts involved would appear as follows: Cash 1916 ; 1916 Mar. 1Onhand...... $1,000 Mar. 30 Note payab Notes Payable 1916 1916 Mar. 30 Cash paid to re- Mar. 1 First Nat’l Bk. deem....... $300 (90 days)... $300 In this illustration the only items entered as a result of this transaction are the credit to Cash and the debit to Notes Payable, the others having been made on March re at the time of opening the books, No deductions are made on the face of the account. At the close of a month or year, or at some other special time the sum of the debit and the sum of the credit sides are found separately, and the difference between the two sums calculated in pencil to find the balance of the account. An Account in Balance.—In the last illustration above, the Notes Payable account having a debit and credit of equal amounts is said to be in balance. The horizontal lines are used to indicate that fact. No Subtractions in Accounts.—From the discussion of the accounts as brought out by this transaction, we can THE LEDGER an formulate the principle that subtractions are never made in ledger accounts in recording transactions. The effect of subtraction is obtained by adding the amount in ques- tion to the opposite side of the account. For that reason we can recognize as correct, only the last form shown above _ for the ledger accounts of cash and notes payable. In- stead of deducting the $300 cash paid from the debit side of the account it is added to the credit side, to show that _ the amount of cash in the business has been decreased by that amount. This is a type of one of the very essential abbreviations used in bookkeeping. | Reasoning Out Debits and Credits.—Referring again to the transactions of Mr. Arnold for March 30, shown on _ page 14, there is seen to be one involving the payment of interest. The $6 paid for the use of money, commonly ealled interest, is placed on the credit side of Cash account because it decreases the cash of the business. It does not reduce the amount of any account showing a liability of the business to outside parties, nor is it disbursed in ex- change for some other form of property. It is a plain case of a disbursement of cash that results in a decrease of the capital of the business. Therefore, the other ac- - count affected by this transaction is Mr. Arnold’s capital account. On which side of the capital account will this $6 be placed? We might say that since every transaction requires equal amounts to be placed on the debit and credit sides of the ledger, and since Cash account is credited in this case, then obviously the other account involved should be debited. This is good logic and leads to the cor- rect entry, but we should always be able to find a reason for such an entry from another point of view. In this ease, we debit Mr. Arnold’s Capital account with the $6 because, as previously stated, it is an item that reduces his capital. If it reduces his capital it is the function of bookkeeping to show his capital reduced in the ledger. 28 FARM ACCOUNTING His capital can be reduced in the ledger only by placing — the item on the left hand or debit side of the Capital ac- count. _ After making the complete entry for this $6 payment of interest, Mr. Arnold’s Capital account would appear as shown in Illustration 5 on page 20, with only two amounts in it, one debit and one credit. Cash account would have three amounts entered up to this time, one debit and two credits. The Capital account would have $4000 on the credit side entered at the time the ledger was opened, and $6 on the debit side. The Cash account would have $1000 on the debit side, the amount of eash in the busi- ness March 1; and two items on the credit side, $300 and $6 respectively. On March 31, Mr. Arnold’s narrative of events as stated on page 12 shows two transactions. He pays $30 for labor, and $20 for general expenses. These two classes of dis- bursement are usually considered as decreasing capital rather than changing its form, hence they require debits to Mr. Arnold’s Capital account. Cash account is credited for the $30 and $20 payments, because eash is decreased in amount as a result of the payments. Another type of transaction that requires analysis at this time is the one recorded under date of April 16, on page 14. It states that Mr. Arnold received a $40 check for milk sold to the creamery. This is regarded as an in- erease in the capital of Mr. Arnold, and is accordingly en- tered on the credit side of his Capital account. The pro- duction and sale of milk has caused Mr. Arnold to possess more wealth. Consequently, his Capital account is eredited to show the addition of $40 to his wealth. Cash account is debited with the $40 because the amount of cash in the business has been increased. A check is considered as cash in bookkeeping. We might proceed to take up each of the other trans- THE LEDGER 29 _ to finding the reason for interpreting them in the ledger kt | accounts as they are illustrated on pages 20-22. How- ' ever, the ones already discussed illustrate all the prin- ciples involved. With the exception of the $700 mortgage _ paid off on December 10th, all the remaining transactions involve either an increase in cash with a resulting increase _ of the Capital account, or a decrease in cash with a corre- _ sponding decrease in the Capital account. — _ Interpretation of Accounts.——From an examination of Mr. Arnold’s Capital account as shown on page 20, _we see that it shows $4000 net capital invested on Mar. 1, 1916. During the year it shows several additions to capital on the right side, aggregating $2000, and several _ deductions from capital on the left side, aggregating $1000. _ By a purely arithmetical process, then, we find that the capital at Mar. 1, 1917, is $5000 as shown by the account, or $1000 more than it was on Mar. 1, 1916. This increase of $1000 in net capital does not take the _ form of an increase in property, for all the property ac- eounts (Cash, Mr. Bell; Horses, Cattle and Equipment) _ show the same amounts on hand Mar. 1, 1917, as on Mar. — 1, 1916. It is represented by a decrease in liabilities. _ Mortgage Payable and Notes Payable have decreased dur- ing the year $700 and $300 respectively, a total of $1000. Since Mr. Arnold has just as much property on Mar. 1, 1917, as he had on Mar. 1, 1916, but owes $1000 less to other people, it is quite apparent that he is $1000 better off. This condition is reflected in his Capital account. We find, then, that this account fulfils the requirements of an account as previously defined, in that it is ‘‘an exhibit of the bookkeeping effects resulting from transactions involv- _ ing a particular thing.’’ The particular thing in this case is Mr. Arnold’s capital. ; Likewise, Cash, Horses and other accounts exhibit the Re Ft iT Siena re gE aN ee, ne OC ot ome — 80 FARM ACCOUNTING bookkeeping effects resulting from transactions involving cash, horses, etc., respectively. Debit and Credit Balances.—Before using the results of the ledger accounts it is necessary to find the balance of each one. The balance of an account is the difference between the sum of the debits and the sum of the credits. If the sum of the debits is greater than the sum of the credits, the ac- count is said to have a debit balance. If the sum of the credits is greater than the sum of the debits, the account is said to have a credit balance. If the sum of the two sides is equal, the account is in balance. Thus, on pages 20-22, Cash, Mr. Bell, Horses, Cattle and Equipment accounts have debit balances; Mr. Arnold’s Capital account has a credit balance, and Mortgages Pay- able and Notes Payable accounts are in balance. From a knowledge of the nature of resources, compared with the observation just made concerning balances of ac- counts, one can see that, in this case, all accounts repre- senting resources have debit balances, and those represent- ing liabilities (including liability to the proprietor) have credit balances. When accounts are in balance they do not represent either resources or liabilities. It can be stated as a rule, that all resources are represented by debit bal- ances in ledger accounts, but it is pointed out later that all debit balances are not resources. Likewise all liabili- ties are represented by credit balances in ledger accounts, but all credit balances are not liabilities. Up to the pres- ent time, however, all accounts considered have represented either resources or liabilities, including the Capital account. Statements Prepared from Ledger Accounts.—From those ledger accounts, then, we are able to prepare a State- ment of Resources and Liabilities, and a Loss and Gain Statement, as in Illustrations 6 and 7 respectively. THE LEDGER 31 It will be seen that the Statement of Resources and Liabilities is the same as the one that was assumed as being prepared from Mr. Arnold’s books in the discussion _ of the reason for keeping a record of business transactions. _ (See Illustration 3.) ILLUSTRATION 6 | §ratement or Resources AND LIABILITIES PREPARED FROM LepaEerR Accounts Frs. 28, 1917—Mr. ARNOLD (4 Resources Liabilities | Se $1,000.00 To outsiders (none) — Owing by Mr. Bell.. 500.00 Arnold’s Capital..... $5,000 .00 Mepenorses....-....2.... 1,600.00 mummattle......... 056. 1,100.00 Equipment......... 800 .00 $5,000.00 $5,000.00 Recalling that Arnold had $1000 in cash at the begin- _ ning of the year (see Illustration 2), the question arises "how, as it did then, ‘‘How can Mr. Arnold pay off $1000 j that he owes and still have the same amount of cash at the ' close of the year as he did at the beginning?’’ The answer is, that he did change his cash balance several times during _ the year, but that the increase in cash from sale of prod- | ucts was just enough to offset the decrease due to payments _for expenses, mortgage and note. | Likewise, Mr. Arnold changed his capital several times _ during the year, but the net result only is shown in the _ Statement of Resources and Liabilities. q | One must look to the Loss and Gain Statement of Illus- tration 7 to find out more about the changes in capital and the reasons therefor. $2 FARM ACCOUNTING ILLUSTRATION 7 Loss AND GAIN STATEMENT PREPARED FROM ANALYSIS OF CAPITAL ACCOUNT FOR THE YEAR ENDING Fes. 28, 1917—Mr. ARNOLD Expense and Losses Incomes and Gains NE dds 5h; ov )ehyze $400 .00 Milk sold........... $300 .00 RA ee 300.00 Corn sold........... 1,200 .00 General expenses.... 300.00 Osts e0ld.. ...ccaseere 400 .00 Balance, gain for year 1,000.00 Miscellaneous Inc.... 100.00 $2,000.00 $2,000 .00 This statement shows that Mr. Arnold made a net gain of $1000 during the year. Accordingly his capital is $1000 greater than at the beginning of the year. It has been seen that his cash balance is exactly the same as at the beginning of the year. These facts lead to a very im- portant conclusion, namely, a gain during a year does not necessarily mean an increase of cash on hand at the close of the year; a loss during a year does not necessarily mean a decrease of cash on hand at the close of the year. The question probably arises as to how we get the fig- ures shown in the Loss and Gain Statement above. These are obtained from an analysis of Mr. Arnold’s Capital account of Illustration 5. The items on the left side of the Loss and Gain Statement, with the exception of the $1000 balance, are obtained from the left side of the account. They represent decreases in capital. The items on the right side of the statement are obtained from the right side of the account. They represent increases in capital. For ex- ample, the $300 for milk sold as shown in the statement is obtained from the sum of the items on the right side of the Capital account, labeled ‘‘milk.’’ The sum of the items on the right side of the statement is $2000, representing gross income or gross increase in THE LEDGER 33 capital during the year. The sum of the first three items on the left side of the statement is $1000, representing ex- penses or decreases in capital during the year. The bal- ance, then, shows the net income, net profit or net gain and represents the net increase in capital during the year. This increase is verified by referring to Arnold’s capital account which shows $4000 capital Mareh 1, 1916, and $5000 on March 1,1 1917, an increase of $1000. ILLUSTRATIVE PROBLEMS 1. Mr. Allen has property valued at $5000 in cash, horses, cattle and equipment at the beginning of the year. He owes $1000 on a note at that time. At the close of the year his Cash, Horses, Cattle and Equipment accounts show exactly the same balances as at the beginning, but his note payable account is closed. (a) What was the balance of his Capital account at the be- ginning of the year? (b) At the close of the year? (c) What was his net gain during the year? | (d) If a gain results in an increase in capital, why do the _ property accounts not show an increase in value at the close of the year? 2. Using ordinary ledger paper, create accounts and the debits and credits necessary therein to interpret the following transac- tions in accordance with the bookkeeping abbreviations and prin- ciples learned up to the present time: March 1, 1916, George Woods starts keeping his accounts in a systematic way and accordingly values his possessions as fol- lows: Cash $600, owing by Thos. Carey $100, cattle $800, poul- try $200, swine $900, horses $1200, equipment $600, land $8000, buildings $5500. He owes $8000 on a mortgage note. *March 1 and February 28 are used interchangeably as occasion requires. The statements are prepared after all transactions are entered February 28, and before any are entered on March 1. 34 FARM ACCOUNTING April 1, Paid cash for labor $25. May 1, Paid $240 for six months’ interest on mortgage. May 6, Received $100 from Thos. Carey in settlement of his account. May 7, Sold eggs for $5 cash. May 8, Paid cash for labor $25. June 1, Paid cash for labor $25. : June 8, Paid for General Expense items $15, : June 10, Sold some fruit for cash $10. July 1, Sold some hay for $180 cash. July 3, Paid cash for labor $45. July 6, Paid $85 for some new equipment. July 21, Paid for General Expense items $25. Aug. 4, Paid eash for labor $60. Aug. 28, Received $500 cash for oats. Sept. 1, Paid cash for labor $50. Sept. 6, Received $25 from sale of fruit and vegetables. Sept. 20, Sold cabbage for $400 cash. Oct. 1, Paid eash for labor $25. Nov. 1, Paid eash for labor $25. Nov. 1, Paid for General Expense items $30. Nov. 1, Sold all the swine for $900. Nov. 1, Paid $240 for six months’ interest on mortgage loan. Nov. 1, Paid $1800 as part payment on mortgage note. Nov. 28, Sold some corn for $700 cash. Dec. 1, Paid cash for labor $30. Jan. 3, 1917, Paid for General Expense items $35. Feb. 15, Paid for taxes $80. Feb. 21, Paid for fire insurance* premiums $20. 3. From the ledger accounts created in problem 2 above, pre- pare a Statement of Resources and Liabilities, as of February 28, 1917; and a Loss and Gain Statement for the year ended February 28, 1917. *When a premium is paid on a fire insurance policy, only the amount of the premium enters into the accounts. The face of the policy, the amount collectible in ease of fire, does not affect the accounts until a loss occurs. For such a transaction see ‘‘ Fire Loss,’” Chapter VII, THE LEDGER ? 35 Note to Instructor—Problems 2 and 3 above should be pre- served and returned to students after they have worked problems 1 and 2 at close of Chapter ITI. (See (e) Dlustrative Problem 2, Chapter ITI.) 4, Using ledger paper create accounts and the debits and credits necessary to interpret the following transactions in ac- cordance with the bookkeeping abbreviations and principles learned up to the present time: March 1, 1916, Harry Mansfield began farming operations with investment as follows: Cash at the farm $30, cash in bank $1320, 2 horses $400, 3 head of cattle $120, equipment $230. He owes his father, E. A. Mansfield, $700 on a promissory note. May 20, Drew $50 out of the bank. May 28, Paid $35 for labor. . May 31, Paid $16 for General Expense items. June 18, Sold fruit for $10 eash. June 30, Sold some hay for $160 cash. July 19, Paid $300 for 2 horses. July 31, Paid $80 for new equipment. Aug. 16, Paid $60 for labor. Aug. 31, Paid $70 for General Expense items. Sept. 1, Paid $21 interest on note. Sept. 1, Paid father $300 on the note, which payment was endorsed on the back of the note. Oct. 1, Sold oats to J. M. Drew on account $350. Oct. 3, Paid $70 for labor. Noy. 19, Received $40 from sale of garden truck Dee. 18, Paid $50 for General Expense items. Jan. 20, 1917, Sold all the cattle for $175. Feb. 18, Sold all the corn crop left for $250. Feb. 20, Received $200 from J. M. Drew on account. Feb. 20, Paid taxes $35. Feb. 25, Paid $40 for labor. Feb. 26, Paid $35 for General Expense items. Feb. 28, Paid father $300 on the note, taking up the old note and giving a new one for the balance of the principal now due. 5. From the ledger accounts created in problem 4 above, pre- pare a Statement of Resources and Liabilities, as of February 36 FARM ACCOUNTING 28, 1917; and a Loss and Gain Statement for the year ended February 28, 1917. REVIEW QUESTIONS 1. Name three methods, anyone of which might be used in recording business transactions during a period of time. 2. Which one of these methods is used more in practice? Which one is unscientific? Why? 3. Why is it considered advisable to learn the direct ledger ac- count method? 4. How is bookkeeping assisted by the use of abbreviations? Why is it necessary to know and understand the abbrevia- tions used in bookkeeping? . Define business transaction; value; property. . What is capital? Distinguish between accounts of prop- erty and the proprietor’s capital account. 7. What is an account? What information should be shown in an account? What is another title for the left-hand side of an account? The right-hand side? 8. What is a ledger? Illustrate the form of a ledger page. 9. In opening a double entry set of books, what entry is made in the proprietor’s capital account? Any resources owned at the time of opening the books are shown on the books in what way? How are liabilities shown at the time of opening the books? 10. What is true concerning the sum of the debits and credits resulting from any bookkeeping transaction? 11. Why does a payment of $300 to redeem a note require a ' €redit to cash account?—a debit to notes payable ac- count? 12. When $300 cash is paid why is it not recorded in the cash account as a deduction from the debit side instead of an addition to the eredit side? | 13, What is the difference between a note payable and a mortgage payable account? 14, When $6 is paid for the use of money, why is Cash account credited? Why is the proprietor’s capital account debited? ao or ~ st aiid in Ce atin - Cre Sa eee ee ee ee ee ee ne - ane anol mn STR ~~ a 15. 16. 17. 18. 19, 20. 21. 22. 23. 24. THE LEDGER 37 Why is a $30 payment for labor expressed in the ledger as a credit to cash and a debit to the capital account? When Mr. Arnold receives cash for the sale of milk, why does he debit cash and eredit his capital account? How is a decrease of capital shown in Mr. Arnold’s capital account ? If all the property accounts, liability accounts and proprie- tor’s capital account have exactly the same balance at the close of the year as at the beginning, does it mean that no changes have taken place during the year in any of the accounts? Discuss. When does an account have a debit balance? A credit bal- ance? When is it in balance? If changes in capital have taken place during the year what financial statement shows the changes? Does a loss during a given year necessarily mean that there is less cash in the business at the close than at the be- ginning of the year? Why? Does a gain mean there is more cash in the business? Why? How were the figures obtained for the Loss and Gain State- ment in Illustration 7? What is the relation existing between a Statement of Re- sources and Liabilities as of February 28, 1917, and a Loss and Gain Statement of the same business for the year ending February 28, 1917? Study the transactions in connection with Illustration 5, and state the reason for each debit and credit recorded. Give reasons for a decrease or increase in capital as the transac- tions seem to indicate when recorded in Illustration 5, CHAPTER III SUBDIVISION OF CAPITAL ACCOUNT Reason for Subdividing Capital Account.—It has been shown up to the present time how to “‘keep books’’ consist- ing of only one book, the ledger, with accounts only for each of the several classes of Resources and Liabilities, including the Proprietor’s Capital account. Under that method the transactions of any business operated by a sin- gle proprietor can be recorded, and statements of Re- sources and Liabilities and Loss and Gain can be prepared. If the transactions causing an increase or decrease in capi- tal are very numerous, the preparation of a Loss and Gain Statement is rather tedious, for it requires considerable work in analyzing the capital account of the proprietor. It is principally for that reason that another method of showing increases and decreases in capital is much more common. It is based on the principle that an account which requires much analysis in order to present data in a usable manner should not be created in that way. In order to avoid such analysis, separate accounts are used. For example, under this latter method, an increase in eapi- tal due to the sale of corn is credited to Corn account rather than to the Proprietor’s Capital account; a sale of oats is credited to Oats account; and expense for labor is debited to Labor account rather than Capital account. In this way the total income from corn can be found very easily from the Corn account without the necessity of picking out ‘‘corn’’ items from the Capital account. The total expense for labor can be found directly from the 38 ILLUSTRATION 8 PROPRIETOR’s CaprTtaAL ACCOUNT SHOWING DAILY INCREASES AND DECREASES DEBIT Mr. Arnold’s Capital CREDIT 1916 1916 Mar. 30 General (Int.).... $6 | Mar. 1 Capital invest- Mar. 31 Hired man’s labor 30 ed.......... $4,000 Mar. 31 General expense.. 20 | Apr. 16 Milk.......... 40 Apr. 16 General (Ins. & May 16 Milk.......... 60 fates). ede dk 60 | June 16 Milk.......... 65 Apr. 30 Hired man’slabor 30 | June 28 Fruit and gar- May 20 General expense.. 10 den truck.... 20 May 31 Hired man’s labor 30 hi Se US 1 a 50 June 30 Hired man’slabor 30 | Aug. 16 Milk.......... 20 July 31 Hired man’s labor 60 Aatg TR ORGS . s.0.0:s'600's 400 Aug. 31 Hired man’s labor is 30 Sept. WO Mee pons a clea 25 Sept. 10 General expense.. 25 | Oct. 7 Garden truck Sept. 16 General expense.. 40 and fruit..... 60 Sept. 30 Hired man’s labor 30 a Milk Sy Sater rant 25 Oct. 31 Hiked. man’s labor. 230 PN lO IMAIK cn is ae esi 15 Oct. 31 General expense.. 25 Nov. 18 Garden Truck.. 20 Win 30 Hired man’s labor 30 Pee, © GOR. 6. ae aces 1,200 Dec. 10 General (Int.)..... 42 Dec. 20 General expense... 32 1917 Jan. 31 General expense.. 20 Feb. 20 General expense.. 20 Feb. 21 Rent for year.... 400. Feb. 28 Bal. down, Net capital........ 5000 $6000 $6000 Se ah Si Mar. 1 Balance brought — a ee $5000 39 40 FARM ACCOUNTING Labor account. In fact, the Loss and Gain Statement can be prepared from the results obtained from the various accounts showing expense and income. A Comparison of the Two Methods.—A comparative study of the two methods of treating transactions that cause increases or decreases in capital tends to show the advantages or disadvantages of each. For this purpose, the transactions of Mr. Arnold are used as stated in narra- tive form on pages 14 and 15. Since this different method of recording increases and decreases in capital does not change, in any material way, the other accounts as Cash, Horses, etc., of Illustration 5, they are not repro- duced here. . The Capital account of Mr. Arnold is reproduced here exactly as shown in Illustration 5 to assist in the compari- son. When all increases and decreases of capital are entered directly into the Capital account as in Illustration 5, the account appears as in Illustration 8. Expense and Income Accounts.—When increases and decreases in capital are recorded in the appropriately named accounts of income and expense, the group of ac- counts presented in Illustration 9 is required to take the place of Mr. Arnold’s Capital account as shown in Illus- tration 8. ILLUSTRATION 9 EXPENSE AND Income Accounts AND CaprraL ACCOUNT Mr. Arnold’s Capital 1916 Mar. 1 Capital invest- Rent | 1917 Feb. 21 Cash.......... $400 . & SUBDIVISION OF CAPITAL ACCOUNT 41 Labor 1916 Mer. 31 Cash Wess pane’ $30 Pee BOSS ube. 30 play Shy one: uaApedio 30 Bune: SOw Otay. s Aeeas 30 BUG Oks PRR... eee 60 ATS OL) ios és great 30 ert. SO yu. lw. Vee 30 BIOs. OL (babar ie. 9: + sees 30 BRING ONL Cia cls c's Sn 30 General Expense 1916 Mar. 30 Cas’: (Int.)..... $6 TIERS CEN SRE Penns 1 20 Apr. 16 “ (Ins. and taxes)....... 60 May 20 ah aaa Sembee 10 NT EMR hac a:9 vies Sate 25 Oe es Pe ee ere 40 BG Sie aco x wale wale 25 NS OM a 8. a pix pak 42 RC alle aly SR aie Ba ea 32 1917 EE i soe ae wem at 20 A TR A reat eons Oy 0 20 Mi. 1916 Apr. 16 Cash......... $40 Re Fe rece o's 0 60 Ac eh So Le ee 65 BoB | TP ea 50 PO ak ives 20 ey wee ere 25 | a ea Bo Bs 25 ROUTE Mac eeces 15 4 FARM ACCOUNTING Corn 1916 Des. 6 Caghiuiiseee $1200 Oats 1916 Aug. 18 Cash......... $400 Miscellaneous Income 1916 June 28 Cash (Fruit & Garden truck) 20 Oct. 7 Cash (Fruit & Garden truck) 60 Nov. 18 Cash (Fruit & Garden truck) 20 The expense and income accounts of Illustration 9, such as Rent, Labor, General Expense, and others are intended to record transactions showing decreases and increases of capital. Those items showing increases are placed on the credit side and those showing decreases of capital are placed on the debit side of the ledger, but are placed under some other heading than Capital account. For example, the $400 on the debit side of Rent account in Illustration 9 is the same item that appears in Illustration 8 on the debit side of Mr. Arnold’s Capital account, dated Feb. 21. Both items were created as a result of the same transac- tion but under different methods of accounting. The debit to the Capital account was made under the method that shows all increases and decreases in the capital of the business direct in the Capital Account. The debit to Rent account was made under the method that shows increases SUBDIVISION OF CAPITAL ACCOUNT 43 and decreases of capital under various appropriate heads named so as to show the reason for such increases and de- ‘ereases. The transaction under discussion is the one shown on page 14, in which Mr. Arnold paid $400 on Feb. 21 for the year’s rent. Under the first method, that of showing increases and decreases of capital direct in the Capital account, the entry made is a debit to Mr. Arnold’s Capi- tal account and a credit to Cash account. Under the sec- ond method, that of showing increases and decreases of capital temporarily in other accounts appropriately named, the entry made is a debit to Rent account and a credit to Cash account. Similarly, under the second method of recording in- creases and decreases of capital, when $30 is paid for labor on March 31, the entry is a debit to Labor account and a ~ eredit to Cash account. When garden truck is sold for $20 eash, the Cash account is debited and MiscelWaneous Income account credited. An account called Garden Truck can be kept if desired. In this way, all of the items in the several accounts of [Illustration 9 might be traced from _ the transactions stated on pages 14 and 15. Nominal Accounts.—It is customary in business practice to use the several specially named accounts for recording increases and decreases in capital. Those accounts showing imcereases in capital are called income accounts; those show- ing decreases in capital are called expense accounts. All expense and income accounts are known as nominal ac- counts. They bear this title largely because of the fact that they are only temporary accounts, while the resource, lability and Capital accounts are more or less permanent. The nominal accounts are said to be temporary, and at the same time merely subdivisions of the Proprietor’s Capital account because they show the nature of increases and de- creases in capital only for a brief period of time. At regu- lar intervals, the results of the several nominal accounts 44 FARM ACCOUNTING are assembled in one place. From this place the net result of all increases and decreases in capital is determined, and such result is shown in a single amount in the Proprietor’s Capital account. Loss and Gain Account.—These several accounts, taking the place of the one Proprietor’s Capital account, enable us to find more easily the expenses and incomes of various sorts, but they do not as yet enable us to determine what the net increase or decrease in capital is, or what the capi- tal is at the present time. In order to find these, it is nee- essary to perform another step in the correlation of the accounts just presented. It is necessary to bring the re- sults of the accounts of expense and income into the Capi- tal account. This is accomplished through the medium of a Loss and Gain account. After this process is performed the accounts should appear as in Illustration 10. ILLUSTRATION 10 Nominat Accounts CiLosep Intro Capita, THrovuea Loss AND Gain Account Mr. Arnold’s Capital 1917 1916 Feb. 28 Balance down. . $5,000 Mar. 1 Capital invested $4,000 1917 Feb. 28 From loss and GRID 52550 vies 1,000 $5,000 $5,000 1917 Mar. 1 Balance, net capital...... $5,000 - SUBDIVISION OF CAPITAL ACCOUNT i! 1916 45 Rent 1917 1917 Feb, 21 Cash.......... $400 Feb. 28 To loss & gain $400 Labor 1916 1917 lar, 31 Cashes... 25 $30 Feb. 28 To Loss & Gain $300 RE SO) Seiten so teed 30 aye SE SS Gia. G08 30 meme S001 ' uiyevesed 30 BAL tee ely cul 60 Mehr BINS ic hi ack a ale 30 A lla ap 30 ty 3a hs Poe ae 30 I aE EL ck eee 30 $300 $300 General Expense 1917 Mar. 30 Cash (Interest). $6 Feb. 28 To Loss & Gain $300 ONES toh aaa ane en 20 Apr. 16 “ (Ins. & Taxes)®..... 60 May 20 Cash.......... 10 ES Tae aa ae 25 SG eile Tapa Sr 40 EE Sh ae 25 Dec. 10 “ (Interest). 42 eM, te io eet ye. 1917 RE re coe 20 MND: SUNS SE its we eae wiser 20 $300 $300 aay oe ee Bt ee ee Beas le Page aa it lata 64 a an ‘ . | ‘\ oe : pkg ; 46 FARM ACCOUNTING = f 4 4 yur > Corn ea 1917 1916 A) an Feb. 28 To Loss & Gain $1,200 Dec. 6 Cash io.sess $1,200 Oats 1917 . 1916 ; ae Feb. 28 To Loss & Gain $400 | Aug. 18Cash......... $400 Milk 1917 1916 . Feb. 28 To Loss & Gain $300 Ase. 16 Cami. ye wos $40 May 16: gas. O:= sure 16° - Tce exes 65 Jaly “16 “Sta 50 Aug. 16 “Sita 20” 3 Sept. 16“ caeenee 2 Oct. 16° WEaAa toes 25 Nov. 16. * gueueeee 15 $300 $300 — ney ‘ —_—_ 7 Miscellaneous Income 1917 1916 Feb. 28 To Loss & Gain. $100 June 28 Cash (Fruit & Garden truck) $20 Oct. 7 Cash (Fruit & Garden truck) 60 Nov. 18 Cash (Fruit & Gardentruck) 20 $100 : $100 } —————s - SUBDIVISION OF CAPITAL ACCOUNT AT Loss and Gain 1917 1917 Feb. 28 From Rent.... $400 Feb. 28 From Milk.... $3800 Feb. 28 From Labor:.. 300 Feb. 28 From Corn.... 1,200 Feb. 28 From General Feb. 28 From Oats.... 400 expense. .... 300 Feb. 28 From Misc. In- Feb. 28 To Arnold’s Cap. come....... 100 a/e Net Gain 1,000 | $2,000 | $2,000 The Loss and Gain account is created temporarily in the ledger at the close of a year or other fiscal period, as a summary account, into which is brought the aggregate re- sults of each of the other accounts that show expenses or incomes. It should not be confused with the Loss and Gain statement, as the latter is not a ledger account, but is a supplementary analysis of some of the facts shown in the ledger. It is true that in its simplest form, as already illustrated, the Loss and Gain Statement looks very much like a Loss and Gain account, but in a more elaborate and elucidating form its similarity to the account is less noticeable. In the exercise at hand, the Loss and Gain statement would be merely a copy of the Loss and Gain account. The Loss and Gain account, then, is a sort of place for the bringing together of figures which affect the loss or gain of a business. From it may be seen in one account, the last one in Illustration 10, that the expense for rent is $400, for labor $300, for general expense $300, and that the income from milk is $300, from corn $1200, from oats $400, and from miscellaneous items $100. In order to find the resulting net gain or loss from these several items it is necessary to bring them together and perform certain a — 48 FARM ACCOUNTING processes of addition and subtraction. One not acquainted with bookkeeping methods might think it necessary to per- form this brief calculation on a separate piece of paper, but bookkeeping principles and abbreviations provide for a more systematic and permanent method. The expense for rent is removed from the debit side of Rent account and placed on the debit side of Loss and Gain account, where it can be used in connection with other expenses and other incomes transferred to the latter ac- count for the purpose of finding the net result. After the net result of all nominal accounts is found in Loss and Gain account it is removed from that account and placed in Capital account. Transfer or Closing Entries—The method of removing or transferring these balances from one account to another involves bookkeeping abbreviations that require further study and analysis. It involves closing entries. Closing entries are those made to transfer expenses and incomes from their several accounts into the capital account of the proprietor. Consider first the transfer of the $400 rent from the debit side of Rent account, to the debit side of Loss and Gain account, as in Illustration 10. Before the transfer, the Loss and Gain account did not contain any entries, while the Rent account appeared as follows: 1917 Feb. 21 Cash.........: $400 In order to transfer this amount from Rent account to the Loss and Gain account, one might choose the way most natural to the person not accustomed to bookkeeping meth- ods. This natural but wrong method would consist in drawing a line through the entry under Rent account and SUBDIVISION OF CAPITAL ACCOUNT 49 writing the entry under Loss and Gain account, in this way: Rent 1917 med, 21 Cashes... oF os% $400 © Loss and Gain 1917 Feb. 28 Cash for rent.. $400 This process would give the result sought, namely, the elimination of the $400 balance in Rent account, and its transfer to the same (debit) side of Loss and Gain ac- count. Bookkeeping primciples, however, will not permit the transfer to be made in the way just indicated. In fact, it might be stated as a principle of bookkeeping, that an item or balance in an account should never be crossed out preparatory to its transfer to some other accownt. In or- der to transfer an item or group of items from the debit side of one account to the debit side of another, credit the account from which the amount is transferred and. debit the account to which it is transferred. Thus, in the case of Rent account under discussion, the correct transfer would cause the accounts to appear as in Illustration 11. ILLUSTRATION 11 Ciosinc Rent Account into Loss anp Gain Account Rent 1917 1917 Feb. 21 Cash.......... $400 Feb. 28 To Loss& Gain $400 50 FARM ACCOUNTING . FS Loss and Gain 1917 Feb. 28 From Rent.... $400 : This conforms to the principle that a debit and credit of equal amounts should be made for every transaction. It gives the results that were wanted, namely, the elimina- tion of the $400 from the debit side of Rent account and its transfer to the debit side of Loss and Gain account. It is the principle that should always be followed in transfer- ring an item or group of items from one account to an- other. In Illustration 11, it is seen that there is an item of $400 on the debit side of Rent account and one of $400 on the credit side. The account is therefore in balance. The double lines ruled under the amount on each side indicate this fact, and also indicate that any items subse- quently placed under Rent account are not to be mingled in any way with any of the figures above the double lines. Similarly the transfer of the total milk income from the Milk account of Illustration 10 to the Loss and Gain ae- count is effected by making a debit entry in Milk account, and a credit entry in Loss and Gain account for the amount of the total income from milk for the period of time in question, one year. In order to transfer an item or group of items from the credit side of one account to the credit side of another, debit the account from which the amount is transferred and credit the account to which it is trans- ferred. From a careful observation of the accounts of Illustra- * tion 10, it can be seen that the debits to Rent, Labor and General Expense accounts are tabulated under appropriate titles during the year; but at the close of the year they are transferred each in total to the debit of Loss and Gain account. Likewise, the totals of Milk, Corn, Oats and Mis- SUBDIVISION OF CAPITAL ACCOUNT 51 cellaneous Income respectively are transferred at the close of the year to the credit of Loss and Gain account. The result of these transfers is that the accounts in which the various expenses and incomes are tabulated during the year are closed and ruled off at the close of the year, while the Loss and Gain account is created. This newly created Loss and Gain account contains the essential financial in- formation of all the accounts closed into it. It shows the total expense for rent, labor and general items. It shows the total income from milk, corn, oats and miscellaneous sources. Any details concerning these expenses or in- comes can be found by reference to the several accounts closed. The essential financial information is the total ex- pense and income of each class. By bringing these figures together the net gain is easily determined, since it is found by subtracting the total ex- penses from the total income. In the account under im- mediate discussion, the Loss and Gain account of Lllus- tration 10, the total income is $2000, while the total ex- penses amount to $1000, the latter being the sum of the first three debit items of the account. Closing Loss and Gain into Proprietor’s Capital—The Loss and Gain account has been defined as an account cre- ated temporarily at the close of a year to serve as a sum- mary for expenses and incomes. Its temporary nature is quite evident when it is learned that Mr. Arnold’s Loss and Gain account is closed into Mr. Arnold’s Capital account almost as soon as it has received all its entries from other accounts. The closing of the Loss and Gain account brings up a point that was not raised in connection with the clos- ing of the several expense and income accounts. In their cases any specific account had entries on only one side, at the time of closing it. In the Loss and Gain account there are entries on both the debit and credit sides. However, only. one entry is made in the Loss and Gain account to 52 FARM ACCOUNTING close it. In this specific instance, the credits exceed the debits by $1000, so it is necessary to transfer $1000 to the credit side of Mr. Arnold’s Capital account. It is not re- quired that the total debits should be transferred to the debit side and the total credits to the credit side of Mr. ‘Arnold’s Capital account. A transfer of the difference between the debits and eredits closes the Loss and Gain account just as effectively and shows the net results in a more concentrated form in Mr. Arnold’s account. In the case at hand the result is a net gain. If the result had been a net loss, the debits in the Loss and Gain account would have exceeded the eredits before closing. The en- try transferring the loss would then have been a credit to Loss and Gain and a debit to Arnold’s Capital account. After closing the nominal accounts into Capital account through Loss and Gain account any balances remaining in the ledger are balances of accounts representing re- sources and liabilities. A statement of resources and lia- bilities, then, can be prepared quite easily from the bal- ances remaining in the ledger after closing the expense and income accounts. Comparison of Results.—From a study of Mr. Arnold’s Capital account as it appears in Illustration 8, when each expense and income was entered on the debit and credit sides respectively as they occurred; and from a further study of it in Illustration 10 when only one entry was made in his account at the close of the year for the amount of the net gain, one may draw some conclusions concern- ing the results. In brief, the result is the same. Mr. Ar- nold’s Capital account under the first method shows a bal- ance brought down on March 1, 1917, of $5000, which is the same balance brought down under the second method. Continuing the comparison of Mr. Arnold’s Capital ae- counts as reflected in Illustrations 8 and 10, it is seen in each case that there is a credit entry of $4000 represent- SUBDIVISION OF CAPITAL ACCOUNT 53 ing his capital on March 1, 1916. Except for the bal- ances at the beginning and at the close of the year, the two capital accounts in question do not have any other figures in common. The one in Illustration 10 has an entry of $1000 on the credit side under date of February 28, 1917. This entry takes the place of all the entries made during the year, as shown in detail in Illustration 8. In other words, using Illustration 8, the sum of all the credit en- tries, except the opening balance of $4000, minus the sum of all the debit entries, representing decreases in capital, gives $1000 as a result. Under this method all increases and decreases in capital are recorded in the Capital ac- count. Under the method used in Illustration 10, all in- creases and decreases in capital are recorded in specially named accounts to indicate the nature of the income or expense. Then the results of these accounts are trans- ferred to the Capital account through the Loss and Gain account, so that only the net increase in capital is entered in Mr. Arnold’s Capital account. This latter method is the one which will be followed more often in practice and in subsequent problems, exer- cises and discussions in this book. It gives an opportunity for analyzing the transactions more fully in the ledger as the transactions occur, and also reduces the number of en- tries in the Capital account. On the other hand, when the Capital account receives an entry for increase or decrease of capital, only at the close of the year one cannot find the net capital of the business as easily at any time as he can under the other method. This, however, is a very minor objection to the method, for one seldom has occasion to find the net capital of the business at any time except the close of a fiscal year, while he does have occasion from time to time to find the expenses or incomes of various classes. Balance Brought Down.—A point of bookkeeping form 54 FARM ACCOUNTING which should be noted carefully is represented in the earry- ing down of the balance of Mr. Arnold’s Capital account, in both Illustrations 8 and 10. It will be observed that there is a debit entry of $5000, ‘‘balance down,”’ on the last line before the total of the debits is recorded. The credit of $5000 to offset this is on the eredit side of the same account, below the double lines. Thus, the equili- brium of debits and credits is maintained. These en- tries do not change the condition of Mr. Arnold’s Capital account. They merely cause the net capital to be shown by a single amount for the purpose of beginning a new year. The net capital would still be $5000 without per- forming the operations of addition, drawing single and double lines and the making of a debit and credit of $5000 as described above. If these bookkeeping operations or abbreviations are not employed, however, it is necessary to add and subtract several amounts from time to time in order to find the net capital. The double lines indicate that everything is in balance above them. The $5000 brought down on the eredit side below the lines indicates that it is the net result of all the amounts above the dou- ble lines. Classification of Accounts.—In the course of the com- parison of results discussed in the last several pages it was — stated, ‘‘under the method used in Illustration 10, that all increases and decreases in capital are recorded in specially named accounts to indicate the nature of the income or expense.’’ These ‘‘specially named accounts’’ are closed into Loss and Gain account, and the latter into Capital account at the close of the year. As previously stated, all the accounts so closed directly or indirectly into Capital account are known as nominal accounts. They are accounts named to represent an increase or decrease of a specific nature in the capital of the business. They do not repre- sent accounts of resources or liabilities. Nominal accounts SUBDIVISION OF CAPITAL ACCOUNT 55 are often called loss and gain accounts, since practically every nominal account results in a loss or gain. There are two generally recognized classifications of ac- counts, the first of which is based upon the nature of the subject matter of the transaction, and the second upon the ultimate use of the balance of the account in the financial statements. CLASSIFICATION 1 BASED ON THE SuBJECT MATTER A. Personal B. Impersonal 1. Real © 2. Nominal CLASSIFICATION 2 BASED ON THE ULTIMATE Use oF THE AccouNT BALANCES A. Balance Sheet 1. Resources 2. Liabilities B. Loss and Gain 1, Expense 2. Income In either case, the principal use of the classification is to make easier the rules governing debits and credits and the treatment of account balances. In general a rule which applies to one account will apply to all others in its group. Accounts are usually arranged in the ledger in groups, as presented in the classification. That is, all resources to- gether, all liabilities together, and so on. Some principles have been developed in the preceding . pages for debiting and crediting the various types of ac- counts shown in the two classifications. These principles will apply in a more or less modified form in the treatment of accounts in subsequent chapters. Personal accounts record transactions with individuals, a a a me 7 oma ahah ag pa 2 = er ai 56 ' FARM ACCOUNTING = firms or corporations. They may be considered as resources — or liabilities, depending on the nature of the balance sd 5 the account. | A real account is one that records transactions relitiag to resources and liabilities other than personal accounts. The other classes of accounts have been discussed in connection with the financial statements. The ledger ac- counts have been presented in accordance with Classifica- tion 2, above. ILLUSTRATIVE PROBLEMS 1. Using ordinary ledger paper, create the necessary nominal and other accounts and express therein the debits and credits necessary to interpret the following transactions in the ledger of Mr. Woods. (Sufficient space is to be allowed for each ac- count to permit of its use in problem 3, below.) | Mar. 1, 1916, Geo. Woods starts keeping his accounts in a sys- tematic way, and accordingly values his possessions as follows: Cash $600, owing by Thos. Carey $100, cattle $800, poultry $200, — swine $900, horses $1200, equipment $600, land $8000, buildings $5500. He owes $8000 on a mortgage note. Apr. 1, Paid eash for labor $25. May 1, Paid $240 for six months’ interest on mortgage note. May 6, Received $100 from Thos. ‘Carey in settlement of his account, May 7, Sold eggs for $5 eash. May 8, Paid cash for labor $25. June 1, Paid cash for labor $25. June 8, Paid for miscellaneous items $15. June 10, Sold some fruit for eash $10. July 1, Sold some hay for $180 cash. July 3, Paid cash for labor $45. July 6, Paid $85 for some new equipment. July 21, Paid for miscellaneous items $25. Aug. 4, Paid cash for labor $60. Aug. 28, Received $500 cash for oats. Sept. 1, Paid cash for labor $50. SUBDIVISION OF CAPITAL ACCOUNT 57 Sept. 6, Received $25 from sale of fruit and vegetables. Sept. 20, Sold cabbage for $400 cash. Oct. 1, Paid eash for labor $25. Noy. 1, Paid eash for labor $25. Nov. 1, Paid for miscellaneous items $30. Nov. 1, Sold all the swine for $900. Nov. 1, Paid $240 for six months’ interest on mortgage note. Nov. 1, Paid $1800 as part payment on mortgage note. Nov. 28, Sold some corn for $700 cash. Dee. 1, Paid cash for labor $30. Jan. 3, 1917, Paid for miscellaneous items $35. Feb. 15, Paid for taxes $80. Feb. 21, Paid for fire insurance premium $20. 2. From the ledger accounts created in problem 1 above, (a) Close the nominal accounts into Loss and Gain account. (b) Close Loss and Gain account into Capital account. (c) Bring down the balances of Capital and Cash accounts on March 1, 1917. (d) Prepare a Statement of Resources and Liabilities as of February 28, 1917, and a Loss and Gain Statement for the year ended February 28, 1917, noting that the latter is practically a copy of the Loss and Gain account in such a simple ease as this. Note.—Closing an account or bringing down a balance always includes the drawing of the necessary single and double lines. (e) Compare the ledger accounts and statements with the ones prepared for Illustrative Problems 2 and 3 of Chapter II. Be prepared to discuss orally any points of similarity or dif- ference noted. (The instructor should lead a discussion of these points in class while students have all papers to examine.) 3. Using the same ledger as in problem,1 above, Mr. Woods continues his business for the second fiscal year beginning March 1, 1917.1 You are asked to record the year’s transactions which follow: +The entries in the second year are made in the same accounts that were used in the first year, nominal accounts receiving their next entries on the first line below the double lines made in closing. Re- source and Liability items are entered in the same way they would have been, had a new period not begun. 58 FARM ACCOUNTING March 10, 1917, Paid cash for miscellaneous items $16. ir April 1, Paid eash for labor $25. J May 1, Paid $186 for six months’ interest on mortgage note. May 16, Sold eggs for cash $8. June 1, Paid cash for labor $40. June 25, Sold fruit and garden truck for $17 cash. July 2, Sold some hay for $166 cash. July 5, Bought a draft horse for $200 cash. Aug. 1, Paid $45 for labor. Aug. 26, Received $600 cash for oats. Sept. 1, Paid $48 for labor. Sept. 22, Received $27 from the sale of fruit and vageteldia! Sept. 30, Sold cabbage to Theodore Wheat on account for $520. Note-——“On account” means that no cash passed hands. — ot a a 74 FARM ACCOUNTING as expenses or resources and all credit balances as incomes or liabilities. . Using the items of Illustration 15, the Loss and Gain Statement contains on the left or debit side all those debit balances marked ‘‘E,’’ and on the credit side all those balances marked ‘‘I’’ as in Illustration 16. The balance is placed on the smaller side, in this case the debit side, in order to make the two sides equal. The balance isa gain because incomes exceed expenses. ILLUSTRATION 16 Loss AND GAIN STATEMENT PREPARED FROM A TRIAL BALANCE. Loss AND GAIN STATEMENT FOR THE YEAR Envep Fes. 28, 1917, Mr. ARNoLD MM Sais ee webvabeses $400 MK... :. ssacee ees $300 BN ees deen d g:0e oh 300 Corn ..:....)aseeesear 1200 General Expense........ 300 Oats... 5. eReiearede 400 Balance, net gain....... 1000 Miscellaneous Inc 100 $2000 $2000 The Statement of Resources and Liabilities as shown in Illustration 17 contains on the left or resource side all those debit balances marked ‘‘R’’ and on the right or liability side, all those balances marked ‘‘L.’’ Relation Between Trial Balance and Financial State- ments.—A further study of the trial balance in Illustration 15 in its relation to the Loss and Gain Statement and Statement of Resources and Liabilities in Illustrations 16 and 17, respectively, presents additional points in account- ing. All the items on the debit side of the trial balance are placed on the debit side of one of the statements. All items on the credit side of the trial balance are placed on ee: a. THE TRIAL BALANCE ec. ILLUSTRATION 17 STATEMENT OF RESOURCES AND LIABILITIES PREPARED FROM A TRIAL BALANCE. STATEMENT OF RESOURCES AND J[.ABILITIES, Fes. 28, 1917, Mr. ARNOLD - > Resources Liabilities OS SA) Dane 2 $1000 Mr. Arnold’s ee ISON aus ois tee 500 capital Feb. ee peri eee 1600 28, 1916...$4000 RR ES irae ora 1100 Add net gain Equipment.......... ..-, 806 for year... 1000 5000 $5000 $5000 the credit side of one of the statements. No other amounts appear in the statements except the net gain, which ap- pears on the debit side of one statement and the credit side _ of the other. Therefore, since the debit and credit totals oi the trial balance are equal, the debit and credit totals of the two statements taken together are equal. That is, the two statements are in balance., The $1000 balance in the Loss and Gain Statement is transferred to the State- ment of Resources and Liabilities in much the same way ‘as it was transferred from Loss and Gain account in the ledger to Mr. Arnold’s Capital account. Stated in another way, the Statemert of Resources and Liabilities itself contains all the items of the trial balance. It contains as separate items all the balances indicated in the trial balance as resources or liabilities, and contains in one amount the net result of all the other balances in the trial balance. Thus, in Illustration 17, the $1000 added to Mr. Arnold’s capital is the net result of all the trial 76 FARM ACCOUNTING balance items not otherwise specifically listed in the State- ment, of Resources and Liabilities. This net result is ob- tained through the medium of the Loss and Gain State- ment. The Loss and Gain Statement, then, might be called an analysis of the one item in the Statement of Resources and Liabilities which is added to the capital to show the total present liability to the proprietor. It should be re- called in this connection that the capital in the trial bal- ance before closing (Illustration 13) is the capital at the beginning of the fiseal period, while the capital in the trial balance after closing (Illustration 14) is the capital at the close of the period, after transferring to it the gain of the period. The amount shown as capital in the last column of the Statement of Resources and Liabilities (Illustration 17) is the same as the balance of the Capital account in the trial balance after closing (Illustration 14). Two Methods of Preparing Financial Statements.—As a result of these comparisons between trial balances and statements we find that there are two general methods of preparing the financial statements, in simple eases, after the trial balance has been prepared. 1. The expense and income accounts are closed into the Capital account through the Loss and Gain account, and a trial balance is taken after closing. The Loss and Gain Statement is then prepared by merely copying the Loss and Gain account, while the Statement of Resources and Liabilities is prepared by copying the trial balance after closing in slightly different form. 2. Using the trial balance before closing, the Loss and Gain Statement is prepared and then the balance of net gain or loss is used in the Statement of Resources and Liabilities as an addition to or subtraction from capital = NA RE REN wn YT) THE TRIAL BALANCE 7 (This is the method used in Illustrations 15, 16, and 17.) All other items in the Statement of Resources and Lia- bilities are taken direct from the trial balance before clos- ing. The latter method does not serve as a substitute for the process of closing the ledger. It merely permits of the preparation of statements before closing the expense and income accounts into Capital account. The closing of the ledger is performed in exactly the same way (but not at the same time), regardless of which method is used in pre- paring financial statements. Under the first method the ledger is closed before the statements are made; under the second method after the statements are made. For farm accounting, the first method is advocated be- eause of the simplicity of operation when there are several classes of inventories to be considered. Also, in farming, there is seldom any necessity for preparing financial statements for silent partners, directors, stock hold- ers or the investing public as there is in commercial en- terprises. Although in commercial accounting the financial state- ments are prepared on loose sheets of paper, which may or may not be filed in permanent binders, it is considered more practical in farm accounting to reserve a number of pages in the back of the ledger for the annual state- ments. ILLUSTRATIVE PROBLEMS 1. From the trial balance presented herewith, prepare a Loss and Gain Statement for the year and a Statement of Resources and Liabilities as of December 31, 1916. “ae | aes ~ “ iar te a 78 FARM ACCOUNTING 2 ee TriaL Baance, Decemper 31, 1916, Epwarp Bry Dr. | Cr. . ye SOP et ph hsaseeGde es $1000 rr Notes Receivable.........-++++eeeeeeeeceees 200] - Edward Bly Capital Account..........+++++- é .| $4200 — General Expense Account........-+++++e+++05 216 a Interest. .... 2.00 ccsve+.se ben cu ee ena eyanls 95 Notes Payable... .......-+++eeeesceeseeeeeees 160 Mortgage Payable.........- -, uh Steen aa ae 1000 ee, NE ee enetacks « 4000 a THOISeS.... scacosswace s sos keen eeemanes = aaee 800 a Cattle ovis cuss 6s dave s%.0esdnneeteee eae 200 s Poultry ........0.c2cccvcccesscssumssaseesss 2 Equipment..........--0+eeeceecreeeeeeeeees 500 4 9 errs Sn 450 Hay... coc s.cc css scceccsescecnateeaeerseas 460— TOAOOD ©. ia vccesccccccucvcasUaUnebeseunh en 700° ah iccice oi dau odss ve deb earetaeape rena 300 Md Olson. o's eos od 6s cobb 8 ae ome eee 84 b James SimpsONn........+seeeeeeseeeeeeeceees 60 TBO ce aad Th oo e8 Chee reede~sesngogawarnch 260 3 $7355 $7355 — Note for Instructor—Solutions of problems 2 and 3 below | | should be preserved and used for comparison later as indicated — in I!lustrative Problem 4, Chapter V. — ‘2 From the transactions given below follow instructions in the order given, namely a (a) Create the necessary ledger accounts allowing enough space — for each account to receive the entries of problem 3 below. yg (b) Take a trial balance at February 28, 1917. 3 (ec) Close the ledger. fl (d) Take a trial balance after closing. . (e) Prepare a Loss and Gain Statement for the year, and a Statement of Resources and Liabilities at the close of the year, THE TRIAL BALANCE “19 Mar. 1, 1916, Frank Rodgers began farming operations for the year with resources and liabilities as follows: Cash $150, Notes Receivable $480, owing by brother Walter Rodgers $100, Equipment $1455, Horses and Mules $1900, Cattle $600, Hogs $900, Poultry $50, Land $7000, Buildings $3000, Mortgage Pay- able $4000, Note Payable $200, owing to a neighbor John Long $35. , Mar. 16, Paid cash for insurance $55. Mar. 18, Sold some eggs for $5 (credit poultry). Mar. 31, Sold some hogs for $300 eash. Mar. 31, Paid wages in cash, $30. Apr. 5, Paid $65 for miscellaneous items. Apr. 6, Sold eggs for $4. Apr. 26, Paid $120 interest on mortgage (debit interest ac count). Apr. 30, Paid $30 for labor. Apr. 30, Sold eggs for $6. - _ May 31, Paid $30 for labor. June 15, Sold fruit for $20. June 16, Received $50 from brother Walter on account, June 30, Paid $30 for labor. July 7, Paid for miscellaneous items $15. July 7, Sold garden truck and fruit for $30. July 31, Paid for labor $45. Aug. 1, Paid for new equipment $45. Aug. 18, Sold some spring chickens for $10. Aug. 21, Sold oats for $400. Aug. 31, Sold wheat for $300. Aug. 31, Paid for labor $50. Sept. 4, Paid my note for $200, and interest $12, Sept. 30, Paid $30 for labor. Oct. 8, Paid John Long $20 on account. Oct. 26, Paid $120 interest on mortgage, Noy. 8, Sold timothy hay for $150. Noy. 30, Paid for labor $40. Dee. 4, Sold corn for $600. Feb. 15, 1917, Paid taxes amounting to $79. 80 FARM ACCOUNTING oS a Feb. 24, Received $24 interest on note receivable (credit tein , account). Feb. 28, Disposed of al hogs for $400 cash and sold all the poultry for $55 eash. Feb. 28, Loaned a neighbor, James Lewis, $1000, taking the — latter’s promissory note as security. (Dr. Notes receivable, — Cr. Cash .$1000.) (Note.—The balances of Hog and Poultry accounts 3 in the prob- lem above are incomes.) 3. After completing the work of the year as outlined in prob- lem 2, Mr. Frank Rodgers asks you to record his transactions _ for the succeeding fiscal year and to follow the same instruc- tions at the close of the year as were given for the year =e = Feb. 28, 1917. .. His transactions are as follows: Mar. 10, 1917, Sells some corn for $200 cash. Mar. 15, Pays eash for insurance $60. Mar. 31, Pays $25 for wages. Apr. 1, Buys some poultry for $24. Apr. 7, Spends $40 for miscellaneous items, Apr. 10, Sells eggs for $5. Apr. 17, Among the miscellaneous items purchased on April 7 was some cement costing $15. It was found to be caked so © is returned and the money refunded. (The same account should be credited now that was debited at the time of purchase, Why?) Apr. 26, Pays $120 interest on mortgage note. Apr. 30, Pays $35 for labor. May 16, Sells eggs for $8. May 31, Pays $32 for labor. June 20, Sells fruit for $10. June 30, Receives cash from Walter Rodgers to balance his account. July 3, Sells hay to W. L. Brown $120 on account. July 24, Receives $18 from sale of fruit and garden truck. July 25, Mr. W. L. Brown, to whom the hay was sold om July 3, ealls attention to an error in ealeulating the amount. It should have been $102. He gives his check for $102 to settle the account. (What is to be done with the $18 difference?) THE TRIAL BALANCE 81 July 31, Pays $80 for labor. Aug. 13, Buys some new equipment for $60 eash. Aug. 25, Pays $12 for cement, for sundry repair work. Aug. 28, Receives $30 for six months’ interest on note of James Lewis. Sept. 1, Sells some oats for $550. Sept. 30, Pays labor $65, Oct. 1, Pays John Long enough to balance his account. Oct. 24, Sells some wheat for $2000 cash. Oct. 26, Pays $120 for six months’ interest on mortgage note. Oct. 26, Pays $2000 on mortgage note. Oct. 27, Sells his poultry for $35. Oct. 31, Wages are paid in eash $30. Nov. 30, Pays for labor $40. Dee. 20, Pays $300 to carpenter for building a new shed. Jan. 17, 1918, Donates $20 to charity. Feb. 24, Receives $24 for one year’s interest on note. Feb. 24, Receives $480 in full of note of that amount. Feb. 26, Pays taxes amounting to $90. 4. Compare the financial statements prepared in problem 3 with those prepared in problem 2. Be ready for an oral or written discussion on the changes that took piace. svt eye ca RI RT Ba og ee ke \ : REVIEW QUESTIONS 1. What is a trial balance? 2. What is meant by “taking off a trial balance”? 3. When is a trial balance said to be “in balance”? When is it “off”? 4, When is a ledger said to he “in balance”? When is it “out of balance”? 5. What are the two main purposes of a trial balance? 6. From an arithmetical point of view why are the sums of the debit and eredit ledger balances equal, barring errors? 7. What does a trial balance prove? 8. Name three classes of errors that might be made in connec- tion with the debits and credits of a transaction without causing the trial balance to be out of balance. 9. 10. 11. Name the three general steps in taking a trial balance. 12. 13. 14. 15. 1 es . i aie a. FARM ACCOUNTING oe A When may a trial balance be taken? > hm if C What is the customary time for taking a trial balance? How is the balance of an account found and ne prepara- tory to taking a trial balance? What kind of paper is suitable for taking a trial bataiest Describe the process of taking a trial balance after the a ledger accounts have been prepared for it and the paper — is ready for the recording of the trial balance figures. Describe the last step in the completion of a trial balance. . What is meant by a trial balance before closing? After . closing? and a trial balance after closing as regards contents. and a Statement of Resources and Liabilities. preliminary step is advisable? statements? statements? Liabilities contains all the items in the trial balance? anything in common? trial balance before closing and after closing? . Deseribe the two general methods of preparing financial statements. Why? . In farm accounting, where is a practical place to preserve financial statements? . What is the relation between the Loss and Gain Statement a and the Statement of Resources and Liabilities? Is there a . Diseuss the difference between a trial balance before closing . Diseuss the difference between a trial balance after closing ES . In preparing financial statements from a trial balance what — ‘ . All debit balances in a trial balance appear saab in the 4 . All eredit balances in a trial balanee appear where in the . Why is it correct to say that the Statement of Resources and — . What difference exists between the Capital account in a — . Which method is considered better in farm accounting? A ’ % . CHAPTER V BOOKS OF ORIGINAL ENTRY ~The Ledger as an Only Book of Entry.—The ledger has been used in the preceding chapters as the basis of all ac- counting information. The essentials of all business trans- actions were recorded in it, and all subsequent information concerning the transactions and their aggregate effect on the progress and condition of the business was derived from it. The trial balance, Statement of Resources and Liabili- ties and Loss and Gain Statement were prepared from the ledger. In fact, as previously suggested, the ledger is the book into which all essential financial information of a business is placed, and out of which data are collected, sorted and correlated as a basis for conclusions and con- structive criticisms of the business. This principle is fol- lowed out in all good commercial accounting, and applies with equal significance to farm accounting. The ledger can be used as the only book of record for a business. In commercial bookkeeping it is not the prac- tice to use it as the only book of record. In farm account- ing precedent does not influence its use in that way, but other factors render it more desirable to use other books in connection with it. | Five Reasons for Using Books of Original Entry.—In commercial bookkeeping there are five reasons for using other books, known as books of original entry, in which debits and credits are expressed before transferring them to the ledger accounts. It should be remembered, however, that these books of original entry do not alter the main 83 i84 FARM ACCOUNTING —™ Va usefulness of the ledger in any way. Even with the use of -- books of original entry the ledger accounts receive all the — debits and credits ultimately, and hold them in permanent — form for use later. Likewise, the financial statements are _ prepared in exactly the same way, whether books of orig- : inal entry are used or not. “4 The five reasons for the use of books of original entry - in connection with the ledger in commercial accounting — may be summarized as follows :— 1. To supply a chronological list of business transactions. — Occasions arise in which it is desirable to know in what order transactions occurred. a 2. T'o present in one place in compact form both the debits and credits involved in a transaction and some ex- — planation concerning it. When entries are made direct to _ the ledger account, it is often difficult to record all the explanation that should be made concerning the transac- tion, also at any later date it causes delay in finding out — what two or more accounts were affected by the transaction. 3. To permit of division of labor, when transactions are numerous. When several bookkeepers are needed to handle _ the transactions, several books of original entry may be used at the same time by different employees, the results - ~ ‘being assembled afterwards into the ledger. 4. To assist in the prevention of errors, or in their dis- covery. For example, if only the ledger is used, the book- keeper might record the debit. Then while he is turning to the page on which the credit is to be recorded he is inter- rupted and forgets to make the credit entry. This would throw his ledger out of balance and would be one of the most difficult classes of error to discover, under the con- ditions. With similar conditions when books of original entry are used the unfinished entry would usually be no- ticed at the time of recording the next transaction. If it were not, the error could easily be found by a serutiny of - 4 . '. } i’ 2 . Ce BOOKS OF ORIGINAL ENTRY 85 the books of original entry when the ledger or trial balance was found to be off. 5. T'o reduce the amount of detail recorded in the ledger, and thus make tt a more compact and permanent record without destroying its usefulness. This is accomplished by the use of any or all of the books of original entry with the exception of the simple journal when used alone. In all books except the latter, provision is made for classify- ing transactions in such a way that a number of debits or credits to the same account may be transferred in total to the ledger account involved. With the exception of the third, that of the division of labor, the reasons given above would apply to farm ac- counting as well as to commercial accounting. Therefore, the use of books of original entry is advantageous on the farm, if the proper book or books ean be selected. Such books should satisfy the conditions mentioned above with- out requiring any more work than would be encountered in using the ledger alone. , Posting.—Books of original entry are used for the pur- pose of expressing debits and credits as transactions arise. The actual debit or credit to the account does not occur until the debit or credit so expressed is transferred to the ledger account. The process of transferring debits and credits from books of original entry to the ledger accounts is called posting. Posting might refer to the transfer of one expressed debit or credit at a time, or it might refer to the transfer of a total obtained in a book of original entry having special columns. It follows that if the ledger is to get its data second hand, so to speak, the books of original entry should show at least as much information concerning the transaction as would be shown in the ledger when it is used alone. All books of original entry are so designed as to show this much, and most of them show more. — OS a Lee | ee ee ee eee 86 FARM ACCOUNTING _ i, ‘12 Characteristics of Specific Books of Original Bary — ¥g The most common books of original entry in use by com-_ mercial trading concerns are: Journal Sales Book Simple Simple Columnar Columnar ” _ Cash Cash Book Purchase Book ¥ Simple Simple Columnar Columnar There are numerous other books in use depending on the size, nature and organization of the business. There are also a great variety of forms in use of each of the four books mentioned. The variety exists chiefly in the colum- __ nar books, those books having special columns in which to _ record debits or credits of like nature. a In farm accounting the journal and cash book are the ~~ only ones considered practical. The sales and purchase books are not needed because the transactions are not nu- merous enough to warrant their use. The cash journal is the book of original entry best adapted to farm use. For that reason it is discussed as a separate book after the presentation of the simple journal and cash book. Simple Journal.—In general when the term ‘‘journal’’ is used it means simple journal unless otherwise specified. However, if a cash journal or columnar journal is in use in a given business, the word ‘‘journal’’ is used to desig- nate the one in use regardless of what kind it might be. For example, if a farmer uses a cash journal and a ledger, he speaks of the former as his ‘‘journal’’ without neces- sarily using the full, correct name. If only one book of original entry is to be used in connec- tion with a ledger, the journal is the-only book that will — ¥ ‘ - BOOKS OF ORIGINAL ENTRY } 87 - satisfy the requirement. The debit and credit of any trans- action can be expressed in the simple journal or in the cash journal. This is not true of any other book of orig inal entry. For this reason the journal form is usualiy used in discussion and for analytical purposes to present debits and credits in the most compact form. The simple journal is so arranged that each debit and each credit must be posted as separate items to the ledger accounts. With its use, the ledger accounts contain ex- actly the same number of items that they do when the ledger is used alone. Simple Journal Entries Illustrated.—The general form, contents and explanation of the simple journal entry may be seen from the few simple transactions presented below. TRANSACTION: January 1, 1916, Walter Marsh opens a set of books and has $2500 cash with no other resources. ENTRY: (Simple) Journal Water MarsH Dr. Cr. January 1, 1916 I have decided today to open a set of double entry! account books for my business, beginning with the following entry to record my resources. Walter Marsh Capital.................5. $2,500 TRANSACTION: January 2 Paid cash as follows: for horses $700, hogs $500, cattle $200, equipment $300. It should be recalled that “double entry” implies the twofold effect of every transaction—debits and credits of equal amounts. It does not derive its name in any way from the fact that entries are made first in a book of original entry and then posted. = i es it , 88 FARM ACCOUNTING = ~—— ENTRY ae January 2 TROOOONS Sob Siteen cc bs ee ds isin’ 9. bea $700 {ard Pree eT eo 500 r CORREO 6 oad 5 v.0'0's wa.00 6 60.00 015 waked ae 200 MUIPENIONE .. . 5.12 5.0 ose vee wee ee 300 COBB ux... . uae 1 iia, Tia ccca ce ees ee see's ae ae 34 (Sold garden truck and fruit) 380 Te Fr: ewe are SS Ger 35 1 OCaml... cede pale peenteas ee Comes 35 (Paid Jas. Brown for June) Ledger Accounts Posted from Journal Entries—After — the entries are recorded in the journal, it is necessary to post them to the several ledger accounts affected. The — ledger accounts in Illustration 19 are the ones made as a — result of posting the journal entries of Illustration 18. BOOKS OF ORIGINAL ENTRY mM ILLUSTRATION 19 - Lepeer Accounts PREPARED FROM JOURNAL ENTRIES OF ILLUSTRATION 18 Cash 1916 : | 1916 Jan. 1Invested 1.... $2,500 Jan. 2Sundries 1.... $1,700 June 10 Hogs 1.... 750 |: Jan. 31 Labor 1.... 25 June 18 Misc. 1.... 34 | Feb. 28Labor 1 25 a Mar. 31 Labor 1.4... 25 Apr. 12 Sundries 1.... 21 Apr. 30Labor 1 30 May 31 Labor 1 30 June 30 Labor 1 35 Horses 1916 | Jan. 2Cash Bic $700 Hogs 1916 1916 Jan. 2 Cash } MP 500 June 10Cash 1.... 750 Cattle 1916 Digan’. 2Cash 1.... 200 § a 7 f ‘2 ) Uae “a - 4 i , ’ + tae is 1 | : ; ‘ 1 ‘J Equipment 300 B 9 z Sn eT 92 7 FARM ACCOUNTING Walter Marsh Capital 1916 Jan. 1 Net Investment 1 $2,500 Labor 1916 Jan. 31 Cash ae $25 Feb. 28 Cash a ~ 25 Mar. 31 Cash 2. 25 Apr. 30 Cash te 30 May 31 Cash py 30 June 30 Cash Sy 35 General Expense 1916 Apr. 12 Cash : 21 Miscellaneous Income 1916 June 18Cash 1.... 34 Posting from Simple Journal.—It will be observed from a study of Illustrations 18 and 19 that the process of post- ing from the simple journal is not at all complicated, as it is performed in accordance with a well defined plan. In posting from the simple journal to the ledger it is advisable to look at only one horizontal line at a time, in order to get all the essentials for posting. For example, using the first item of the second journal entry in Illustration 18, this item expresses a debit to Horse account of $700 on January 2, 1916. Looking only at this one line, we know " y [ BOOKS OF ORIGINAL ENTRY 93 first that since the $700 is in the debit column of the jour- nal, it must be posted to the debit side of the ledger somewhere. The exact place in the ledger is found to be Horse account, when we follow along the horizontal line to the left of the amount in the journal. The next item in the journal is $500 in the debit column. Therefore $500 must be placed on the debit side of the led- ger. ‘The exact place in the ledger is found to be Hogs account, when we look to the left along the same horizontal line. Cattle and Equipment accounts are similarly debited. Likewise the item in the eredit side of this entry must ap- pear on the credit side of the ledger under the Cash ac- count. The journal entry under discussion is called a compound journal entry because it has more than one debit and one credit. The sum of the debits of a compound entry must always equal the sum of the credits. The same principles are followed in posting all other debits and credits from the journal to the ledger. The work is largely mechanical, but requires great care in order to avoid errors. Jt may be said that one performs the men- _ tal work at the time of framing the journal entries, and that he is merely following the instructions of the entries in posting them to the ledger. Simple Cash Book.—The simple cash book usually is so arranged that both the left and right-hand pages are in use at the same time, the left one for cash received and the right one for cash paid. Each page has vertical columns and lines quite similar to the simple journal. On the left-hand side of the cash ‘book are entered in chronological order all amounts of cash received, and on the right hand side all amounts of cash paid out. Cash imcludes all currency, coins, checks, bank drafts and money orders, but not promissory notes. When for example $2500 cash is received as investment of the proprietor, the ee ee (Simple) Casn Boox (Left hand page) Received 1 W.MarshCap. 1 $2,500 June 10 Hogs June 18 Misc. Income 1 34 Jan. 2 Cattle FARM ACCOUNTING " ILLUSTRATION 20 SmmpLte Caso Book ENTRIES 1 750 Jan. 2 Hogs $700 — 500 200 300 25 a: 25 21 30 30 35 entry on the left side of the cash book expresses the same — debit and credit as would be expressed in the journal for the same transaction. In the case just cited the cash book entry must be made in such a way as to express a debit to cash and a credit to the Proprietor’s Capital account. The form of the entry in the cash book is not the same as in the journal. It is a form which permits of a more com- pact record, with less writing, less posting and fewer ; figures. BOOKS OF ORIGINAL ENTRY 95 The simple cash book cannot be used as an only book of original entry unless all transactions involve cash. This - condition seldom exists. Accordingly the simple cash book is usually used in conjunction with the journal. The cash _ book, then, is used for recording all cash transactions and _ the journal for all transactions not involving cash. Illustrations 20 and 21 present the simple cash book and the ledger accounts created therefrom. For comparative ' purposes the same transactions are used as were used in presenting the journal in Illustration 18, all of which in- volved cash. The ledger page to which posting is made (d is recorded to the left of the cash book amount. ILLUSTRATION 21. _ Lepcer AccouNnTs PREPARED FROM CasH Book ENTRIES OF | ILLUSTRATION 20 Cash } 1916 1916 _ June 30 Total Rec’d 138,284 June 30 Total paid out 1 $1,891 Horses 1916 | > Jan. 2Cash 1 700 Hogs 1916 1916 Jan, 2Cash 1 500 | June 10 Cash 1 750 Cattle 1916 Jan. 2Cash 1 200 96 FARM ACCOUNTING Equipment 1916 j Jan. 2 1 300 Walter Marsh Capital 1916 Jan. 1Net Invest. 1 2,500 Labor 1916 Jan. 31 Cash ........ 1 $25 Feb. 28 Cash ........ 1 25 Mar. 31 Cash ........ 1 25 Apr. 30 Cash ........ 1 30 May 31 Cash ........ 1 30 June 30 Cash ........ 1 35 ‘ General Expense 1916 Apr. 12 Cash ........ ee | Miscellaneous Income 1916 June 18 Cash ....... 1 34 Posting from Simple Cash Book.—F rom a study of Illus- trations 20 and 21, it is observed that there is only one item posted to each side of the Cash account. This reduc- tion in the amount of posting is due to the arrangement of the cash book. It is not necessary to post each item to BOOKS OF ORIGINAL ENTRY 97 the debit side of Cash account in the ledger because every item on the cash received or left hand page expresses a debit to cash. The same result is obtained by posting only the total of all the items. Similarly, the total of the cash paid out is posted to the credit side of Cash account. It is noted that the abbreviated way of expressing debits and credits in the cash book requires the writing of the amount only once, while in the journal the amount was expressed twice in each entry. The writing of the words ‘‘cash re- ceived’’ at the top of the page in the cash book is equiva- lent to writing ‘‘ Each amount on this page expresses a debit to Cash account and a credit to the account named on the same horizontal line to the left of the amount.’’ Similarly, the use of the words ‘‘cash paid out’’ at the top of the right- hand page is equivalent to writing ‘‘ Each amount on this page expresses a credit to Cash account and a debit to the account named on the same horizontal line to the left of the amount.’’ These facts give rise to a procedure which many begin- ners in bookkeeping find difficult to master, namely, that in posting from the left hand page of the cash book, the indi- vidual items are posted to the credit side of the ledger ac- counts named; and in posting from the right hand page of the cash book, the individual items are posted to the debit side of the ledger accounts named. The reason for the apparent difficulty les in the fact that the average begin- ner does not have a clear conception of ledger accounts be- fore he learns about posting. Debits and credits may be expressed in a variety of ways in books of original entry. In order to post intelligently one must know that a debit expressed anywhere must ultimately be posted to the debit side of some account in the ledger. The Cash Journal.—The cash journal as used in com- mercial enterprises is a book that is criticized by auditors, — but the criticisms in that connection do not hold in farm 98 FARM ACCOUNTING accounting. Except from the auditor’s point of view, the — book is a very useful one. Especially is its use adapted to the farm because of the fact that all transactions can be recorded in the one book of original entry and because a great saving is made in the amount of posting. It is not practical to use the simple journal alone because of the volume of posting. The cash book, if used, must always be accompanied by the journal, thus necessitating the use of two books aside from the ledger, if the simple cash book is used. A variety of forms may be devised for the cash journal. The principle upon which all cash journals are founded, — however, is that special debit and credit columns are pro- vided for those accounts which are affected the greatest number of times by transactions in the business in ques- tion. In any business, cash is usually affected a great many times. This always gies rise to the use of special columns for cash, which fact is largely responsible for the name of the book. Besides the cash columns there are invariably at least two other columns, one on the debit and one on the credit side. If there is only one column on each side of the cash journal in addition to the cash column, such additional columns are called ‘‘sundry’’ and are used in the same way as the columns of the simple journal. A cash journal, then, always has at least two debit and two credit columns, and it may have as many more as are demanded by the nature of the transactions. It is not necessary that there — be an equal number of debit and credit columns, but it is essential that debits and credits of equal amount shall be expressed for each transaction. Illustrations 22 and 23 presext the cash journal, and the ledger accounts created from its entries. For comparative purposes, the same transactions are used as in Illustrations 18 and 19, in which the journal was used alone; and in ILLUSTRATION 22 CasH JOURNAL ENTRIES WALTER MARsH Cash Journal Cash Dr. $2,500 750 34 Fo. Sundry Dr. Items Fo. Sundry Cr. Cash Cr. ae 21 Jan. 1, 1916 Cash, W. Marsh Cap. st hg Invest.) | Equipment, cash (Bought property for cash) Labor, cash (J. Brown for Jan.) Feb. 28 Labor, cash (J. Brown for Feb.) Mar. 31 Labor, cash (J. Brown for Mar.) Apr. 12 Gen. Exp. cash (Sundry items bought, viz.: ..) 30 Labor, cash (J. Brown for Apr.) May 31 Labor, cash (J. Brown for May) June 10 Cash, hogs (Sold all 1088) Cash, Mise. Income (Sold fruit and vege- tables) Labor, cash (J. Brown for June) $2,500 750 34 $1,700 25 25 25 21 30 30 35 $3,284] . = Cash Labor $3,284 1,891 $5,175 $1,891 July 1 Cash balance, $1,393 100 FARM ACCOUNTING | 20 and 21, in which the cash book was used alone. The © columns are used to fit this particular case but are quite representative. The ledger pages are indicated in the cash © journal in the columns to the left of the amount in the *‘sundry’’ columns. ILLUSTRATION 23 Lepcer AccouNTS PREPARED FROM CASH JOURNAL OF ILLUSTRATION 22 Cash 1916 1916 June 30 Rec’d ...... 1 $3,284 June 30 Paid out 1.... $1,891 Horses 1916 ane. 2 Cem. sscas 1 700 Hogs 1916 1916 Jan. 3Cagh. vee. 1 500 June 10 Cash | ee Cattle 1916 dam... 2Cegh . ca 1 200 Equipment BOOKS OF ORIGINAL ENTRY 101 Walter Marsh Capital 1916 Jan. 1NetInvest.1.. 2,500 Labor — 1916 ™ June 30Cash ...... 1 170 General Expense 1916 Apr. 12Cash ...... 1 21 | Miscellaneous Income | 1916 June 18 Cash 1....... 34 Posting from the Cash Journal.—F rom an examination of the cash journal and the ledger accounts as presented in Illustrations 22 and 23, it is seen that the ledger accounts are more condensed than in Illustrations 19 and 21, when the ledger was prepared from the simple journal and sim- ple cash book, respectively, with the same group of transac- tions. The Labor account has only one entry, which is the total of the labor debit column of the cash journal. The Cash account has only one entry on each side, as it did in the ledger prepared from the cash book. In posting from the cash journal the items in the sundry columns are posted individually while those in the other columns are posted in total. Before posting the totals, they are carried into the sundry columns for two reasons: 1. In order to have all postings meer from one debit column and one credit column. . 102 FARM ACCOUNTING 2. To bring all amounts into the two columns, one debit and one credit, so that it can be seen more easily whether the sum of the debits equals the sum of the credits. In Illustration 22 the sum of the three debit columns is shown as $5175 and the sum of the two eredit columns as $5175. Apparently, debits and credits of equal amount have been made for all the transactions. The balance of cash is shown in the explanation column on the first day of the succeeding period as in the [llustration. The columns used in this problem were selected because __ Labor was found to be the account with the most entries in Illustration 21, while, of course, the cash and sundry columns are essential in all cash journals. Optional Form for Cash Journal.—Because of inability to procure appropriate blank account books ruled for use as a cash journal similar to the one shown in Illustration 22, another form is often used. This optional form has the explanation columns to the left, followed by the several money columns. Under this form’ the money columns may be grouped by accounts or by debits and credits. When they are grouped by accounts the columns from left to right might be as follows, using the headings employed in Illustration 22: Explanation space, Sundry Dr., Sun- dry Cr., Cash Dr., Cash Cr., Labor Dr. When they are grouped by debits and credits, the columns would be ar- ranged in some such way as this: Explanation space, Sundry Dr., Cash Dr., Labor Dr., Sundry Cr., Cash Cr. . Under either of these optional methods, the general prin- ciples of entering and posting transactions apply as ex- plained for the cash-journal form in Illustration 22. That 1 Blank books for use as cash journals may be obtained at stationery stores. Books with six, eight, twelve, fourteen or eighteen columns may be used, depending on the requirements of the business. A twelve or fourteén column one is best for all geheral farming pur- poses. . BOOKS OF ORIGINAL ENTRY 103 is, the debits. and credits to accounts not represented by special columns are recorded in the sundry columns; the totals of all debit columns are summarized at the end of the debit sundry column, and of all credit columns at the end of the credit sundry column. When an item is entered in a sundry column it does not mean a debit or.a credit to an account called ‘‘sundry.’’ The name of the account to be debited or credited is placed in the explanation column on the same horizontal line with the amount in question. The ledger posting pages are re- corded in the column marked ‘‘F'o.’’ meaning “‘ folio.”’ Preventing and Finding Errors.—In the making of en- tries in books of original entry, in adding columns, in posting, in finding balances of accounts and in listing bal- ances in the trial balance, opportunities for making errors arise. Such errors are usually not discovered until the addition of the two columns of the trial balance indicates that it is off. Looking for errors is one of the most tedious processes in bookkeeping. PR Ree hae as $5,000 ZANG . Veal kes > + $4,000 Loss and Gain...... 1,000 This leaves the Land account with a debit balance of $4000, representing the book value of the half remaining unsold. The profit of $1000 is made on the part sold. Buildings.—Buildings account is debited with the cost of buildings at the time of erection, the appraised value at time of opening books or at time of inheritance in ac- cordance with the principles stated for Land account. The same principles also apply for repairs, additions and re- placements, and for sale of structures. The principal points of difference between Land and Building accounts are appreciation and depreciation. The question of appreciation seldom, if ever, arises in connec- tion with buildings. The matter of depreciation, however, does arise. That is the principal reason for keeping land and buildings under separate accounts. Depreciation is discussed under separate title later in this chapter. Building depreciation is taken up there briefly, although it does not call for much special com- ment. It should be stated, however, that the common statement so often made in connection with farm records, that ‘‘depreciation of buildings is offset by appreciation in land’’ is not upheld by scientific principles of account- ing. Mixed Accounts in a Trading Business.—The class of 124 FARM ACCOUNTING accounts known as mixed accounts has received much jus- tified criticism when used in commercial accounting. The most prominent account of this nature in trading concerns is merchandise. It is called a mixed account, because it does not come under any of the other classes, but is a combination of several. It does not show a resource, an expense or an income exclusively, but contains entries rep- resenting resources, expenses and incomes all together. The Merchandise account is debited with the value of the goods on hand at the beginning of the period, with the cost of goods purchased, with freight and drayage on goods purchased, and is credited with the selling price of goods and with the inventory of goods on hand at the close of the period. Any purchases or sales returned are also credited or debited respectively to the merchandise account. After making entries as noted, any credit bal- ance remaining in the account indicates a gross profit, any debit balanee represents a gross loss. The criticism of the account is based on the fact that it must be analyzed in order to show correct results. The total credits cannot be taken as sales, for some of the credits are usually for purchases returned at cost price. Likewise the total debits do not usually show the pur- chases because some of the debits are at sale price repre- senting returned sales. In place of the Merchandise account several accounts are used as subdivisions of the account as follows: Pur- chases, Sales, Returned Purehases, Returned Sales, Inven- tory, Freight and Drayage-In. At the close of a fiscal period these several account balances are brought together into a Trading account to find the net result. | Mixed Accounts on the Farm—Jn farm accounting the mixed account cannot be condemned to the extent that it is in commercial accounting for four reasons. (a) The work of keeping extra accounts in place of the mixed ac- SPECIAL ACCOUNTS AND ENTRIES 125 count does not warrant their use, since an analysis of the mixed accounts on the farm is not as essential and the entries in any one account are so few in number. (b) The kinds of commodities requiring mixed accounts on the farm are more numerous than in the average trading business, and represent departments of farming opera- tions, the main object of which is to find the profit or loss in each. (¢) There is seldom occasion in farming transac- tions to record returned commodities. Consequently the mixed accounts on the farm almost invariably contain, aside from inventories, only items at cost price on the debit side, and at selling price on the credit side. (d) In case of farm animals there are additions due to the natural increase which are not taken into account, except through the inventory at the close of the fiscal period. The mixed account affords the best way of accounting for the natural increase. , The most common mixed accounts on the farm are those representing the commodities from which an income is de- rived, as the livestock accounts and grain accounts. The equipment used in production is also recorded in mixed accounts sometimes, but it is better not to keep the ex- penses and incomes from this class of resource in the re- source account. This is especially true in cost accounting. Horses.—On the average farm where the primary object of keeping horses is to assist in the farm work, Horses ac- _ count is debited with the inventory value of horses on hand at the beginning of the fiscal period and with any expenses incurred on their behalf during the period. It is cred- ited with any income from the use or sale of horses and with the inventory value of all horses on hand at the close of the year. The balance represents a loss or gain for the year. In cost accounting it is advisable to keep separate ac- counts for work horses and other horses, if any general 126 FARM ACCOUNTING attempt is made to raise horses for the market. If a horse or colt is sold only occasionally, it should be considered as an income arising because of the general plan to keep enough horses on hand to perform the work economically. That is, the occasional sale would not require an account for other horses. Swine.—The Swine account is charged with the inven- tory value of all swine on hand at the beginning of -the year and with all expenses incurred on their behalf. It is credited with the selling price of all swine sold and with the farm value of all swine slaughtered for consumption by the farmer’s household. At the close of the fiscal year it is eredited with the inventory value of all swine on hand. The balance of the account then shows the loss or gain as a result of raising swine. Cattle—An account with Cattle is kept when it is de- sired to find out how much is being made or lost as a result of keeping cattle on the farm. If one engages in dairy farming and also in beef cattle raising, it is better to keep a record of the results of each class separate. For this purpose, two accounts called Dairy Cattle and Beef Cattle respectively are maintained, each to show the results of its specific class. It is not advisable to keep the two accounts if one of the lines mentioned is entirely subsidiary. That is, if the main cattle industry on a farm is that of dairying, but a few steers or heifers are sold in the market each year, it is not necessary to keep an account with beef cattle. Such sales are considered as an essential part of the main purpose of keeping the dairy herd up to standard. Like- wise, if the main cattle industry is that of feeding for market, but one or two cows are kept for dairy purposes, only the Beef Cattle account is required. Cattle account is one of the several accounts, needed in @ farm ledger, which are of a peculiar type, from an aec- SPECIAL ACCOUNTS AND ENTRIES 127 counting point of view. It must record sales of the re- source itself and sales of the product. It is impossible to keep accurate, separate cost accounts of the cattle as livestock and of the products of the cattle as milk, cream and butter. The difficulty from a cost accounting view- point lies in the fact that the costs cannot be divided ac- curately. When feed is given to a dairy cow it is quite impossible for the farmer to state what proportion of the value of the feed contributes to the cost of the dairy products and what proportion to the up-keep of the animal. If one is in the dairy business selling products and also selling pure bred dairy cattle, it is advisable to keep an account called Dairy Products, and one called Dairy Cattle. Under such conditions the Dairy Products account is ecred- ited with all income from the sale of dairy products to outsiders or to the household, and is debited with the costs of producing and marketing the products. The Dairy Cattle account would contain entries for the inventory at the beginning and close of the period. It would be debited with all costs of up-keep of the herd and credited with all income from sale of members of the herd. At the close of the year the Dairy Products account is closed into the Dairy Cattle account. After crediting the Cattle account with the inventory value of animals on hand at the close of the year, any balance is transferred to Loss and Gain account. Poultry.—As suggested in connection with the Dairy Cattle and Dairy Products accounts outlined above, Poul- try account presents the twofold results of the income from sale of property and the income from sale of product, without any basis for dividing the expenses. That is, in cost accounting it is difficult, or rather, impossible to de- termine how much of the feed consumed by chickens is to be charged against the eggs and how much against the poultry, if two accounts are kept. Accordingly, if two 128 FARM ACCOUNTING accounts are kept, it merely assists in finding the income from eggs throughout the year as a separate item to be transferred to the credit of Poultry account at the close of the year. The net profit on eggs cannot be found sep- arately from the net profit on poultry except through the use of estimates or averages. The net profit from the handling of eggs can be found if the Eggs account is charged with all costs in connection with them after they are laid; and credited with the selling price of those sold and used. | However, for all practical purposes, one account with poultry is sufficient unless it is desired to keep the Eggs account merely for the purpose of crediting if with the income, which is transferred to Poultry account at the close of the year. After crediting Poultry aecount with the inventory value of fowls on hand at the close of the year, any balance remaining is transferred to Loss and Gain account. Sheep.—Sheep account is another of the mixed accounts to which the same principles apply as have been brought out in connection with cattle and poultry. In this case, however, there is not as good a reason for keeping a sep- arate account for wool as there is for dairy products and eggs, since the sales of this product do not require as many entries in the course of a year. It would be a very easy matter to pick out from the credit side of Sheep account the item or items representing sales of wool, if one wished to find out at the close of the year how much of the total income was due to the sale of sheep and how much to the sale of wool. Equipment.—The title ‘‘Equipment”’ is used to desig- nate the account with farm implements and tools of va- rious sorts. Some writers on the subject advocate the separation of Equipment account into several classes, depending upon SPECIAL ACCOUNTS AND ENTRIES 129 the use made of the various equipment units. For exam- ple, there might be hay machinery, corn machinery, grain machinery, ete. This separation is suggested by some in cost accounting systems in order to facilitate the charge to the various crops for machinery depreciation. It has been found by experiment that a better and easier method exists. This method is presented in Chapter IX on cost accounting. A separate account for the Farm Tractor may be kept if one wants to find out its cost of operation without much analysis at the close of the year. Likewise, any special machines as hay balers, corn shredders and threshing ma- chine outfits may have special accounts of a mixed nature to show the income, expenses and inventory values of each special type of such machinery. Such accounts would be operated in the same way as any other mixed accounts, being debited with beginning inventory and expenses and eredited with income and closing inventory. The net gain or loss would be transferred to Loss and Gain account. Farm Crops.—There is no account called ‘‘farm crops,’’ but the title is used as a basis for discussing grain and forage accounts in general. There is no distinguishing characteristic that requires one of this class of accounts to be treated in a different manner from the others. A erop account is debited with the inventory at the be- ginning of the period and with expenses incurred, and is credited with the sale of the commodities, and the in- ventory, at the close of the year. In cost accounting it is debited with all ascertainable costs of production up to - time of harvest, as transferred from the field account; and with all subsequent costs in connection with the specific crop, and is credited with the value of feed sold and that consumed on the farm by livestock or in the household. When a cost system is not used, any balance remaining in a crop account, after crediting it with the inventory at 130 FARM ACCOUNTING the close of the period, is transferred to Loss and Gain account. Household.—The Household account is one of the first ones that should be established in any system of farm accounts. This does not necessarily mean that it is the first one to be studied. This account contains all transac- tions involving the personal affairs of the farmer and his family as opposed to the other accounts which relate to his operations as a farmer. Household account has no parallel in commercial ac- counting. It might arise in commercial accounting, if the doctor, the lawyer, or the merehant recorded his expenses for groceries, clothes, amusements and similar items among his business expenses. In case of the doctor, he records his expenses and fees in a set of books at the office. At the close of the year he finds from the Loss and Gain ac- count how much he has made as a doctor. If it is $50,000, for example, it is considered that he has made a success in his profession. Had the doctor recorded all expenses of maintaining his house in the set of books at the office, results might have been different. For example, suppose his family had lots of clothes, entertained lavishly and took vacations at a fashionable summer or winter resort, as a result of which the Loss and Gain account of the doctor’s office books showed a loss of $1000 at the close of the year. It might lead to false conclusions if one did not stop to analyze the situation. It might lead to the conclusion that he was not a suc- cessful physician. The facts, when known, however, are that he was a good physician, from a business point of view at least; but the standard of living of his family did not permit him as an individual to be any better off at the close of the year than at the beginning, in mie of his ; earnings in his profession, SPECIAL ACCOUNTS AND ENTRIES 131 The physician can easily avoid that apparent misrepre- — sentation of his books, by keeping two sets of books, one at the office, and one at the house. | The farmer, however, finds this to be very impractical if not impossible. The household is so near to the busi- ness, in his case, and the activities are so interwoven that it is almost forgotten that the farm is, in a business sense at least, separate from the house to which the man goes after finishing his day’s work. However nearly related the household and farm may be, it is necessary to keep the records of the farmer in such a way that it can be easily determined what his profit is from the farming business and what it is as an individual. For this purpose, the Household account is one of the accounts that should always be found in the farm ledger. In it are recorded all transactions of the household with the farm proper or with outside parties. In fact it is con- sidered that all property in the beginning belongs to the farm with the exception of household furnishings and uten- sils. At any time subsequently the Household is debited for what it uses of the farm’s resources or services and is eredited for the value of its resources or services used by the farm. Briefly, the Household is debited for everything bought for its use, and for everything contributed to it by the — farm in the way of livestock and their products, grain, fuel or other commodities. It is credited for any services given to the farm by members of the household. This in- cludes the time of the owner of the farm or any of his family and the board and lodging of hired help. In the closing process at the end of the fiscal year, the Household account is credited with the inventory value? of household and personal belongings on hand. Such in- ventory includes all house furnishings, utensils, jewelry, ~ +See Appendix A, Pricing Inventories, 132 FARM ACCOUNTING books and other articles not subject to immediate consump- tion, that are chargeable to the Household at the time of purchase. The house itself is not included in the inventory of household property. It is considered as part of the farm property, for which the household is charged with rent or interest. It has been found by investigation * in 483 farm families in ten states scattered through the east, south and middle west that the farm contributed to the household annually products and utilities valued at the following average amounts per family per year: food $261.35, fuel $34.72, use of house (rent) $125.10, a total of $421.17 per family or $91.97 per person. None of these items include articles of food or fuel purchased away from the farm. Statistics obtained from the same 483 families show that the average cost of board per person was $14.64 a month. This means that hired labor costs more than the eash paid for wages and that the household should be given eredit for this additional amount representing board and lodging. Labor.— \ ILLUSTRATION 25 INVENTORY ENTRIES IN AN Account SHow1nG A GAIN | Swine 1916 1916 ] Mar. 1 Inventory...... $400 Nov. 5Cash......... $200 1917 1917 Feb. 28 To Loss & Gain 400 Jan. 30 Cash......... 300 1917 Mar. 1 inventory..... 3 3 lg lai The entries in the Swine account of Illustration 25 are made as a result of the following transactions or transfers of value: SPECIAL ACCOUNTS AND ENTRIES 137 Mar. 1, 1916. The debit of $400 indicates either a credit to Capital account at time of opening the books; or a eredit to Swine account on the last day of the preceding year, if the account books were kept at that time. Nov. 5, 1916. This credit of $200 indicates that swine were sold for $200 eash, the latter account being debited. Jan. 30, 1917. This credit of $300 resulted in a debit to Cash for the sale of swine. Feb. 28, 1917. The $300 credit for the inventory was made after taking the trial balance at the close of the year, but before preparing the Loss and Gain Statement or Statement of Resources and Liabilities. It was made as part of the process of closing the ledger. The debit to offset the credit is found below the double lines of the same account. It is dated Mar. 1, 1917. It is considered as being made the first instant of the new year and the credit as being made the last instant of the old year. The date does not have any material effect except that it is better to have the entries above the double lines bear a date within the limits of the old year; and those below the double lines bear a date within the limits of the new year. When books of original entry are used this is one of that class of entries that do not have to appear in a book of original entry first. The reason is that it is a debit and a credit to the same account. The $400 debit in Illustration 25, under Feb. 28, 1917, is made in order to transfer the net gain to the Loss and Gain account. This is the last entry made before ruling off the account and bringing down the inventory. The loss or gain is found by the same arithmetical process that is used when the inventory is not brought into consideration. Tn this case (Illustration 25) the sum of the two sales plus the inventory at the close of the period is $800. By sub- tracting the $400 debit entry of Mar. 1, 1916, it is found that the result of dealing in swine is $400. This gain is ‘lo. eee a. ne 138 FARM ACCOUNTING transferred to Loss and Gain account by debiting Swine — account and crediting Loss and Gain. The credit entry in Loss and Gain account is not shown in Illustration 25. Some question arises as to why the $300 inventory at the close of the period is credited to the Swine account, and also debited. It might be considered as a sale to the next fiscal year. All sales of swine are credited to the account. Since it is desired to show the profit of each year separate, it is considered that the swine on hand at the close of the year are sold to next year’s operations. This sale to the succeeding year, however, is not made at selling price. This explanation also justifies the debit to the Swine ac- count below the double lines, with the value of the inven- tory. It is covered by the principle that a mixed account is debited with the cost of the property on hand at the be- ginning of the fiscal period. The year in which the swine are sold will then receive the profit. Natural Increase in Livestock.—It is only through the inventory entries that the natural increase in livestock is recorded. It is not practical to record values for young livestock born from time to time in the way a merchant records values for merchandise bought. Such values are reflected in the books annually at the time of recording the inventory. Thus the young stock born during a given year has its effect on the Loss and Gain account and upon the specific livestock account in the inventory entry or in the entry for sales. In Illustration 25 any pigs born dur- ing the fiscal year are accounted for in one of two ways. If they are sold on the market they are included in the regular sale credits. If they are not sold on the market they are sold to the next year’s operations, so to speak, and are, therefore, included in the inventory entry. In order to present the inventory and loss and gain en- tries under other conditions, let it be assumed that cholera caused the death of a considerable number of swine during © SPECIAL ACCOUNTS AND ENTRIES 139 _ the year so that instead of selling $500 worth and having _ $800 worth left at the close of the year, as in Illustration _ 25, the owner sold only $200 worth and had $100 worth at the close. Under these conditions there would be a loss, ‘and the account would appear as in Illustration 26 after closing it and bringing down the inventory. The inventory entry is made in the same way whether the account shows a gain or a loss. When the account shows a loss, it is nec- essary to credit such account and debit Loss and Gain account. ILLUSTRATION 26 INVENTORY ENTRIES IN AN ACCOUNT SHOWING A Loss Swine 1916 1916 Mar. 1 Inventory...... $400 Nov. 5Cash......... $200 1917 Feb. 28Inventory.... 100 Feb. 28 Loss & Gain.. 100 $400 ' $400 1917 Mar. 1Inventory...... $100 If an account does not have any debit or credit entries after the inventory at the beginning of a given year, and if the physical inventory at the close of the year agrees with the balance of the account, no entry is necessary for the inventory. For example, if Horses account has a bal- ance on Mar. 1, 1916, of $1200 and at time of closing on Feb. 28, 1917, there are no other entries in the account, and the inventory of horses taken at that date is $1200, the account is left exactly as it was. It shows the true condition of affairs and there is no loss or gain to transfer. Taking and Recording the Inventory.—The physical in- 140 FARM ACCOUNTING ventory (the process of counting and valuing) is taken and recorded on sheets of paper or in a permanent book at the close of the fiscal year. This is Feb. 28, in the middle west, Mar. 31 in some other localities, and Dee. 31 in some spe- cial types of agriculture, especially orchards and nurseries. However, under the new Income Tax regulations it is more convenient to have the fiscal year coincide with the calen- dar year. It is a very good plan to record inventories in compara- tive form, having the names of the items written on the left side of the page, reserving the space to the right for several money columns, one for each year. In this way one has the figures for about five years at a time to com- pare, which comparison serves as quite a valuable source of information. Another good feature of the inventory record in perma- nent or comparative form is that it presents a good excuse for ‘‘calling in’’ tools that have been loaned. If one sees listed in 1916, among the tools, ‘‘1 post hole digger,’’ but sees a blank space in the column of the comparative inven- tory for 1917, indicating no such tool on hand, it often serves to refresh the memory, and results in a trip or phone call to the neighbor’s farm to have the missing article returned ‘‘so as to straighten out the records at the close of the year.’’ It serves much the same purpose as the mer- chant’s appeal to his customers to ‘‘ please remit so we can close our books for the year.’’ If the customer does not remit the merchant closes his books anyway. If the post hole digger is not returned, it is counted in anyway. In either case, the pretension of an excuse often does much good and usually does no harm. A typical inventory in comparative form is presented in Tilustration 27. The relation between the figures in this comparative inventory and the ledger accownts ts the essen- tial point in the record. The physical inventory is taken SPECIAL ACCOUNTS AND ENTRIES 141 in order to derwe figures to use in the accounts. For this purpose the inventory sheet is so arranged that the figures to be used in the accounts stand out very prominently. In Illustration 27 the amounts recorded in the ‘‘ Valua- tion for Accounts’’ column each year are the ones that af- fecttheaccounts. Thenamesof the accounts affected are also brought out quite prominently; except that the inventory of Miscellaneous Supplies affects General Expense account, Equipment Expense or Dairy Equipment Expense, or other account charged at the time the supplies were acquired. In the case at hand, the valuation at Mar. 1, 1915, is considered as having been made for the purpose of opening a set of books at that time. Using the figures at that date as a basis, then, along with figures for cash, buildings, land, notes, and accounts receivable and payable, the opening entry would bear the following form, using figures shown in the Mar. 1, 1915, inventory of Illustration 27: CMOR: 45 ket e dasa Mae ose XXX Notes Receivable............. XXX RORTIOS beat is 4 Dees Rie $1,446 .00 PIII oe cee hl octane 46%, 565 .00 bol ES Sey Re be eae 1,760.00 POM y eA eee 134.50 ROOD sd Eee eine ale es 100.00 Boqumpments os assests 576.00 Equipment (Dairy)........... 120.00 SUMMOTE fp eats gait a acakeetse aie 450.00 COME: J/g arctic cath aire wtaleld ate 200 .00 MENG 55: cater Walaa uno calaa ee ys 56 .00 POUNOOCS.. Cet es ce hades tee 36.00 Bay, timothy 2.085 Ye. bc ne 100.00 BRED 5 5! nade ba eT OR dad, Grins 120.00 General Expense (Supplies on BORO) o2 = [FS7z9p Ut 2 ‘090 ‘orIM ‘osvers ‘TIO iS se soyddns s0yjo ppy — OF ze 80° og 00°F go: log | ‘sqrt S['e a A euou 0S 2$ OFS. 1A. oe Syovs “yuouled a sayddng snoaunyjeos. jy ei Spuvwep UOIsBD00 < se sjonpoid Jeyj0o ppy fe) 00° 0ST 00° 0¢ | 00° 0ZI 00°¢ Wl ay” ae aseTIG = 00° OST 00° OT ST | 00° 00T 00° OT OT |suoq****-Aqgouny ‘Key < 00°08 09° | OF | 00°9E 09° ae Ze sok ees $90}VOT J 00° 9€ 06° OF | 00°9S 08° a ee Mame se i =. eo M eS < 00° O8T 0g" 009; 00°00z OF" WOR) 3 os Sr ae 8¥8O a. 00° SZr$ os'$ 0S8) 00° OSS og’$ COG) Oe aaa wo) o a SPONPOLT ‘ wn oa : PanUuyuoj—auoody AYOLNAANT WAILVUVANOD ‘a1dNVE panuyuoj—)Z NOILVULSOTIT ner ees Sse fe ee Brig a. om c = 146 FARM ACCOUNTING It is to be observed from the pro forma entry above that only those amounts are extended in ihe ‘‘valuation for ac- counts’’ column of the inventory sheet that are to be trans- ferred to accounts in the ledger. For example, the title “‘ealves’’ appears in the inventory, but their value is not shown as a separate item in the column called ‘‘ valuation for acecounts’’ because there is no ledger account with calves. The transactions with calves are recorded in the Cattle account. In the inventory record, therefore, the calves are included with the total cattle in the ‘‘ valuation for accounts’’ column. For a similar reason each of the farm product items is extended into the valuation column. The inventories of Equipment and Dairy Equipment are shown separately, but both of the totals are carried to the Equipment account. Showing them separate in the inyen- tory record enables one to caleulate depreciation on the two classes of Equipment separately, if occasion demands. The Equipment and Dairy Equipment items are detailed in the inventory sheet only for the purpose of listing the great variety of items for future reference, and to show the quantities. The value of the equipment items is not shown, either in detail or in total, except at the time of opening the account books. The inventory value of Equip- ment at the close of a year is obtained by deducting a gwen percentage of depreciation, such depreciation and inven- tory values being recorded in the account without being shown first on the inventory record. This is discussed un- der ‘‘ Depreciation,’’ below. The inventory sheet is not totaled, as the totals are not used for any purpose. After depreciating the equipment and entering the several items of the valuation column in their respective ledger accounts, closing and bringing down the balances, the total value of possessions can be found easily from the trial balance after closing or from the Statement of Resources and Liabilities. ’* aot ee ete ee ae SPECIAL ACCOUNTS AND ENTRIES 147 The amounts in the ‘‘valuation for accounts’’ column under date of Feb. 29, 1916 (Illustration 27) are consid- ered as the values at the close of the first fiscal year and the beginning of the second. Accordingly, their use is that previously described herein and presented in Illustrations 25 and 26. For example, under date of Feb. 29, 1916, Cattle account would be credited with $1585 after taking the preliminary trial balance. The debit would be re- corded in Cattle account also, under the double lines after closing. Livestock Inventory in Accounts.—TIllustration 28 shows accounts affected by inventory items. It is pre- sented for the purpose of showing more clearly the relation existing between the inventory record and the ledger ac- counts. " The Cattle account is selected as a fair representative of the principles governing the several livestock accounts. The inventory of $1446 on the debit side of the account is posted from the opening journal entry on March 1, 1915, as given on page 141. The figure was taken originally from the ‘‘ valuation for accounts’’ column of the inventory rec- ord, Illustration 27, being the total value of cattle. The inventory of $1585 on the credit side of Cattle account is obtained directly from the same page of the inventory rec- ord, but from the valuation column of Feb. 29, 1916, which is one year later. The entries of May 20 and Nov. 1 are assumed merely for illustrative purposes. Crop and Field Inventory in Accounts.—The Corn ac- count is selected as a representative type of product ac- counts in Illustration 28. It is presented with the inven- tory figures as shown in the inventory record on page 145 being $450 on March 1, 1915, and $425 at the close of-the fiscal year Feb. 29, 1916. The $450 at the beginning ap- pears in the ledger account as a posting from the opening entry as given on page 141. Ordinarily, however, it would 148 ILLUSTRATION 28 Lepcer AccouNTs AND THEIR RELATIONS TO THE INVENTORY FARM ACCOUNTING RECORD Cattle 1915 1915 Mar. 1 Capital Invest. Nov. 1 Cash sale.... $500.00 per Inventory 1916 Record...... $1,446.00 | Feb. 29 Inventory per May 20 Veterinary... 25.00 Inventory 1916 Record. .... 1,585.00 Feb. 29 Net Gain to Lossand Gain $2,085.00 BIS. ciichae 614.00 ee $2,085.00 1916 Feb. 29 Invty. brought down....... $1,585.00 Corn 1915 1915 Mar. 1 Capital Invest. Dec. 16 Cash sale.... $506.00 per Inventory 1916 ; Record...... $450.00 | Feb. 29 Inventory per 1916 Invento Feb. 29 Net Gain to Record.... 425.00 Lossand Gain 2 ee 481.00 $931 .00 $931.00 1916 Feb. 29 Invty. brought down....... $425 .00 SPECIAL ACCOUNTS AND ENTRIES 149 General Expense 1915 | 1916 Mar. 1 Capital Invest. Feb. 29 Inventory per per Inventory . Invty. Rec- Record (ce- ord (nails)... $2.40 ment and Feb. 29 Bal. to Loss & Nags). 2. ess $11.50 Gain a/e.... 169.10 1916 Feb. 29 Sundries from Cash journal $171.50 3 $171.50 1916 Feb. 29 Invty. brought down (nails). $2.40 appear as an item carried down below the double lines from the preceding year. Miscellaneous Supplies Inventory in Accounts.—In showing the relation between miscellaneous supplies in the inventory record and in the accounts, the General Expense account is used in Illustration 28. The two classes of sup- plies specifically designated in the inventory record Illus- tration 27 are cement and nails. At the time these com- modities are purchased they are charged to General Ex- pense. When purchased in large quantities, they are not all used in the year in which they were purchased. In order properly to show in the General Expense account what supplies are used in a given year, an inventory is taken of the supplies on hand at the close of the year. These supplies are then credited to the General Expense account before closing, and debited below the double lines 150 FARM ACCOUNTING to General Expense account after closing, thus effecting a “*sale’’ of the commodities to the succeeding year’s busi- ness. Such an entry decreases the General Expense for the year below what it would be if the inventory of sup- plies as cement, nails :nd so on were not considered. It increases the expense of the succeeding year. In other words, the expense of the year is increased in which the cement and nails are used, regardless of when they are purchased. Considering the General Expense account of Illustration 28 with the inventory record, it is seen that the $11.50 debit in the account is the same as the total miscellaneous supplies on March 1, 1915, in the valuation column of the inventory record. Also, the $2.40 credit in the account is the same as the total of miscellaneous supplies Feb. 29, 1916. Although General Expense account has been used in illustrating the relation between ledger accounts and the inventory of miscellaneous supplies it is not the only ac- count that might be affected by an inventory of miscel- laneous supplies. Any given inventory of sundry articles affects the account that was debited when the articles were purchased. For example, when axle grease is bought, it is charged to Equipment Expense account. If only one or two boxes are bought at a time, they need not be con- sidered in the inventory. However, if a large quantity is bought a short time before the close of the fiscal year, it should be inventoried as one of the miscellaneous sup- plies. In recording the inventory for such axle grease, the entry both credit and debit is made in the Equipment Expense account, in a way similar to that used in record- ing nails in General Expense account of Illustration 28. Cost price is taken as a basis for valuing the products and miscellaneous supplies from year to year. However, when one does not operate under a cost system, the cost SPECIAL ACCOUNTS AND ENTRIES 151 price being difficult to determine, it is necessary to esti- mate a cost price for the products. This is sometimes easily done by taking a percentage of market price—say 5% or 10% off. Such an inventory valuation is unsatisfac- tory as a rule. Livestock is inventoried at a fair value on the farm, always less than the selling price, in order to avoid showing fictitious profits. The same average unit value for each class of livestock should be maintained from year to year, as far as possible. Depreciation.—Depreciation is a decrease in the value of property. The term is used on a farm in connection with buildings and equipment. Other possessions are not considered as depreciating to the extent that special ac- counting recognition must be taken of them. Hay may depreciate in a stack or corn in a erib under certain con- ditions, but such depreciation is taken care of in the an- nual inventory. Taking an inventory, then, is one way of _ providing for depreciation. It is known as the ‘‘ Revalua- ° tion’’ method of calculating the amount of depreciation. There are two main points to consider in depreciation, (a) the calculation of the amount of wear and tear expressed in dollars and cents and (b) the recording of the amount so calculated in the books. In the case of buildings and equipment it is more diffi- cult and unsatisfactory to caleulate depreciation accord- ing to the revaluation method, so the percentage method is used. There are several ways of calculating deprecia- tion by percentage. The most common is ealled the **straight line’’ method, in which the anticipated number of years of life of the asset is divided into the original cost in order to find the depreciation for each year. If a ma- chine costs $100 and it is estimated to last 10 years, the depreciation for each year is calculated as 1/10 of $100. The 1/10 is more often reduced to a percentage basis, mak- ing it 10% of $100. 152 FARM ACCOUNTING A method similar to the straight line, which is very practical and sufficiently accurate for farm purposes, is an unscientific modification of the ‘‘diminishing value”’ method. As practiced on the farm, it consists in caleulat- ing a certain percentage of the book value at the close of each year. The percentage is based on the number of years of life of the machine or building, e.g., 10% for a machine or building expected to last 10 or 15 years. This method never reduces the book value to zero. That is one element in its favor as far as use on the farm is concerned. Recording Depreciation in Accounts.—Under the ‘‘di- minishing value’’ method as practiced on the farm, if Equipment account has a balance of $1000 at the begin- ning of the year and 10% is considered as a reasonable rate of depreciation, the entry at the close of the year is a debit to Equipment Expense and a credit to Equipment of $100. This would leave a balance of $900 in the Equip- ment account at the beginning of the second year. At the end of the second year, the entry would be for $90 (10% of $900, the book value at the beginning of the year). At the end of the third year, it would be $81 (10% of $810). If at the beginning of the third year, $50 worth of new machinery is purchased, the depreciation calculated at the close of the year is 10% of $860. The effect of the entries for depreciation as stated above is to decrease the profits of each year and decrease the value of the resource depreciated. The profits are de- creased because the annual charge to Equipment Expense account represents the wear and tear on the equipment for the year. Diminishing Value and Straight Line Depreciation.— The rate of 10% as used in the examples above is a con- servative and practical rate to use in caleulating deprecia- tion on farm equipment, under the diminishing value method. A given rate used under this method results in pom? SPECIAL ACCOUNTS AND ENTRIES 153 a less annual amount of depreciation than the same rate under the straight line method. Illustration 29 shows a more or less hypothetical case in which the two methods are compared. In this Illustration it is presumed that some equipment is purchased for $1000. May 2. Receives from J. M. Whiton 4 bushels of seed potatoes; and sends him a New York draft for $16 in payment. The bank charges 10c for the draft. (Debit potatoes $16, General Expense $0.10 and credit cash $16.10.) May 3. Buys 2 tons of middlings at $22, and a barrel of salt, $1.50 (consider both items as Feed). May 5. Has 1000 each of envelopes ($2.50) and letter heads ($3.75) printed, paying cash for same. May 7. Has had so much trouble to get competent help on the farm that he makes a contract with Ed. Wise, who has been working for him off and on for some time, to work by the year at $420. Wise is to board all the extra help employed on the farm, and in addition to the wages agreed on, to have a truck patch, pasture for cow and house rent free of charge. Con- tract is dated May 1. It was mutually agreed that Mr. Jones should credit Mr. Wise at the close of each month with the amount he had earned during the month; and that Mr. Wise could draw against the account at any time. May 10. Buys a sheep shearing machine, $15. May 25. Pays Eli Johnson $40 for stallion service. May 31. Credits Wise with wages. June 2. Wm. George, to whom Jones shipped seed corn on April 8, writes that it hasn’t arrived—that it is now too late— he can’t accept, and wants his money refunded. In order to retain the good will of his eustomer, Mr. Jones refunds the money ($15) by bank draft; and makes a claim against the A. D. R. R. Co. for the amount, ineluding 10e for the draft. (Debit the R. R. Co. with the full amount paid. If the R. R. Co. should not settle within a reasonable time, their account would. then be closed into General Expense as a bad debt.) June 8. Sells his wool—726 lbs. at 16c. He pays 60¢ for resetting shoes on Prince, and $3 for mower repairs. June 22. Pays John Dole and Sam Peck each $6 for three days’ labor. June 24. Sells 20 hogs, averaging 230 Ibs. each, at $13.50. SPECIAL ACCOUNTS AND ENTRIES 167 June 24. Pays for household supplies $22 and for furnish- ings $38. June 28. Ed. Wise. draws $20 on account. June 30. Ed. Wise is credited with wages. July 20. Sends $6 and $5.20 respectively to two farm periodi- cals to pay for seed corn advertisements. The money orders cost him 16e. (Debit Seed Corn $11.20, General Expense $0.16.) July 21. Accepts the stock scale put in for him by E. Thomas, and pays $65 for it. July 28. Buys 100 bushels of oats at 50c. July 31. Credits Ed. Wise with wages. Aug. 3. Gives Ed. Wise $10 on account. Aug. 15. The roads are good and he has the time, so he puts in the coal needed by the household for winter, 10 tons at $4.75. | Aug. 23. Pays Joe Morgan $24 for threshing 800 bushels of wheat at 3c. Aug. 26. Pays $18 for household supplies and $25 for cloth- ing. Aug. 28. Buys 100 Ibs. linseed meal at $27 a ton, and a keg of nails at $3.70. (Debit Building Expense for the nails.) Aug. 30. Sells 80 bushels of wheat at $2. Aug. 31. Credits Ed. Wise with wages. Sept. 5. Buys 21% tons of fertilizer at $18. (Debit Fertilizer.) Sept. 8. Buys two tons of middlings for $24 a ton. Sept. 10. Gives his wife $20. Sept. 20. Buys 4 bushels of timothy seed for $10. (Debit 1917 timothy crop.). Sept. 27. Pays freight on timothy seed $0.60. (Debit 1917 timothy crop.) | Sept. 28. Pays John Betts $22.50 for ten days’ labor. Sept. 30. Credits Ed. Wise with wages. Oct. 3. Gives Ed. Wise $10 on account. Oct. 15. Sells 25 head of hogs, averaging 200 lbs., for $13 a ewt. Oct. 20. Sells 150 bushels of potatoes at $1.80. (Consider potatoes as a crop account.) Oct. 25, Takes 20 bushels of potatoes for personal use and _——=" eS eae ae in ian a ee eal fee! \o' #-s ‘ ’ '~S : 168 FARM ACCOUNTING also gives Ed. Wise 20 bushels, charging $1.70 a bushel in each ease. The truck patch allowed Ed. Wise did not raise ee (No cash is involved in the transaction.) Oct. 30. Pays John Betts $2.25 a day for 15 days’ work. Oct. 31. Credits Ed. Wise with wages. Nov. 15. Sells 117 lambs, averaging 100 Ibs., at $9.50 per ewt. Buys 500 bushels of corn at $1.50, not for seed. Nov. 20. Sells 34 head of hogs at $12 per ewt. Average weight is 220 Ibs. Nov. 23. Pays for husking his corn crop, sass bushels at 3e a bushel. Nov. 29. According to contract made in March, he sells for eash to the Williams Seed Co., his crop of corn for seed at 25¢ a bushel above market price. After sorting, it amounts to 1600 bushels, calculated at $2 a bushel. (Dr. Seed Corn, Cr. Corn #2800 [1600 at $1.75] Dr. Cash, Cr. Seed Corn $3200 [1600 at $2].) Nov. 30. Pays John Betts and Sam Peck each $22.50 for ten days’ labor. Nov. 30. Credits Ed. Wise with wages. Dec. 5, Ed. Wise is given 3 hogs to butcher, same to be charged to his account. Weight averages 240 Ibs. at $12 per ewt. Dee. 8. Butchers 3 hogs himself. Average weight 230 lbs. at $12 per ewt. Dee. 10. Has some shoeing done, $4.75. Dee. 15. Gives his wife $50, and takes $47 himself for per- sonal use. Dec. 18. Buys 200 bushels of oats, paying 55¢. He renews his subscriptions to various stock and farm journals, costing $6.60. He also pays 12e for money orders, and $2 for postage stamps. (Subseriptions to farm journals are charged to Gen- eral Expense. Subscriptions to popular journals and news- papers are charged to Household.) Dee. 23. Gives Ed. Wise a check for $50 and also writes an- other for $10 for personal use. Dee. 31. Credits Ed. Wise with wages. Jan. 12, 1917. Withdraws $30 from the bank and spends all of | } ; : | SPECIAL ACCOUNTS AND ENTRIES 169 it while attending annual meeting of the State Board of Agricul- ture. (This is considered as a business rather than a pleasure trip.) Jan. 22. Receives a check from the A. D. R. R. Co. for $15.10 for his claim made in June for seed corn lost in transit. Jan. 31. Credits Ed. Wise with wages. Feb. 1. Pays taxes $118.43. Feb. 2. Gives Ed. Wise a check for $10. He has the shoes sharpened on Jack and Jim, for which he pays $1.40. Feb. 7. Buys a bob sled, $15, and also buys a ton each of bran, $21; and middlings, $24. Feb. 10. Buys 41% bushels of clover seed for cash, at $9 per bushel. (Debit 1917 clover crop.) Feb. 15. Buys the 40 acres adjoining the Lone Tree Farm for $82.50 an acre. He pays $2000 in cash and The First National Bank loans him the balance at 5% on three years’ time, agree- ing to accept payment of the whole or any part of the principal on any interest paying date. He secures the bank by mortgage. (Credit Mortgage Payable account for amount borrowed, show- ing name of bank in explanation column. Debit Land for en- tire purchase price.) Feb. 27. Pays for 2000 four-inch tile at $12.50 a thousand. (Debit General Expense.) Feb. 28. Credits Ed. Wise with wages. Mar. 2. He gives Ed. Wise a check for $20. Mar. 9. He buys a pair of rubber boots for himself, $4.50. Mar. 20. Gives his check for 1000 feet of lumber, $27, to be used in repairing buildings. (Debit Building Expense.) Mar. 31. Credits Ed. Wise with wages. Mar. 31. An inventory taken on this date resulted in the fol- lowing aggregate amounts being shown as values of the various possessions : Land $18,300; Buildings have depreciated 5% during the year and equipment 10% of the value at the beginning. Horses, $500; cattle, $75; hogs, $215; sheep, $600; corn $560; potatoes, $20; clover hay, $90; seed corn, $30; fertilizer, $30; 1917 timothy crop, $10.60; 1917 clover crop, $40.50; mill feed, $74.10. The corn consists partly of that left after sorting seed for sale. The 170 FARM ACCOUNTING — pay tee household furnishings are valued at $700. All tile purchased on Feb. 27 are still on hand; also the lumber bought on Mar. 20. (a) Make all the entries for the transactions given above. ) (b) Post all entries to the proper ledger accounts, ruling off eash journal. (ce) Take a trial balance immediately after posting the last transaction, before considering inventories. (d) Considering inventories, prepare a Loss and Gain account — in the ledger, and rule off the necessary accounts, bringing down balances or inventories whenever the nature of the account re- quires it. (e) Take a trial balance after closing which may be used also as a list of the Resources and Liabilities as of March 31, 1917. REVIEW QUESTIONS 1. Deseribe the method of recording the value of services of a hired man employed regularly, but drawing cash as wanted at irregular intervals. 2. What is the general principle governing debits and eredits — to Notes Receivable account? 3. What three methods of parting with a note receivable cause eredit entries in the account? 4. Why must Notes Receivable account always have a debit bal- ance, if any? 5. Is interest on notes included in the note account? 6. State two ways in which it ean be determined whether a promissory note parted with is eredited to Notes Re- ceivable or Notes Payable account. 7. Why must Notes Payable account always have a eredit bal- ance if any? 8. What negotiable instruments are considered as lk rather than notes receivable or payable? How are mortgages treated in accounts? 9. What principles govern the debits to Land account when — opening a set of books? When purchasing land? When inheriting land? | SPECIAL ACCOUNTS AND ENTRIES 171 10. What items may be charged to Land account, that do not represent the actual amount paid for the land? 11. Diseuss the charges to be made for fence or tile repairs under varying conditions. 12. Why is it not considered good accounting to record apprecia- tion or depreciation of land in the books of account? 13. What is the nature of the entry to record a sale of land for more than the book value? For less than the book value? 14. Under what conditions is an account with buildings debited? When eredited? 5. What is a mixed account? 3 eer ere See te commercial 20 counting. 17. Why is the use of the mixed account considered by some as unscientific ? 18. Name four reasons why objections to the mixed account do not apply in farm accounting. 19. What class of accounts on a farm are generally used as mixed aceounts? 20. What entries are commonly made in the account with horses? 21. Diseuss the advisability of keeping one account with work horses and one with other horses. . 22. What is the nature of the entries in Swine account? 23. When is it better to keep separate accounts for dairy and beef cattle than to have them combined into one account? 24. What peculiarities exist in cattle raising that make it diffi- eult to record transactions accurately as regards cost? 25. Make suggestions for keeping proper accounts when one is engaged in raising dairy eattle for the purpose of dis- posing of dairy produets and also for selling dairy cattle, quite extensively. 26. Diseuss the account or accounts required to record poultry operations. What advantage is there in keeping two ac- eounts for poultry transactions? 27. Diseuss briefly the reeording of transactions in connection with sheep. 28. What accounts might be iat to record transactions involv- ing farm machinery and tools? 43. ee —— ——— neste A fio a? aw | » ve. P cue rr : F . = 4 . ¢ ; dy FARM ACCOUNTING . Make suggestions concerning transactions with tractors, corn shredders, threshing machines, and hay balers. . Diseuss the nature of debits and eredits recorded in corn, oats and wheat accounts. . What is the nature of the transactions requiring entries in the household account? . Why is the household account such an important one in farm accounting? Compare the business of farming with other classes of business in this respect. . Why is labor account debited with the value of food and lodging given to hired help? . Present two ways of making entries for labor of a permanent hired hand receiving board and lodging free, and drawing amounts of cash from time to time as needed. - How is labor performed by members of the household re- corded? . Diseuss the entries to show correct costs when a member of the household is paid a nominal amount in eash for his labor, but not an amount which he is really worth. . Diseuss the entries for feed bought, when all used for the same class of livestock. When used for several classes. . How is commercial fertilizer recorded in the books? . What is an inventory? What accounts are affected by in- ventories? . How are accounts affected by inventories? . Which results in the showing of the larger gain in an ae- count, a large inventory or a small inventory at the close of the year? - Does the large or the small inventory in an aeceount at the beginning of a year result in the greater gain during the year, other entries being the same? When an account is credited with the value of the inven- tory at the close of the year what account is debited? Discuss. . Is the eredit for inventory at the close of a period made before or after taking the preliminary trial balance? Be- fore or after the trial balance after closing? — o7. 58. 59. 60. 61. SPECIAL ACCOUNTS AND’ ENTRIES 173 . Why does the entry for the inventory not have to appear in any book of original entry? . After closing inventory is properly recorded in an account what steps are necessary to complete the closing of the account? . Discuss the reason for debiting and crediting the same ac- count with the inventory value. . How does a natural increase in livestock affect the loss or gain of the specific livestock account? . Illustrate the method of making the inventory and closing entries in an account that results in a loss. . Under what conditions is it unnecessary to record an inven- tory value in an account, although an inventory exists? Why? . What is the procedure in taking and recording a physical inventory? . What advantage is there in having a detailed inventory in comparative form? . What is the point of contact between the inventory record and the account? . How is general expense account affected by inventories? - How is the inveritory record used in making the opening entries at the time of opening ledger accounts for the first time? . Why are dairy and general equipment kept separate in the inventory record and also in the ledger? How is the value of equipment determined? How is it shown in the inventory record? Discuss the advantages of this method of valuation. Why is it not necessary to find the aggregate total of all items listed in the inventory record? State how taking an inventory is a method of calculating depreciation. What method is it called? What is the straight line method of calculating deprecia- tion? Illustrate. What is the diminishing value method as used on the farm? Illustrate. Compare the two methods. 62. What debits and credits are expressed to record d preci: n of equipment? a | sa i th 63. Diseuss the principles governing depreciation of dings. 64. What is the object of making closing journal entries? 65. Discuss the method and form of elosing journal entries. are they always entered in the “sundry” cam er the cash journal? 4 if 4 £ 3] CHAPTER VII SPECIAL ACCOUNTS AND ENTRIES (Conrmxvsp) Fair Exhibits——Considerable expense is incurred, and some income derived by some farmers as a result of ex- hibits of livestock and farm products at fairs. If a farmer has an exhibit of several commodities or groups, it would be advisable to open an account called ‘‘Fair Exhibits,’’ to which is debited all expenses incurred in preparing and transporting exhibits, together with any entrance fees and cost of protection while at the fair. The account is cred- ited with any income from the exhibits, except that income from the sale of the articles exhibited is credited direct to the livestock or farm produce accounts representing the articles sold. Any balance in the Fair Exhibits account is closed into Loss and Gain account, at the close of the year. If one deals in one specialty that es exhibits largely at fairs, such an account would be opened as described above, but the balance would be transferred into the ac- count representing the specialty. For example, a farmer specializing in Poland Chinas and exhibiting them, but nothing else, at fairs, keeps an account called ‘‘Poland China Exhibit.’’ After all expenses and incomes of the exhibit are entered he transfers the balance to Swine ac- eount before finding the loss or gain on the latter. Consignments.—Produce or livestock shipped or placed in the hand. of someone else for sale on commission are known as consignments. The title in the goods remains with the consignor, who is the original possessor. The 175 : 176 FARM ACCOUNTING possession of the goods, but not the title, is transferred to the consignee, who is the party receiving the goods for sale. The consignee is sometimes called the factor. In recording consignments in the books of account no debits and credits are expressed in the books of the con- signor at the time of sending the goods. He makes a mem- orandum in a notebook or in the back of the journal, in- dicating the quantities and nature of the products or live- stock sent, to whom sent and any other facts concerning the terms of sale and so on. Any freight paid or other expense incurred in sending them is charged to the prod- uce-or livestock account under consideration. When the consignee has sold the goods he usually re- mits in the form of cash or note. At such a time, when the cash or note is received, the debits and credits of the consignment are expressed. Cash account or Notes Re- ceivable is debited and the proper produce or livestock ae- count credited. This credit to the produce account is for ‘the net amount after the consignee’s commission and ex- penses have been deducted, as shown by the ‘‘ Account Sales,’’ the statement accompanying his remittance. There are several methods of handling consignments, of which the one described is the simplest to operate but is not the most theoretically correct one. The records from the viewpoint of the consignee do not interest the farmer, hence are not presented here. Auction Sales.—No account with auction sales is neces- sary. The sale of each article is recorded as a credit to the property account affected. This does not mean that a sep- arate entry is made for each article sold. Some items can be grouped in a single entry. For example, the sale list kept by the clerk of the sale forms the basis for the entries. If one cultivator, two wagons, one hay rake and one walking plow are sold for $110 cash, according to the clerk’s record the entry is: SPECIAL ACCOUNTS AND ENTRIES 177 Equipment......... $110.00 ¢ If the same equipment were sold for 10% cash down and | a note for the balance, the entry would be: i A WAP, ANNA asta $11.00 A. Notes Receivable........ 99 .00 | Equipment......... $110.00 Presuming that the book value of the five articles sold is $150, an entry is made as follows: z Loss on Auction Sale.... $40.00 ee | Equipment......... $40 .00™ 2 This entry’ reduces Equipment account to an amount representing the value of the equipment still on hand, and ) at the same time shows the loss due to the sale at auction. | The Loss on Auction Sale account is debited with loss from other classes of property also. For example, if five . cows are sold at a price aggregating $35 below their inven- | tory or book value, an entry is made to show the result in this way: 7 Loss on Auction Sale. ... $35.00 CGE aa gn ie acts $35.00 Considering the last two entries above as being the only ones affecting the Loss on Auction Sale account, the entry to close the latter account is: Loss and Gain.......... $75.00 Loss on Auction Sale $75.00 This entry transfers all losses due to the special auction sale direct to Loss and Gain account rather than permitting them to appear in the several property accounts at the close of the year. If they appeared in the property ac- 178 FARM ACCOUNTING counts it would tend to indicate poor management, or that some property cost was excessive, when, as a matter of fact, the unusual event—the auction sale—was responsible for the loss. Fire Loss.—Under this title is illustrated the method of handling the transactions incidental to loss of property of any sort by fire. The same treatment would apply in case of hail insurance, tornado insurance or livestock insurance. _ As an example, assume a farm having a blanket fire policy on the buildings and contents amounting to $5000. If the buggy and tool house burns, rendering all articles therein useless, the insurance adjuster calculates the amount of insurance money to which the loser is entitled. For the purpose of recording the transactions on the books it is necessary to credit the Buildings account with the value of the building destroyed, credit Equipment ae- count with the value of buggies and tools that were in the building and debit Fire Loss account with the sum of the two debits named. Credit Fire Loss account with the cash received from the insurance company, debiting Cash. If there was nothing else to consider, the balance of the Fire Loss account would now show a loss or gain, whose balance would be transferred to Loss and Gain account at the close of the year. Quite often, however, in a case like the one cited, some of the remnants can be sold for junk, or there are parts from which salvage can be recovered. In such instances, the Fire Loss account is credited with the selling price of any salvage and debited with any expenses incurred in ~ removing such parts from the ruins and disposing of them. . If the recovered parts are retained for use on the farm, eredit Fire Loss account and debit Equipment account. The latter account being credited with the total value of contents immediately after the fire, is now debited with any recovered and kept for further use. ee SPECIAL ACCOUNTS AND ENTRIES 179 If no insurance is carried the Fire Loss account is oper- ated in the same way, except it is 8 not eredited with insur- “ance recovered. Death of Livestock.—Livestock deaths covered by in- surance are treated in a way exactly similar to fire losses, discussed above. An entry may or may not be made for loss of livestock at time of death when not insured. If it is not made at that time, the loss is reflected in the proper livestock ac- count at the time of recording the inventory at the close of the year. The only difference between the two rekindle | is that in one case, the loss due to death will show in the account as a separate item; while in the other it will be merged in with all other items of expense and income contributing to the net loss or gain on that class of stock. The difference in results under these two methods is brought out in Illustrations 31 and 32. Assume a swine herd with an inventory value of $400 at the beginning of the year, and $150 at the close. Consider that expenses of maintenance, charged to the account, amount to $100, that sales amount to $140, and that the farm value of hogs lost through cholera is $200. If no entry is made in the Swine account when the hogs are taken by cholera, the Swine account and the Loss and Gain account as far as affected by swine will appear as in Illustration 31. If a eredit entry is made in the Swine account at the time the hogs are taken by cholera, Loss and Gain account is debited. The two accounts would then appear as in Illustration 32. Illustration 31 indicates a loss of $210 in swine. It does not show what the result of the ordinary transactions was. Illustration 32 shows a loss of $10 due to the ordinary a — - a —- —_—— a » - _ 7 180 FARM ACCOUNTING ILLUSTRATION 31 Accounts AFFECTED BY DEATH or LivesTocK WHEN No Entry 1s Mape at Time or DEATH Swine 1916 1916 Mar. 1 Inventory..... $400 Dec. 22 Cash sale..... $140 1917 1917 Feb. 28 Expensefor year 100 Feb. 28 Inventory..... 150 Feb. 28 Loss & Gain... 210 1917 Mar. 1 Inventory down $150 Loss and Gain 1917 Feb. 28 Swine........: $210 transactions and $200 from unusual events. The latter method presents the facts in a more useful way. Market Gardening.—Retail market gardening does not involve any general principles not presented in general farming as far as accounts are concerned. The nature of the expenses differs somewhat and in keeping cost records the details involve more work, but the principle of keeping necessary accounts to show results applies as in general agriculture. In one respect there is less work involved in keeping accounts of a market gardener because the in- terrelation between crops and livestock does not have to be provided for in the cost records. Crops Sold under Contract.—There is a class of farming allied to both market gardening and general farming that SPECIAL ACCOUNTS AND ENTRIES 181 ILLUSTRATION 32 Accounts AFFECTED BY DratuH or Livestock WHEN ENTRY 1s Mapr aT TIME OF DEATH Swine 1916 1916 Mar. 1 Inventory..... $400 Dec. 22 Cash sale..... $140 1917 1917 Feb. 28 Expensesfor yr. 100 Jan. 25 Died of cholera 200 Feb. 28 Inventory 150 | Feb. 28 Loss and Gain. 10 $500 $500 1917 Mar. 1Inventorydown $150 Loss and Gain 1917 Jan. 25 Swine (cholera) $200 Feb. 28 Swine (operat- ing loss)..:.. 10 requires special consideration. The crops sold under con- tract are referred to. A beet sugar concern contracts at the beginning of the season for all the beets in a field at so much a ton, and agrees to furnish the labor for ecultiva- tion and harvesting. A similar agreement might be made concerning a field of cabbage, cucumbers, sweet corn, broom corn or other crops. From the bookkeeping point of view no entries are re- quired at the time the contract is made. The contract should be in writing in order to be enforceable and should be carefully preserved. | 182 FARM ACCOUNTING Since the labor for cultivation and harvesting is not employed by the farmer he does not have any entries to make concerning them. Under the cost method, however, the farmer would debit the beet field account with the labor and expenses connected with the preparation of the soil and the planting. If the contract calls for cash on delivery of the beets, the simple entry for a cash sale is made, crediting Beets and debiting Cash. If, however, the payment is deferred until sometime later, the party buying the beets should be debited at the close of each day with the contract price of the beets delivered during the day. When he irr he is credited and Cash debited. Orchards.—F or accounting purposes the orchard is con- sidered in practically the same light as the annual crops. It has some peculiarities that must be reflected in the ac- | counts in order to show proper results, but brings up few new problems. The orchard is charged with all costs of clearing and pre- paring the soil, staking, purchase of nursery stock, plant- ing, and all maintenance charges for the first four to seven years when it begins to yield. All expenses thus charged up to and ineluding the first year of its yield are consid- ered as adding to the value of the orchard. To these ex- penses are added interest? on the investment for the period mentioned. The resulting debit balance is the figure which is to be considered as the investment in the orchard during subsequent years. Any expenses after that time are to be considered as operating expenses to be offset against the income from the orchard for the year to find the yearly loss or gain. In finding the loss or gain, an account suliad Orchard Expense and Income account is kept. To this is debited all expenses, after the first bearing year, such as cultiva- 1See Appendix for the rate of interest. — SPECIAL ACCOUNTS AND ENTRIES 183 tion, care of trees, harvesting, and overhead charges, in- cluding interest on the investment for the year. It is cred- ited with all income for the year from the fruit. The bal- ance of the account is the net profit for the year and is closed into Loss and Gain. This method of handling the items after the investment is found, leaves the investment intact in the Orchard ac- count itself, which is carried as a resource from year to year until the orchard starts to depreciate. Orchard ac- count is then credited and the Orchard Expense and In- come account debited for depreciation. The time of this is quite indefinite,’ peach trees having a bearing life of only about nine or ten years, while apple trees are about in their prime at that time, the twelfth to fourteenth year of their growth. If it is desired to know which variety of fruit pays best it is necessary to keep detailed cost records. The one that sells for the highest price is not necessarily the one that pays best. Perhaps the last named variety requires more spraying, is more susceptible to frost, is more expensive in thinning, or in pruning, and that picking costs are in- ereased because of the difficulty in finding sufficient color to class as Fancy or Extra Fancy. Detailed costs are required in order to state intelligently that one class or variety pays better than another. Such detail could be made profitable in large orchards, but not in the average orchard conducted incidentally with general farming oper- ations. Woodland.—tThe value of wooded land should be kept in an account by itself, and not classed with farm land until it is cleared for cultivation. The value at which it is placed on the books may be left indefinitely, since the removal of the wood is considered as making it more val- uable for tillage. For this reason a Woodland Expense +Oregon Agricultural College Experiment Station Bulletin No. 132. 184 FARM ACCOUNTING and Income account should be established, to which is cred- ited the wood charged to the household or sold for cash; also any income from pasturage. This expense and income account is charged with taxes and (under the cost method) with interest on the property. When the land is cleared for tillage, the cost of grub- bing and disposing of stumps is properly charged to the property account ‘‘Woodland’”’ in order to arrive at its cost as tillable land. After it is cleared, the balance of the account is transferred to Land account. Bees.—The operations of bees are recorded in the account bearing this title. It is charged with the inventory at the beginning and all expenses of operation; and is credited with the income and the inventory at the close of the pe- riod. Any balance remaining after these entries, is carried to Loss and Gain account. The inventory, for purposes of this account, consists of the value of the hives, honey, and all apparatus main- tained for special use in connection with the bee industry. Care should be exercised in valuing the swarm, on account of the uncertainty of its duration. A low nominal value, if any, should be used. Partnership.—The form of the organization of an enter- prise does not alter the principles of recording transactions except at the beginning of business and at the close of a fiscal period. There have been only two principles presented up to the present subject that do not apply equally in a single pro- prietorship or in a partnership. Those two relate to the opening of the books at the beginning; and the closing entry. In the case of a partnership, the opening entry credits the capital in two or more amounts depending on the num- ber of partners. The closing entry credits each partner SPECIAL ACCOUNTS AND ENTRIES ~— 185 with his share of the profits, or debits him with his share of the losses. _ Opening Entry of a Partnership.—The opening entry of a partnership shows the resources brought into the busi- ness, the liabilities assumed, and the total investment of each partner, credited to his Capital account. For exam- ple, if A. B. Clay and Ike Laahre enter into partnership on a rented farm, the entries in Illustration 33 would in- dicate the amounts contributed by each: ILLUSTRATION 33 PARTNERSHIP OPENING ENTRIES A partnership agreement having been effected, we (A. B. Clay and Ike Laahre) today open a set of books by recording our respective investments in the firm of Clay and Laahre by the following entries: 3 March 1, 1917 NOMBM. cs sans RE ae $1,000 Equipment. ....66 ices eae 500 Note Payable......... $500 A. B. Clay, Capital. . . 1,000 March 1, 1917 MOMMY: 2 FR Las POOR E FS $1,000 A Rhgrses 43s, Seabee os ie 1,000 Ike Laahre, Capital... $2,000 The entries of Illustration 33 indicate that Clay put in $1000 net capital and Laahre $2000. The capital of the business is therefore $3000. In a partnership each part- ner has a capital account bearing his name. In the ease at hand, A. B. Clay’s Capital account is eredited with $1000 and Ike Laahre’s with $2000. In order to find the aggregate capital of the business conducted on a partner- ship basis, it is necessary to take the sum of the balances of the capital accounts. ~?ts. > Beet ets et A — > ~ hs =e =e a t 186 FARM ACCOUNTING Closing Entries of a Partnership.—After posting the opening journal entries, all subsequent entries are the same as for a single proprietorship until the Loss and Gain ac- count is closed. With two owners instead of one, the entry closing Loss and Gain account assumes the form presented in Illustration 34. ILLUSTRATION 34 PARTNERSHIP CLOSING ENTRY Feb. 28, 1918 Loss and Gain. ...... +s ee 202 FARM ACCOUNTING = Feb. 14. Buggy shed burned, in which $300 worth of equip- ment was rendered useless. (Building loss does not affect the tenant.) Feb. 18. Sold remnants of the equipment damaged by fire for — $30 cash. Feb. 28. Received a check from the insurance company for $250 to reimburse for damage from the fire of Feb. 14. Feb. 28. Paid rent for the year in eash, $550. Feb. 28. The inventory taken at this date was valued as fol- lows: Equipment, $295; horses, $530; cattle, $270; hogs, $545; corn, $1030; oats, $300; hay, $190; and straw, $225. (a) Post all entries to the ledger, including totals of all but the Sundry columns, (b) Take off a trial balance before considering inventories. (ec) Considering inventories, prepare a Loss and Gain ac- count, close its balance into Capital account and rule off the accounts, bringing down inventories below the rulings. (d) Prepare a trial balance after closing, which may be econ- sidered also as a Statement of Resources and Liabilities, as at Feb. 28, 1918. (e) Prepare a Farm and Individual Income Statement for the year ended Feb. 28, 1918. (f) Prepare a Change of Wealth Statement at Feb. 28, 1918. 2. On Jan. 1, 1917, Frank Anderson took a complete inven- tory of his farm and found he had the following, which are to be entered in the comparative inventory record except land, buildings, notes receivable, ete.: 194 A. of land valued at $19,400; dwelling, $2500; tenant house, $1000; 1 new barn, $1000; 1 old barn, $200; 1 poultry house, $80; 1 smoke house, $40; 1 wood shed, $10; 150 bu. wheat at $1.70; 600 bu. oats at $0.50; 100 bu. corn at $1.20; 55 T. elover and timothy hay in barn at $12; 15 T. clover and timothy hay in stack at $12; 7 T. oats straw at $6; 10 T. wheat straw at $1.50; 1 grain binder, $70; 1 cultivator, $24; 2 walking plows at $5 each; 1 corn planter, $24; 1 cultivator, $15; 1 mower, $20; 1 riding ~ plow, $18; 1 riding plow, $22; 1 steel roller, $16; 1 broadeast grass seeder, $1; 1 old sulky rake, $1; 1 double harpoon fork, ~ rope, ete., $7; 2-6” Diamond plows, $2.50; 1 manure spreader, SPECIAL ACCOUNTS AND ENTRIES 203 $40; 1 harrow, $1; 1 14-dise harrow with truck, $12; 1 2-see. steel spike-tooth harrow, $5; 2 double shovel plows, $2.50; dairy _tools, $7; 1 wagon, $10; 1 road cart, $10; 1 wagon, $25; 1 car- — riage, $50; 1 single top buggy, $40; 1 four-cylinder automo- bile, $400; 1 feed grinder, $12; miscellaneous equipment, $15; 1 Fairbanks stock and wagon scales, $25; 1 road drag, $1; 1 lawn mower, $4.50; 1 wheelbarrow, $1; 1 small galvanized tank, $1.50; 1 pr. dehorning clippers, $3.50; 3 sets double work har- ness, $45; 1 set double carriage harness, $18; 2 sets single buggy harness, $18; 2 saddles, $18; robes and dusters, $2; halters, $12; fencing tools, $2; garden tools, $4; ditching tools, $0.75; barn tools, $7; shop and repair tools, $10; miscellaneous tools, $10; 8 head horses $1165 and 6 head mules, $810; 15 head cattle, $585; 35 hogs, $580; 70 chickens, $50; 60 T. ground limestone, $120; miscellaneous supplies, $2 (Charge General Expense) ; notes re- ceivable, $465; (John Pals’ note without interest due March -1, 1917) ; His liabilities were as follows: 6% mortgage, $4000 interest _ payable Jan. 11 and July 1; note payable without interest to Jake Dillon, $100; owing to Johnson Bros. on account, $25. He decides to keep a double entry set of books. Determine his present worth and open his books, using cash journal, ledger, and comparative inventory record. Cash journal columns are: debits: Frank Anderson Drawing, Fred Anderson Drawing, Cash and Sundry; credits: Sundry and Cash. His transactions are as follows: Jan. 1. Fred Anderson, the proprietor’s married son, who has saved some money while working in the city enters into partner- ship with his father for the term of one year from today. The terms of the copartnership agreement contain among others the following provisions: (a) Fred is to invest $1000 in cash, (b) He is to rent the tenant house and garden plot for $60 for the term of one year, said rental to be an income of the elder Anderson and not of the business. *Frank Anderson has given his personal check to pay the interest . due today (January 1), so it is not necessary to consider interest in _ the entry made at this time. 204 FARM ACCOUNTING ole (ce) Before distributing the gain or loss for the year, an entry is to be made debiting Loss and Gain and erediting the Part- ners’ Drawing accounts with 5% interest on the respective in- vestments of the two partners. (d) Labor account is to be debited and each partner eredited in his drawing account at the close of the year with $600 for labor during the year. (e) Each partner may draw from the business for private use, cash or produce to the value of $600 during the year. (f) Either partner drawing more than $600 in cash and pro- duce the year shall be charged with 5% interest for the elapsed time on the excess withdrawals, Loss and Gain being credited. (g) Depreciation at 5% per annum shall be charged to Loss and Gain account on all buildings and 10% on all equipment before distribution of profits. Note.—The terms of the copartnership agreement as given above do not require an entry until transactions are stated. Jan. 1. Fred Anderson invests $1000 cash in the business ae- cording to the terms of the partnership contract. Jan. 3. There was sold to the Jones Elevator Co. on account, 75 bu. wheat at $1.70. Jan. 10. Sold for cash 5 T. oats straw at $6. Jan. 20. Frank Anderson withdrew cash for life insurance, $34.82. Jan. 25. Received a check from the Jones Elevator Co. for — wheat sold them on the 3rd. Feb. 3. Sold to Sam’l MeNulty on account 15 hogs for $300. Feb. 6. Each of the partners withdrew $30 for personal use. Feb. 24. Sold to Andrews & Johnson on account oats, $150. Mar. 1. Received $465 from John Pals to redeem note due today. Mar. 15. Sold to Jones Elevator Co., on account 75 bu. wheat at $1.75. Mar. 18. Sold for cash 1 T. oats straw at $6.50. Apr. 5. Frank Anderson used dairy products valued at $25 and eggs and poultry valued at $10 during the first three months, while Fred’s family used dairy products valued at $20 and eggs and poultry valued at $5. (Debit the Drawing accounts) SPECIAL ACCOUNTS AND ENTRIES 205 Apr. 28. Received from Sam’l McNulty check for $200 to apply on account. May 1. Fred paid his father $30 to apply on rent of tenant house (no entry is made for this, since it is a side transaction, not affecting the cash of the business). May 15. A new cultivator is bought of Anson & Co. for $35 cash. May 20. Paid for repairs on mower, $5. May 25. Paid Johnson Bros. $25 in full of account. May 28. Frank withdrew $100 for private use and Fred $80. June 7. Received a check from Andrews & Johnson in full of account. June 12. Received check from the Jones Elevator Co. in full of account. June 18. Paid a note owing to Jake Dillon, $100. June 30. During the past three months, Frank’s family has used dairy products, $30; poultry products, $10; garden truck, $10. Fred’s family has used dairy products $25; poultry prod- ucts, $12, and garden truck, $8. July 1. Paid $120 interest on mortgage, and $1000 on the principal. July 30. Frank withdrew $75 for personal use and Fred $50. July 31. Paid wages in cash, $46.50. Aug. 18. Sold for cash 200 bu. wheat at $2. Aug. 25. Sold 58 T. hay at $15 to Alberts and Casey on ac- count. Aug. 28. Bought a farm tractor for $300 cash. Sept. 3. Received check from Alberts and Casey for $400 to apply on account, and a 60-day 6% note for $470. Sept. 30. Frank’s family used during the last three months dairy products valued at $20, and poultry products, $7; Fred’s family used dairy products, $13, and poultry products, $8. Sept. 30. Frank withdrew $250 for private use and Fred with- drew $100. Oct. 28. Sold to the Jones Elevator Co. for cash 200 bu. corn at $1.25. Nov. 2. Received check from Alberts and Casey for $474.70 for note and interest due today. 206 FARM ACCOUNTING Nov. 6. Sold for cash 50 tons of hay at $13. Nov. 25. Sold some hogs for $780 cash, Nov. 30. Frank withdrew $300 for private use and Fred with- drew $50. Dec. 12. Paid carpenters for addition to barn, $390. Dee. 16. Fred paid the balance of $30 rent on tenant house. (Same as transaction of May 1.) Dec. 31. Frank’s household used during the last three months dairy products valued at $30 and poultry products valued at $15. Fred’s household used dairy products valued at $20 and poultry products valued at $15. Dee. 31. (a) Post all entries to the ‘ledger, including totals of all but the Sundry columns. (b) Make the caleulations and entries necessary to carry out the provisions of the copartnership agreement which have been designated in this problem under date of Jan. 1 as (c), (@), (f) and (g). (c) Post the entries made under (b) above. (d) Take off a trial balance before considering inventories. (e) Make the proper entries in the Comparative Inventory Record, considering the following facts: All items of equipment on hand at the beginning of the year were on hand at the elose. In addition, any new equipment bought during the year is to be considered. Products on hand were as follows: Wheat, 200 bu. at $1.60; oats, 500 bu. at $0.50; corn, 200 bu. at $1.10; timothy hay, 20 tons, at $10; oats straw, 10 tons at $6; wheat straw, 10 tons at $2. Livestock inventory was as follows: Horses, 9 head, $1230; mules, 6 head, $810; cattle, 17 head, $660; 30 hogs, $480; 90 chickens, $65. There were 30 tons ground limestone, $60. (f) Considering inventories, prepare a Loss and Gain account, close its balance into Drawing accounts, and rule off the ae- counts, bringing down inventories below the ruling when neces- sary. (g) Prepare a trial balance after closing which may be con- sidered also as a Statement of Resources and Liabilities as of Dee. 31, 1917. (h) Prepare a Change of Wealth Statement as of Dec. 31, 1917. SPECIAL ACCOUNTS AND ENTRIES 207 (i) If the partnership is not to be renewed, and Fred Ander- son withdraws, how might settlement be effected? Show the entry in simple journal form that would be required to record the withdrawal of Fred Anderson. 3. Mr. L. E. Fay, who has been farming for several years as a tenant, decides to keep accounts of his transactions. Accordingly, he arranges to use a cash journal and ledger, beginning with his new lease, on Jan. 1, 1916. The following columns are to be used in the Cash Journal in the order named: Debit: Labor, Roy Wade, Household, Cash, Sundry. Credit: Sundry, Cash, Household, Roy Wade, Poultry and Cattle. He valued his possessions and prepared a Statement of Re- sources and Liabilities, as follows: STATEMENT OF RESOURCES AND LIABILITIES, JAN. 1, 1916. L. E. Fay Resources Liabilities OMEN, cash SRW @ i Lasetate .. $800 Watt. Hdw.Co....... $150 Household Furnishings.. 500 Mortgage Payable..... 2,000 m. Hi. Adams... 2... ..5.. 60 L. E. Fay, Capital..... 3,430 Notes Receivable (At- WOOD i Vahey > cee 200 NON S055 Buin ec hare 800 BU. Va: afi b's 42 A Oa 600 ER chap aia c's: 4 anata pe 350 1 RO. OEE ey? 150 ANY 5 ro dis, 5-4, 5. aewe ae 30 Bran, shorts, etc. (Dr. Dau F660)... sd iene | 40 A Grama fr 500 SIs isi rae 6, 4 © 100 MNOS «5 sy dsahin gs 5.6 aod 250 ERED eae he fs: 200 Equipment............ 1,000 $5,580 $5,580 208 FARM ACCOUNTING In order to reduce the details of the problem, the inventory record of Mr. Fay is not to be used. Make the necessary entries in the book of original entry to open the books of Mr. Fay; and then proceed to record his transactions for the year, as detailed below: Jan. 2. Gave two promissory notes to landlord for $250 each in payment of year’s rent, one due Sept. 1 and one Dee. 15, 1916, without interest. (Debit Rent account.) Jan. 9. Spent $10 for household supplies. Jan. 10. Sold corn for $140 cash. Jan. 31. The household received during the month $5 worth of dairy products and $1 worth of eggs. (Credit Cattle and Poultry accounts respectively). Jan. 31. Butchered, for household use, four hogs valued at $50. Feb. 1. Paid interest on mortgage for six months, $60. (Keep an interest account.) Feb. 11. Bought for eash two horses at $150, and two sets of harness at $19.50. (Harness is considered as equipment.) Feb. 16. Received a 60 day note, bearing interest at 6%, from B. E. Adams to settle his account. Feb. 28. The household received during the month, poultry valued at 90e, eggs valued at $1.15, and dairy products valued at $6. Mar. 4. Sold wheat for $175 eash. Mar. 4. Paid cash for groceries, $6. Mar. 4. Paid personal taxes, $35.67. Mar. 31. The household received during the month, poultry valued at 95e, eggs valued at $1.10, and dairy products valued at $6.40. Apr. 3. Paid for repairs to wagon and corn planter, $2.25. Apr. 16. Received cash from B. E. Adams to redeem his note of Feb. 161 and to pay interest on same. Apr. 30. The household received during the month, poultry valued at 80c, eggs valued at 90e, and dairy products valued at $5.30. May 1. Arranged with Roy Wade to work by the month until *In figuring 60 days from February 16, it should be remembered that 1916 was a leap year. od en ei: SPECIAL ACCOUNTS AND ENTRIES 209 December 1, for $30 a month and his board, room and laundry. It is agreed that he can draw his wages in installments of not less than $5 at any time after he has earned them. May 5. Received cash from A. M. Atwood for note due today, with interest on same at 6% per annum from Dee. 5, 1915. May 6. Paid Watt Hdw. Co. in full of account, $150. May 25. Decided to discontinue the eine of sheep, so sold all the sheep for $230 cash. May 25. Roy Wade drew $10 on account of wages. May 31. Sold part of the hay for $95. May 31. The household received during the month, poultry valued at 70c, eggs valued at $1.30, and dairy products valued at $7. May 31. Credited Roy Wade with wages for May, $30. May 31. The household values the board, room, and laundry of the hired man during May, at $20. June 1. Paid $30 for bran and shorts. June 8. Roy Wade drew $20 on account. June 10. Bought sundry supplies for the house, $16.50, of which $13 was paid in cash, $2.50 in butter, and $1 in eggs. (The Household is credited for butter and eggs sold sinee it is debited with all milk and eggs produced on the farm.) June 10. Bought nails, bolts, ete., for repair of equipment, $1.15 cash. June 10. Bought a new hat and suit of clothes for $27.50 cash, June 30. The household received during the month, eggs valued at 50¢ and dairy products valued at $5.60. June 30. Credited Roy Wade with wages for June, $30. June 30. The household values the board, room, and laundry of the hired man during June at $20. July 3. Paid for binder twine for oats crop, $19.50. July 3. Roy Wade drew $30 on account. July 4. Spent $7.40 for sundry expenses in town at holiday _ celebration. ‘July 8. Deposited $500 in savings account at State Trust and Savings Bank. (Debit State Trust & Savings Bank, Credit Cash.) co) a 210 FARM ACCOUNTING | July 15. Paid for extra help during the haying season, $9,50. (Dr. Labor.) ° July 22. Bought groceries for cash, $16. a July 31. The household received during the month, al hatied at 35e, and dairy products valued at $3.40. J why 31. Credited Roy Wade with wages for July, $30. July 31. The household values the board, room, and laundry of the hired man during July at $20. Aug. 1. Paid interest on mortgage, $60. Aug. 6. Paid for sundry small tools, $6.30. Aug. 16. Paid for threshing coal for oats crop, $4.27. Aug. 18. Sold 520 bushels new oats at 53¢ cash. Aug. 23. Sold some corn for $150 cash. Aug. 23. Bought groceries for cash, $19.50. ‘ts Aug. 31. The household received during the aes eggs valued at 60c, and dairy products valued at $3. Aug. 31. Sold eggs for 90¢ cash during August. Aug. 31. Credited Roy Wade with wages for August, $36. Aug. 31. The household values the board, room, and laundry of the hired man during August at $20. Sept. 1. Paid $250 to redeem note held by landlord due today. Sept. 6. Bought bran, shorts, ete., for $29 cash. Sept. 6. Sold four ealves for $85 cash. Sept. 8. Paid Roy Wade on account, $15. Sept. 15. Paid for extra help during threshing season, $4.50. (Debit Labor.) Sept. 21. Paid fire insurance premiums, $8. (Dr. General Ex- pense. ) Sept. 30. The household received during the month, eggs valued at $1 and dairy products valued at $5.10. Sept. 30. Credited Roy Wade with wages for September, $30. Sept. 30. The household values the board, room, and laundry of the hired man during September at $20. Sept. 30. Paid Roy Wade on account, $15. Oct. 6. Paid for winter clothes for self and family, $86.50. Oct. 10. Bought for cash, two husking hooks, 40e; two corn knives, 60¢; and one wheelbarrow, $3. (Dr. Equipment) SPECIAL ACCOUNTS AND ENTRIES 211 Oct. 21. Sold for cash, 30 shotes, 4500 Ibs. at $13 per ewt. Oct. 31. Credited Roy Wade with wages for October, $30. Oct. 31. The household values the board, room, and laundry of the hired man during October at $20. Oct. 31. The household received during the month, poultry valued at $1.25, eggs valued at $1.20, and dairy products valued at $6.30. — Nov. 6. One cow valued at $20 died and was buried on the farm, — La Nov. 20. Sold some poultry for $16.45 cash. Nov. 30. Donated to the United Charities, $10. (General Expense. ) Nov. 30. The household received during the month, poultry valued at $2, eggs valued at $1.10, and dairy products valued at $5.90. . Nov. 30. Credited Roy Wade with wages for November, $30, and paid him $30 on account. Nov. 30. The household values the board, room, and laundry of the hired man during the month at $20. Dec. 3. Paid cash for bran, shorts, ete., $26. Dec. 6. Paid for buggy wheel, $5.95; one pair trace springs, $1; one wagon tongue support, $1.70; one single tree, 60¢; nails, screws and bolts, 70c; and two horse blankets, $5.90. (All are to be charged to Equipment Expense.) Dec. 15. Paid $250 to redeem note held by landlord due today. Dec. 18. Sold some poultry for $6.20 cash. Dec. 18. Paid for incidental Christmas purchases, $10.65. Dec. 19. Paid Roy Wade on account, $50. Dec. 31. The household received during the month, poultry valued at $1.40, eggs valued at 45c, and dairy products valued at $4.80. | Dec. 31. Mr. Fay places the value of his services as a laborer at $600 for the year. Dee. 31. Inventories taken on this date showed the following values: household furnishings, $500; horses, $1100; cattle, $570; hogs, $240; bran, shorts, etc., $15; oats, $350; corn, $830; hay, 212 FARM ACCOUNTING $290; poultry, $25. Equipment has depreciated 10% during the year. (a) Post all items to the ledger, allowing enough space for the transactions of problem 4 below which require the use of the same ledger accounts. (b) Take a trial balance before considering inventories. (c) Make the proper entries for inventories. (d) Prepare a Loss and Gain account; close and rule off the necessary accounts to show net profit in Fay’s Capital account. (e) Take a trial balance after closing, which may also be used as a Statement of Resources and Liabilities. (f) Prepare a Farm and Individual Income Statement for the year. (g) Prepare a Change of Wealth Statement as of Dee. 31, 1916. Note.—The cash-journal and ledger accounts used in the Fay problem above are to be used in problem 4 below, the latter being a continuation of the affairs of L. E. Fay for the year ended Dee. 31, 1917. Also, the books and accounts of problem 3 above are to be used later in a comparative study and discussion as outlined under problem 2, Chapters VIII and IX. 4. You are to record in the cash journal (beginning on a new page) the transactions of L. E. Fay for the year ended Dee. 31, 1917, which were as follows: Jan. 3. Gave two promissory notes to landlord for $250 each in payment of year’s rent, one due Sept. 1 and one Dee. 15, 1917, without interest. (Debit Rent account.) Jan. 3. Paid Roy Wade cash to balance account. Jan. 4. Sold some corn for $400 cash. Jan. 15. Paid $20 for clothing. Jan. 30. Butchered a beef for family use, $70. Jan. 31. Took savings bank pass book to bank and had in- terest credited for the six months to Jan. Ist, $7.50. (Debit State Trust & Savings Bank and credit Interest.) Feb. 1. Paid interest on mortgage for six months, $60. Feb. 3. Sold beef quarter and other parts of the animal butch- ered a few days ago for $30. SPECIAL ACCOUNTS AND ENTRIES ~ 218 Mar. 1. Sold hogs for $100 cash. Mar. 1. Paid personal taxes, $39. Mar. 20. Paid for sundry household supplies, $28. Mar. 31. The household record shows the following commodi- ties turned over to the house during January, February and March: poultry, $4; eggs, $9.20; milk, $22. Mar. 31. During the three months, the household has sold for cash part of the products as follows: eggs, $4; butter, $5. Apr. 1. Made a contract with Roy Wade similar to the one of last year, except that he begins April 1 instead of May 1, and is .to receive $35 a month and his board, room and laundry, and the use of a horse and buggy. Apr. 1. Sold some hay for $150 cash. Apr. 3. Bought millfeed for $30. Apr. 18. Paid for harness repairs $4 (Harness is part of the equipment). Apr. 28. Paid horseshoeing bill of $2. Apr. 30. Credited Roy Wade with wages for April, $35. Apr. 30. The household values the board of hired man at $20 for the month of April. Note.—On the last day of each month from May to November, both inclusive, you are to make entries for the $35 wages credited to Roy Wade and for the $20 board without being told to do so, each time. May 8. Paid Roy Wade $5 on account. May 10. Paid for sundry repairs to equipment, $8. June 20. Paid cash for extra labor, $6. June 25. Paid Roy Wade $7 on account. June 30. The household record shows the following commodi- ties turned over to the house during April, May and June: poultry, $6; eggs, $18; milk, $35. *Theoretically, the value placed on the use of the horse and buggy would be debited to Labor and credited to Miscellaneous Income or to General Expense because this concession is equivalent to a recogni- tion that labor is worth more than $35 plus $20 board. Mr. Fay, how- ever, does not wish to consider the value of labor as increased by this concession, SR Cen ee 214 FARM ACCOUNTING June 30. During the three months, the household has sold for — cash, part of the products as follows: eggs, $10; butter, $15. July 1. Paid Roy Wade on account, $10. - July 4. Sundry expenses over the holiday amounted to $3.10. July 5. Paid cash for binder twine for 20 acres of wheat and — 30 acres of oats, $25. (Divide the charge between the two ae- counts on a basis of acreage.) July 18. Paid for extra labor, $7.50. July 20. Paid Roy Wade on account, $8. July 21. Bought sundry household supplies for cash, $11. July 21. Had interest for 6 months entered in savings bank pass book, $7.50. Aug. 1. Sold hay for $160 cash. Aug. 1. Withdrew all of savings account balance, and paid i in- terest on mortgage, $60; and $500 in reduction of the principal of the mortgage note. Aug. 1. Paid Roy Wade on account, $9. Aug. 8. Paid for new small pieces of equipment, $12. Aug. 10. Sold some wheat to D. C. Robbins for $500, receiv- ing a 60-day note bearing 6% interest. Aug. 20. Sold some oats for $450 cash. Aug. 30. Bought supplies for household, $15. Aug. 31. Paid Roy Wade $8 on account. Sept. 1. Paid cash for extra labor, $10. Sept. 1. Paid $250 to redeem note held by landlord, due today. Sept. 8. Sold two ealves for $50 cash. Sept. 18. Paid Roy Wade $12 on account. Sept. 21. Paid fire insurance premiums, $12. Sept. 30. The household record shows the following com- modities turned over to the house during July, August and Sep- tember: poultry, $4; eggs, $16.30; milk, $27. Sept. 30. During the three months, the household has sold for eash part of the produets as follows: eggs, $9; butter, $12. Oct. 19. Received a check from D. C. Robbins to redeem his note of August 10, with interest, $505. Oct. 19. Paid $100 for Liberty Bonds. (Dr. Liberty Bond account.) SPECIAL ACCOUNTS AND ENTRIES 215 Oct. 26. Paid Roy Wade $20 on account. Oct. 31. Sold some shotes for $300 cash. Nov. 6. Bought sundry household supplies, $15. Nov. 15. Sold poultry for $18 cash. Nov. 16. Donated $25 to Red Cross work. (General Expense.) Dee. 1. Sold 400 bu. corn at $1.20 for cash. Dec. 2. Bought a half interest! in a self feed corn sheller for $42.50 eash. Dee. 15. Paid $250 to redeem note held by landlord due to- day. . Dec. 20. Paid Roy Wade cash to balance his account. Dec. 20. Paid $30 cash for household supplies. Dee. 31. The household record shows the following commodities turned over to the house during October, November and Decem- ber: poultry, $10; eggs, $12; milk, $30. Dec. 31. During the three months, the household has sold for cash part of the products as follows: eggs, $3; butter, $13. Dec. 31. Mr. Fay places the value of his services as a laborer at $600 for the year. | Dec. 31. Inventories taken on this date showed the following values: household furnishings, $500; horses, $1200; cattle, $600; hogs, $300; poultry, $30; wheat, $200; oats, $300; corn, $1250; hay, $330. Equipment has depreciated 10% during the year (diminishing value method). (a) Post to the ledger accounts. (b) Take a trial balance before considering Sainetsi Gelae: (c) Make the proper entries for inventories. (d) Prepare a Loss and Gain account, close and rule off the necessary accounts tc show net profit in Fay’s Capital account. (e) Take a trial balance after closing, which may also be used as a Statement of Resources and Liabilities as of Dec. 31, 1917. (f) Prepare a Farm and Individual Income Statement for the year. This requires a debit to Equipment account for only $42.50. If the comparative inventory record were in use, the machine would be en- tered as a matter of record, with proper notation to indicate the other half-owner. ) 216 FARM ACCOUNTING | (g) Prepare a Change of Wealth Statement as of Dec. 31, 1917. Note——The books and accounts of problems 3 and 4 above are to be used later in a comparative study and discussion as outlined under problem 2, Chapters VIII and IX. REVIEW QUESTIONS 1. State two ways of treating expenses and incomes connected with fair exhibits. 2. In shipping goods to be sold on consignment, what entry is made at the time the shipment is sent? Discuss. 3. What entry is made when the consignee renders his account sales? 4, Discuss the use of the Loss on Auction Saies account. 5. What entry is made at the time property is destroyed by fire? 6. When the insurance company settles for a fire loss, what entry is made? When some salvage is sold? 7. How is salvage retained for use on the farm treated in the books? What is done with the balance of Fire Loss aec- count? 8. Diseuss two ways of recording death of livestock, stating the effect of each on the livestock account and on the Loss and Gain account. 9. Discuss any special transactions involved in market garden- ing, and crops sold under contract. 10. What value is considered as the investment in an orchard as compared with expenses of operation? 11. How are incomes and expenses recorded after the orchard begins to bear? 12. When is depreciation figured in an orchard? 13. Why is it not safe to say off-hand that the fruit that sells for the highest price is the one that pays best? 14, Discuss the use of the Woodland account. The Woodland Expense and Income account. 15. After all standing timber is eut and the woodland is cleared for tillage, what entries result? SPECIAL ACCOUNTS AND ENTRIES 217 . What entries arise in the bee industry? . What features in partnership operation of a business re- quire special consideration from a bookkeeping point of view? . Discuss the opening entry of a partnership. . What is the nature of the entry closing Loss and Gain ac- count in a partnership? . Under what conditions may profits or losses be shared equally while the capital of the partners is unequal? . What conditions in a partnership make it desirable to credit interest to the proprietors on their capital invested? . What is the function of the partner’s drawing account? . Name the points to be covered in a partnership agreement. . How are the resources of a partnership divided at time of dissolution ? . What is the nature of the entry made at the time of part- nership dissolution? . Is renting a farm on shares equivalent to forming a part- nership ? . What conditions in leases and methods of accounting are to be considered before determining how to treat transac- tions relative to share rental? . A given tenant receives one-half of value of products and livestock sold. How does his Swine account differ in operation and amounts involved from the account as it would appear if he were a cash renter, or a landlord? . What effect does share rental have on the inventory record? . How does renting on a eash basis affect the accounts of the tenant? . When a landlord owns and operates more than one farm, how should his accounts be kept? . . What is the purpose of the Change of Wealth statement? Describe its contents and discuss its results. . Discuss the Farm and Individual Income Statement when the Household account shows a loss; when it shows a gain; when the Household gain is more than the gain as an indi- vidual. CHAPTER VIII COST ACCOUNTING Definition.—It has been said that all accounting is cost accounting. It might better be said that all accounting should be cost accounting. Since there is so much account- ing, in the broad sense, however, that records only cash transactions, inventories, deferred charges, and deprecia- tions without attempting to distribute expenses properly over the various productive elements, it is still quite proper to consider that there are two terms in proper use, “‘ac- eounting,’’ and ‘‘cost accounting.”’ A cost system is a method of apportioning elements of expense and income over a number of operations within the same business. Cost accounting is that interpretation of transactions and operations of a business which aims to carry out the purpose of the cost system. Cost accounting results in showing the proper expenses, income, and net gain or loss of each element or department of the business that is maintained for the purpose of producing income. For the purpose of a cost system, the term ‘‘expense”’ must include something more than an outlay of cash for some commodity or service to be consumed within a short space of time. That is, it must include other than bo-enli eash expenses. By the term ‘‘operation’’ in farm cost accounting is meant each of the several crops or classes of livestock which are grown or maintained on the farm. The ‘‘productive elements’’ on a farm include practically the same articles or bodies as the operations, except that draft animals are 218 COST ACCOUNTING 219 not considered as productive elements. The latter are not kept for the purpose of making a profit, but merely to assist in reducing costs of production among the really productive elements. Cost and General Accounting Compared.—A comparison between a set of accounts kept under a cost system and one kept under a general system might be summarized as follows: (a) The cost system includes all that the general sys- tem does. | _ (b) The cost system includes no more transactions with outside parties than the general system. (ec) The cost system includes more expenses and incomes within the business, commonly called adjustments, or transfers from one account to another. The general system, therefore, is sufficient if one wishes to find his profit as a farmer, as distinct from his profit as an individual; and to find the amounts of the expenses and of the sales of various commodities represented by trans- actions with outsiders. The general system of accountmg is not sufficient 1f one wishes to find the profit from each branch of his farming operations, after considering all ex- penses of production and maintenance and all incomes re- sulting from the consumption of the productive elements on the farm, as well as from sales. The showing of such detailed profits requires the keeping of cost records to collect the data. The matter of collect- ing the data is a very important one in accounting. Under the general system, data collection is carried on more or less automatically. Some commodities are bought and a bill is received showing the nature and value. This bill is used as a basis for making the check or currency payment and the eash entry. A lease is signed. This forms the basis for making a check or note and the corresponding entries for rent. A contract is made with the hired man. 220 FARM ACCOUNTING This is the information supporting the entries for labor. Some grain is sold for cash. The specific amount received supplies the data from which cash is debited and the proper grain account credited. Under the cost system, data collection includes all that is included under the general system and more. The col- lection of data for cost records is not carried on automati- cally, because there are usually no documents to support the making of entries. The nature of the cost data explains this. Cost data are collected from transactions between inanimate objects or inhuman beings on the farm. They represent more or less continuous operations which are dif- ficult to analyze into completed transactions. Hence, it is more difficult to obtain this class of information for bookkeeping entries. Some of the more important elements of cost not con- sidered for each branch of farm operations in the general system are: labor, horse labor, feed, depreciation of equip- ment and buildings, repairs, rent, interest and general ex- penses. Likewise, in general accounting, crops used on the- farm are not accounted for as incomes for which the crops should receive credit. In general accounting, one element similar to these has been considered; namely, the consumption by the house- hold of some of the dairy and poultry products, and the giving by the household of certain services and food for the benefit of farm labor. This is one reason why the transactions between the household and the farm are more involved in cost than in general accounting—because they involve transactions within the farm premises only. They involve, however, transactions between the farm proper and the household, which must be recorded properly in order to enable the profit or loss as a farmer to be shown separate from the profit or loss as an individual even under the general system. | COST ACCOUNTING 221 Use of Cost Data.— What is done with the cost data after collection? It is used to the best advantage in the accounts. All data should be collected with a definite end in view. They should not be collected merely to bring a lot of fig- ures together. . The results obtained from the collection of a mass of data should be correlated as much as possible with some other results. .For example, the results showing the cost of man labor and horse labor in the production of corn should be correlated—brought into juxtaposition—with fig- ures showing other costs connected with corn; and also with income from corn. This is effected by bringing all the information concerning the costs of corn under the account with corn in the ledger. Any information, then, concerning the cost of, or income from, corn can be found _ by referring to the ledger account bearing that title. It is sometimes necessary to refer back to the account with the fieid* in which it was produced, as field No. 1, No. 2 or No. 3, in order to get certain details of the cost. In order to get the figures from the cost records into the proper places in the ledger, an entry is made in the cash journal expressing the proper debits and credits to the accounts affected. These are then posted to the proper ac- counts. For example, if the cost records show that corn valued at $100 has been fed to the hogs during a given period of time, an entry should be made in the cash jour- nal debiting the Swine account and erediting Corn ac- count. This entry is then posted to the ledger according to the ordinary methods of posting. Such an entry in the cash journal may be dispensed with, if the cost data are tabulated in permanent books that can be used as post- ing mediums. | This is one of the most essential features of the double entry system of farm accounting. There is a centraliza-, *See ‘Operation of Field Accounts.’’ 222 FARM ACCOUNTING tion of data in the accounts which makes the records much > more useful than under the single entry or purely statis- — tical system. All figures concerning a department of farm operations are brought together under one heading in the ledger where the net results of the operations of that — department can be found. Then the results of these sey- eral departmental or productive accounts are brought to- gether under one heading called Loss and Gain account, — if they show either an expense or an income. The result of all these losses and gains brought into the Loss and Gain account shows the net loss or gain for the period of time under consideration. Some so-called systems of farm accounting provide elab-. orately ruled columns for various and multitudinous fig- ures concerning costs of production, and income and other facts, but they do not make provision for correlating these results with other elements of cost and income.’ In other words, the many variations of the single entry or statisti- eal system provide for the collection of data without mak- ing provision, at the same time, for the intelligent use of such data. Purpose of a Cost System.—The question should nat- urally arise, ‘‘Why do we keep cost records, including those that show the cost of labor employed, and the cost of grain consumed ?”’ There are three main reasons for keeping cost records and using the results in the ledger accounts as previously indicated. | (a) To find the profit from each productive element of the farm after considering all elements of cost. (b) To present figures as a basis for constructive critr cism of the business, or of farming methods ™m use. (c) Theoretically, to fix prices. | Finding Profit of Each Productive Element.—Analyzing (a) above, brings out a well established principle in ac- COST ACCOUNTING 223 counting, that a profit is not a profit unless it is produced or calculated after all elements of cost and income have been considered. One cannot truly say that he has made a profit of $1000 on corn unless he has considered all ele- ments of cost incurred in raising the crop, and all ele- ments of income derived from its disposal. Labor of man and horse is a cost of raising the corn. Contributions b» the corn to the upkeep of animals is a benefit derived from the corn and should, therefore, be considered as income from the corn. Corn account should be credited, in other words, with the amount fed to livestock. The same prin- ciples apply to other crops. Likewise, the several classes of tiestouk should be charged with the value of crops consumed, before finding the profit on them. In short, expenses in connection with any branch of farming operations should include not only cash expenditures, but all other costs arising from benefits transferred from one department of the farm to another. Basis of Constructive Criticism.—Analyzing (b) above, the second reason for keeping cost records, there is one point which stands out preéminent in the operation of a cost system. It affords a basis for intelligent constructive criticism. It forms the basis for judging the relative finan- cial advantages derived from the conduct of the several farming operations. A man usually engages in business for the purpose of making a profit from it. The business of farming is not considered as an exception to this rule. The farmer desires to make as much money as he can from the time he puts in and the investment he has made. A desire to make money is usually not sufficient. The de- sire must be backed up by action. The action should be directed along proper channels. The proper channels can be determined very largely by an intelligent perusal and interpretation of the accounts properly kept with the aid of cost records. That is, the intelligent scrutiny of and Pr ie yes ee a > a) Pa 224 FARM ACCOUNTING interpretation of the Loss and Gain account and the State- — ment of Resources and Liabilities prepared from books — kept under a cost system, will enable a farmer to find out what elements of his farming operations were profitable in a given year and which unprofitable. By comparing with preceding years, he will be able to form conclusions as to whether the loss or very small profit in any line is due to unfavorable weather or to some ap- parently more permanent cause, as soil, climate, market conditions or poor management. Fixing Prices, Theoretically —The third purpose of cost accounting on a farm, that of fixing prices, is more theo- retical than practical. It is theoretical, because cost ac- counting is not universally applied to farming operations. A few individuals knowing that they are losing money on a certain crop or livestock at prevailing prices cannot prevent the great mass of other farmers from selling be- low cost. Some farmers like some manufacturers think they are selling everything above cost because they come out ahead financially at the close of the year. As a matter of fact they are sometimes making one remunerative class of goods carry the burdens of another unremunerative élass. If farmers throughout a competing district kept accur- ate and detailed cost records and accounts they would be able to sell above cost, for the crops that were losing money would be so generally discontinued that prices would be adjusted to a reasonable profit-making figure. As a matter of fact, then, fixing prices of farm products on a basis of cost of production is quite remote, partly because of the great competing area that produces and sells in ignorance of cost, and partly because the compet- ing area includes practically the whole world. General Scheme of Operation—In operating a cost system on the farm, it is necessary to keep the cash journal COST ACCOUNTING 225 or other suitable books of original entry, and the ledger, the same as in general accounting. In addition to these tt is necessary to keep books of record into which to collect data concerning the transactions between the different farm elements. It is not practical to make an entry in the gen- eral books (cash journal and ledger) for every day’s labor chargeable to the wheat crop, for example. Neither is it practical to make an entry at the close of each day credit- ing Corn and debiting Horses, Swine or Poultry for the value of feed consumed during the day. Instead of making these entries every day, the data that would otherwise go to make up such entries are collected elsewhere, along with similar data from other days. At the close of a year or month, the aggregate of similar data is used as a basis for making an entry in the cash journal. Thus the Wheat, Corn, Horses, Swine and Poultry accounts are affected ulti- mately by each day’s labor or each day’s feed to the same extent they would have been, had the entries been made in the cash journal every day. Obviously the work in- volved is much less when the labor and feed costs can be collected in subsidiary records and the aggregate results used in debiting and crediting the accounts affected. The subsidiary records that are in most common use on a farm are the Labor Record, Horse Labor Record, and Feed Record. The Tractor Hour Record is becoming use- ful. Labor Records.—The Labor record always means the record showing the number of hours and value of labor performed by man, on each element of farm activity. Monthly Labor Record.—lIllustration 41 presents a form which is bound in book form or created as a loose leaf record to show the class of work each farm hand is engaged in each day. At the close of each day the number of hours spent on each farm element is recorded as in Illustration 41, For : ae fet ers 226 FARM ACCOUNTING instance, the illustration shows that on Mar. 1, 1917, two q hours were spent in work connected with the keeping of — cattle, 1 hour on horses, 1 on swine and 6 in work in field — No. 1. On March 2, it is noted, among others, that 1 hour — was spent for the household. This might have been in — chopping wood, churning, making garden, or some similar — work connected with the house. On large farms, a sepa- rate monthly record may be kept for each laborer. Hach one would be similar to that shown in Illustration 41. At ILLUSTRATION 41 Labor Recorp For Marcu, 1917 _ "| Field | Field |House- Ho Swine No. 1 | No. 2} hold | Total Cattle Total....... 45 | 24 | 18 | 180 | 30 | 50 | 347 the close of the month, the total of each laborer’s sheet would be transferred to a monthly summary. Using either the Labor record of Illustration 41 or the Labor Summary as described above, at the close of the month, the total is found for each farm element. In Illus- tration 41, for example, 45 hours were spent on Cattle, 24 on Horses and so on. This total number of hours, multi- plied by the rate at which labor is charged, is used as a basis for crediting Labor account and charging Cattle, Horses, Swine, Field No. 1, Field No. 2, Household, ete., respectively. COST ACCOUNTING 227 Yearly Labor Record.—lIf it is not thought necessary to make cash journal entries for this labor at the close of each month, the labor monthly totals can be summarized on a yearly labor sheet as in Illustration 42. The values in this illustration are calculated on a basis of 20 cents ILLUSTRATION 42 Lazpor ReEcorD For YEAR Envep Fes. 28, 1918 Field | Field |House- Month __|Cattle|Horses| Swine} No, 1] No. 2] hold | Total 1917 Mar... .% 45 24 18 | 180 30 50 | 347 ADRS. . aptewr 0 Pe ee one = a a ON GO Geet eae etc. — 1918 BO cia dbe vss FOG; '. caereis. Total Hours | 500 | 250 | 400 | 700 | 150 | 850 /|2,850 Total Value.'| $100 | $50] $80 | $140 | $30 $170 | $570 1A table is presented in the Appendix to assist in calculating the value of man and horse labor. See Labor and Horse Labor Con- version Table, Illustration. 75. an hour for labor. The entries for March in Illustration 42 are taken from the totals for the month of March iz the monthly labor record of Illustration 41. Debits and Credits in Labor Record.—The entry to transfer the aggregate value of labor used during the year is shown in Illustration’ 43, using the figures from Illus- tration 42, 228 FARM ACCOUNTING ILLUSTRATION 43 Entry ror Lasor aT CLose oF YEAR (Simple Journal Form Used for Convenience) Catile... 0. bi dscccadcneesh sean eee $100 HIOTGGS . . coos tne o Uae tee yeaa Eee 50 SWIMS... .s0ccscnddpecses bebe EE Ee ene 80 Field No. 1... si .0:s's sts cs atpe eee 140 Field No. 2.. .i..0ccts0sck 0 0b eeRIetes 30 Household .....i:ci0<:0 sew» co veh ieee eae 170 Labor (Credited with total)........... $570 The debits and credits may be posted direct from the Labor Record by indicating the ledger pages below the amounts in the record. However, care should be exercised in making sure that the debits and credits posted are of equal amounts. Daily Labor Record.—Although entirely impractical for any but the largest farms, a daily labor record may be kept. It shows the exact nature of the work performed by a laborer every hour of the day or even every fifteen min- utes if desired. If such a form is employed, it is used as a means of collecting data to fill into the monthly labor record of Illustration 41. A daily Labor Record designed by the U. 8. Department of Agriculture is shown in Illustration 44. It is called ‘‘Regular Worker’s Daily Time Sheet.’’? Provision is made thereon for showing the nature of the work being done at every change in operations during the day. If the man eats breakfast from 6:30 to 7:00 A.M. that fact is -recorded. If it rains from 2:45 to 3:45 P.M., causing work to cease, notation to that effect is made in the proper space indicated by the time of the day in question. ‘This form has recently been altered somewhat in the details, the principles remaining the same, ILLUSTRATION 44 ReGuLaR WorKER’s Dainty TIME SHEET FORM A. U. S. Department of A uliure in seoaerarion ak ie C. A. Smith, Oakdale, Mich. DAY OF salesogg Tuesday, DATE April 30, 1917. KIND OF WORK. FIELD. we HORSE. Include implements used, number of loads, etc. a h aen, aAena, —— SAMPLE SHEET. Refer to Notes on Cover. 4.30— 5.00—— Care of horses. See Note 9. 5.30—, ‘ Feeding cows and milking. See Note 9. 1% 6 .00—— 6.30— = ‘ Breakfast. pare 7.00—— 7.30— ; See ‘ Note 3 (0) i Plowing f 7” deep, 16" riding plow A 3 3 9 * ng Jor corn, DP, ng - 8.30— See Note 4. 9.00—— 9.30— 10.00—— 10.30— pe Disking for corn (John Deere 12 disk). B 1% 4 7 “ See Note 4. 11.30— 12.00—— 12.30— Dinner — 1.00—— 1.30— “ Hauling manure—s yy 2k $3 loads. A 2 2.00—— Working with . 'd. Moore, See Note 6. 2.:30— : 3. 00-—— ‘ Rain—Nothing done. See Note 6. — 3.30— +e Repatrt See Note 8 1 . ‘pair ence. See Note 8. 4.30— bis’ eae Feedi nd milkt 1 3 cows and m 5 5.30— ” ited . "Care of horses. 6 .00— % 6.30— Supper. 7.00-—— 7.30— 8.00—— : WORKMAN Sam Edwards. TOTAL HOURS 10% 16 REMARKS REPORT O. K. ‘ C. A. Prop. 230 FARM ACCOUNTING This form of Daily Labor Record is also used to record facts about machines in use. For example, if a specific riding plow is in use from 7:00 to 10:00 A.M. such nota- tion is made together with the nature of the operation “Plowing for corn 7 inches deep.’’ The field in which the operation is carried on is shown in a special column as are also the number of horse hours. Explanatory notes giving directions for the use of the Regular Worker’s Daily Time Sheet are presented in II- lustration 45.+ These directions are printed on the inside front cover of each book put out by the U. S. Department of Agriculture. The book contains a great many of the blank forms of which the one of Illustration 44 is a sample with items recorded thereon for illustrative purposes. ILLUSTRATION 45 Directions ror Maxine Our Report (Read Carefully) 1. The time sheet should be made out at the close of each day by each regular workman, and signed by him. The proprietor or superintendent should O. K. the report. If for any reason the regular workman can not make out report the proprietor or superintendent should make it out for him. 2. Each operation or kind of work should be reported sepa- rately, so as to avoid confusion in classifying the records. 3. (a) To fill out, draw a line completely across the sheet from the time when you begin a kind of work and another line from the time when you stop that particular work, filling in the name ‘of work between the lines, as, for example, suppose you began plowing for corn, field A, at 7.00 o’clock and finished at 10.00. Draw a line across the sheet from the figure 7.00 and another from the figure 10.00; fill in the words “Plowing;” also give the field letter and number of horses used. Continue the time of be- ginning and ending on the different kinds of work until all the work for the day is reported. In the proper columns put the COST ACCOUNTING 231 field or place where the work was done, the number of man hours, the number of horses working, and the total number of horse hours. The dots indicate quarter hours. (b) In figuring horse hours, the number of hours worked should be multiplied by the number of horses used; that is, if you use 2 horses 4 hours, it is 8 horse hours. 4. Name implements used when work is reported, and when hauling state number of loads; also weights, if weighings are made. 5. When two or more men are using the same team only one should report the number of horses and horse hours. The other should report helping or “working with .............. ” in the use of said team. | 6. Make out report for every day, including Sundays. Account for the whole day. State when nothing is done and, if convenient, give reason. 7. When a man does not work at all on a certain day, report should be made out for that day, stating this fact. 8. Avoid combining reports of different kinds of work, as “plowing and harrowing” a field or using such terms as “odd jobs,” “chores,” “went to town,” ete., as it is impossible to prop- erly interpret such items. State exactly what was done, as “plowing,” “harrowing,” “mending harness,” “repairing fences,” “cleaning out horse barn,” “went to town for groceries or per- sonal business,” ete., giving the time each operation required. Also avoid indefinite expressions as “work on roads,” “work on fences,” ete., but state what the work was, as “grading farm roads,” “public road repairs,” “repairing fences,” “building fences,” ete. 9. In reporting livestock, report separately work on each kind of stock unless otherwise directed by proprietor. Note.—Make two copies at one time by putting carbon sheet (carbon side down) under sheet. Tear out original and allow copy to remain in pad. Study the sample sheet. Hourly Cost of Labor:—In calculating the total value of labor in Illustration 42, a rate of 20 cents an hour was used because that is the common rate that has been found a ee 232 FARM ACCOUNTING to apply on a great many farms. It is a convenient rate to use because of the ease with which calculations can be made from it. If one does not have occasion to doubt its accuracy to a very great extent, it should be used on the average farm. However, if one finds or knows that labor on his farm costs more or less than that amount, he should use the rate that represents the facts. When one does not know what rate represents the facts, he may find the rate after having determined the total num- ber of hours in the yearly labor record. This is the amount corresponding to the 2850 hours of Illustration 42. The total hours is divided into the total labor cost as shown on the debit side of Labor account. This result gives the cost per hour for all work during the year. This hourly rate is applied to the total hours of each of the farm ele- ments in the same way as the 20-cent rate was applied in Illustration 42. If the flat rate of 20 cents is used, it usually leaves a balance in Labor account. Such balance is closed into General Expense before closing the latter. Horse Labor Record.—The principles presented in con- nection with labor records are applicable practically with- out change to horse labor records. In recording the num- ber of hours worked each day, the horse is used as a unit rather than the team. If a team works 6 hours on Field No. 1 on Mar. 1, the notation in the horse labor record at the close of the day would show 12 in the proper place under Field No. 1, opposite Mar. 1. This means 12 horse hours. The summary and journal entry are prepared in the same way as shown for labor in Illustrations 41, 42 and 43. Horses are not charged with the value of their work performed for horses. In the journal entry, Horse account is eredited with the value of the horse labor. The cost per horse hour is cal- culated on a basis of about one-half the cost of a man COST ACCOUNTING 233 hour. If such an arbitrary rate is not used the cost per hour of horse labor is found by dividing the total horse hours worked during the year on all elements into the cost of maintaining the horses. Such cost of maintenance is determined by taking the net loss shown in the Horse account, after considering inventories and deducting ex- traordinary losses. : If the flat rate of, say, 10 cents is used, and all of the cost of keeping horses is not charged, or if-too much is charged out, any balance remaining in Horse account, after considering inventory, constitutes part of the bal- ance carried to Loss and Gain account, along with profits or losses arising from sale or natural increase. Tractor Hours.—When the tractor is used in the place of horses, a record similar to the horse labor record is kept so as to show the hours worked on each field. At the close of the month or year, an entry is made to bring the proper charges into the ledger accounts affected, tractor account being credited. Exchange Labor Account.—In order to account properly for all man and horse labor on the farm, it is often neces- sary to keep an account which will record the value of the work performed for the neighbors and by the neighbors. This account bears the title ‘‘ Exchange Labor.’’ It should be treated, for all practical purposes, as an account with the neighbors. We debit our neighbors through exchange labor account when we work for them and credit them when they work for us. This rule applies in all cases, whether the work be done by man or horse; and whether it be in the oat field or for the house. Exchange of work by the women in the house, as at harvest time, for example, would not come under this rule, but any work performed by neighbors, such as sawing wood for the house, would be given con- sideration in the account called Exchange Labor. 234 FARM ACCOUNTING It is obvious from the nature of the account that it would be in balance at the close of any year, if we worked for our neighbors just as many hours with a man and team as they worked for us. If we worked more hours, the account would have a debit balance. If we worked less hours, it would have a credit balance. Exchange Labor Balance.—This brings up an important feature of this account. Ordinarily, if we charge someone . for services and do not get full pay in return, we consider the debit balance in such an account as a resource. In this case it is not a resource, because we do not expect to collect it, under the usual working agreements existing among farmers. The balance of Exchange Labor account is an expense or an income depending on whether it is a debit or credit respectively. Any balance remaining in the account at the time of closing the books for the year, is closed into General Expense account. A debit balance of the Exchange Labor account is considered an expense in that it repre- sents a donation to our neighbors. A credit balance is con- sidered as an income or negative expense and is credited to General Expense account because it is an item that tends to reduce the farm expenses. The disposition of the balance of the account is the ele- ment that gives it its name. It might be called ‘‘neigh- bors’’ account, except for the fact that the balance of the account with such a title should be considered as a resource or liability With the title ‘‘Exchange Labor,’’ it is ap- parent that its balance is an expense or income. . The account as described above is seen to be one that shows in the aggregate the relation between the amount of labor given and received in exchange with the neigh- bors. Its purpose is served at the end of a year if it en- ables the farmer to form opinions and policies as to the exchange of labor in succeeding years. It does not show COST ACCOUNTING 235 - the exchange labor relations with each of the neighbors, but merely with all of them considered together. If one wants to find cut whether he is giving more labor than he receives from any specific neighbor, he can keep a memorandum of the number of hours exchanged between himself and the neighbor. Such a notation would not af- fect the keeping of the Exchange Labor account in any way. Recording Exchange Labor.—The Entries in the Ex- change Labor account come from the Labor record and the ' Horse Labor record. In these two records, all debits and credits to Exchange Labor account have their origin. The debits are expressed in the same way that debits are ex- pressed for work performed on the farm. The credits are expressed from time to time by some distinguishing mark to indicate the specific labor performed by the neighbors. The operation of these original entries for debits and credits to Exchange Labor is represented in Illustrations 46 and 47. : Illustration 46 represents a labor record for a month in which we worked for neighbors and neighbors worked for us. It shows that on July 1, our neighbors worked 40 hours in field No. 1, while the regularly employed men (pro- prietor or hired man, or both) worked 16 hours in the same field. On July 2, our neighbors worked 42 hours in field No. 1, while the regular men worked 16 hours in the field. These facts are shown in the column headed Field No. 1. The number of hours worked in that field by all classes of laborers on July 1 was 56 and on July 2 was 58. The 40 and 42 hours worked by the neighbors are recorded in parentheses merely as a means of identification, so that they may be kept separate throughout the month and year. For this reason, the totals, both vertical and horizontal, show within parentheses the hours worked by the neigh- 236 - FARM ACCOUNTING ILLUSTRATION 46 Lasor Recorp Invo_tvinc ExcHaNnGce Lasor For Juty, 1917 Ex- Swine | Field |change|/House-| Total Labor| hold Date Cattle|Horses (82) (82) Total Hours |-60 | 35 | 30 | 32 | 39 | 37 | 233 bors.* Thus, the total for July 1 shows 40 hours worked by the neighbors and 20 hours by the regular men. Like- wise, the total of the Field No. 1 column, shows 82 hours worked by neighbors and 32 hours worked by the reg- ulars during the month. The totals for the month are self- proving, in that the amounts in the lower right-hand eor- ner are obtained by adding the total column or by adding horizontally the totals of the several columns as cattle, horses and so on. In this way it is proved that during the month of July the total hours worked by our neigh- bors was 82 and by the regular men on the farm, 233. In order to find the number of hours that we worked . for neighbors during the month of July, it is necessary to refer only to the column headed Exchange Labor. It * Instead of parentheses the distinction could be made by means of red ink or red pencil. COST ACCOUNTING 237 ILLUSTRATION 47 Lasor Recorp, Invotving ExcHance LABoR, FOR THE YEAR EnveD Fes. 28, 1918 Ex- Month _|Cattle|Horses| Swine| Field |change|House-| Total No. 1] Labor| hold | Hours 1917 ; March........ 78 43 45 13 8 | 187 Arik: 2 wens. 83 47 52 42 16 20 | 260 Mayirs cious 70 40 43 45 | 198 (33) (33) MUNCH: eens gs 65 40 37 44 12 10 wal (82) (82) Pos eee ae 60 35 30 39 39 37 933 | ANE sa iiss ss 50 38 35 20 27 | 170 2 ER 55 28 60 48 | 191 St ucae eas <: 55 25 46 38 40 58 | 262 POV Siew LN ds 67 36 51 . 30 63 | 247 BG oe ee ai 68 50 62 7 257 1918 MON fe Ee as 72 46 54 86 | 258 ES ae 75 45 50 40 | 210 (115) (115) Total Hours.| 798 | 473 | 565 | 169 | 157 | 519 | 2,681 (23.00) (23.00) Total Value . at 20c. per 1X0) )) $159.60/$94.60 |$113.00/$33.80 |$31.40 |$103.80|$536.20 shows that we worked for neighbors 12 hours on July 3, 13 hours on July 30, and 14 hours on July 31. Appar- ently we did not work for them on any day between July 3 238 FARM ACCOUNTING and July 30, for the total of the column seems to be the total of the three figures shown in the illustration. These last named figures for exchange labor are not identified by parentheses because they are sufficiently designated by being placed in a special exchange labor column. Illustration 47 shows a labor record summary for the year. It is prepared from the twelve monthly labor rec- ords of the year. The method of preparing the yearly summary can be studied by verifying the transfer of the July totals, as given in Illustration 46, to the space used for July results in Illustration 47. The figures for the other months in the yearly summary labor record are ob- tained by a process similar to that used in obtaining the July results. The labor record for the year has two totals, one for the time worked expressed in hours, and the other for the value of the time expressed in dollars and cents. In Il- lustration 47 the total value is obtained by considering one hour’s time as worth twenty cents, a fair average rate. The items in parentheses have been carried through to the final total, which shows that $23 is the value of the time worked by neighbors on the various farm operations during the year. The yearly summary also shows that we worked for neighbors 157 hours, which is charged at a value of $31.40. The debits and credits expressed in the Labor Record for the year, as presented in Illustration 47, may be ex- pressed first in the cash journal, as shown in Illustration 48, or may be posted direct to the ledger accounts from the labor record book. It may be concluded from the entry of Illustration 48 that the object in designating by parenthesis, or any other device, the labor performed by the neighbors from day to day and month to month, is to obtain the amount to eredit to Exchange Labor account at the close of the year, COST ACCOUNTING 289 ILLUSTRATION 48 Entry Invotvine Excuancre Lasor, Fes. 28, 1918 (SIMPLE JOURNAL FORM USED FOR CONVENIENCE) MOACCIG.. Corian 2 = teed ete on tee aes aes $159.60 PIOVBIEE yata 5 etd Saas Sa Oa ee bo Oe ets 94.60 Pew ini. fP PE aR a, GON Ey Pe dae 113.00 Bicid Nov Bie ei ae cava eetindile a « 56.80 Exchange. Labor G ps ods cas bal eee eG 31.40 EL OUSB RON i 5 59.0 Fie wished Caw 103.80 DBR ce seaed cas hs ae a air< G2 $536 . 20 Exchange Labor sso. o5%.. ss 05 wekeoes 23 .00 $23 in the case at hand. Exchange Labor account is deb- ited with the value of labor chargeable to the neighbors, $31.40 in this case, as shown by the exchange labor column of Illustration 47. Concerning the debit to Field No. 1 as expressed in the entry of Illustration 48, it is perhaps sufficient to staté that the $56.80 is the sum of the $23 and $33.80, the value of neighbors’ time and time of regular men spent on Field No. 1 during the year as shown in the Labor Record of Illustration 47. Field No. 1 is properly charged with all labor performed on it, whether that labor is paid for in cash or in services. Exchange Labor for Horses.—The same principles and - methods presented for recording exchange labor for men apply to exchange labor for horses. One Exchange Labor account is used for recording both man and horse labor exchanged with the neighbors. 3 The horse exchange labor is recorded in the horse labor monthly record and carried to the yearly horse labor sum- mary in exactly the same way that the man labor is (Illus- trations 46 and 47). The same method, the parenthesis, is used for designating the labor performed by neighbors’ 240 FARM ACCOUNTING horses. inadequate? . Why are cost records kept? . Diseuss the collection of cost data as to (a) Source and nature of information, (b) Method of recording or tabulating. . What is done with the cost data after collection? . Name and diseuss briefly three purposes of a cost system. . Describe the construction and use of the monthly labor record, the yearly labor record. . To what extent may it be said that the yearly labor record expresses debits and credits? . Diseuss the practical use of a daily labor record. . If a flat hourly labor rate is not used, how may the cost of labor per ‘hour be caleulated in any case? . Deseribe the monthly and yearly horse labor record, pre- senting points of similarity or difference as compared with the labor record. . How may a tractor receive proper credit for its work on the farm? . What is the purpose of the Exchange Labor account? When | is it debited? When credited? . Under what conditions does the Exchange Labor account have a debit balance? A credit balance? . What does a debit balance in the Exchange Labor account mean? A credit balance? . Describe a means of recording in the labor record exchange labor for the neighbors and by the neighbors. . Why is it proper to charge a crop with the value of labor performed on it by neighbors? . Compare the treatment of horse exchange labor with man exchange labor. . What is the purpose of the feed record? Wy , Describe a form of feed record. What debits and eredits are expressed therein? CHAPTER IX COST ACCOUNTING (ContrNvzED) The Farm Plot.—A plot of the farm is a convenient and useful record to have on a farm. It is especially desirable for use in connection with a cost system. It is not a part of the accounting system proper, but may be sketched in the back part of the ledger or cash journal. The plot may be elaborate, or it may be merely an out- line sketch drawn roughly to some convenient scale, show- ing the general dimensions, size and shape of the various fields, cultivated or uncultivated. Each field should bear a number to remain unchanged as long as possible. If it is necessary to divide field No. 4, for example, into two parts, they should be designated as 4a and 4b. From the viewpoint of farm management, the plot may be used for a number of purposes. From an accounting viewpoint, its chief advantage lies in the fact that it always presents a ready reference for sizes, numbers and locations of fields. If the plot is used for recording rotations of crops, and other data of similar importance, it may serve as a means of comparing unit costs of production under vari- ~- ous methods of farming. _ Field Accounts—General.—aAs mentioned in the discus- sion of Farm Crops in Chapter VI, detailed costs of pro- - duction are not kept in the crop accounts, but in accounts with the various fields in which the crops are raised. . There are three principal reasons for keeping separate accounts with the fields and crops. 1. To afford a convenient and accurate means of ac- 245 246 FARM ACCOUNTING counting for fertilizer unused, and for fall plowing and other work performed on a field when such work is not applicable to any crop of the current year. 2. To enable one to find the unit cost of prediction on different fields, as a means of testing the relative merits. of different crop rotations, fertilizers, methods of cultivation or other theories of management. 3. To permit the complete separation of one year’s crop from the next, when it happens, as is often the case, that one year’s crop is not all disposed of before the next one is harvested. Field Accounts—Contents.—Separate accounts are kept with each field, designated by number as indicated by the farm plot. A field account is charged at the beginning of a fiscal year with the value of fertilizer unexhausted in the field, with the value of any seed sown but not yet harvested, and for the value of labor, horse labor, use of equipment or other charge for services or expenses incurred on the crop in the ground at that time. The items enumerated constitute what is known as the field inventory or deferred charges carried down from the preceding period. During the year the appropriate field account is charged with all expenses for seed, fertilizer, labor, horse labor, equipment use, general expenses, rent, interest on invest- ment and other charges incurred during the period. The appropriate field account is credited at the close of the year with the inventory value of seed, labor, fertilizer and other items debited to the account during the current year, but which are applicable to the crop of the succeed- ing year or years. Any balance remaining is transferred to the appropriate crop or feed account by crediting the field and debiting the crop account. This entry closes the field account for the year. The inventory of charges to be carried to the operations of the succeeding year is then brought down as a debit balance in the field account. COST ACCOUNTING 247 , The charges for labor, horse labor and other items men- - tioned above should include all costs up to the time the crop is ready to be removed from the field. In the case of small grain and hay or forage crops, it includes the cost of cutting, shocking or cocking. In the case of corn, it includes all costs up to the time the crop is ready to cut for fodder or silage; or to husk. This distinction is made between production costs and harvesting costs, so that production costs will afford a more uniform basis for comparison of one year with another, thus enabling crops used for several different purposes to be charged properly. For example, at the time of harvest- ing oats in one year, all oats may be stored on the premises. In another year a large part of them may be hauled from the threshing machine to market. If the field account is charged with the cost of harvesting, it would be charged with more the second year than the first, unless the difficult task were undertaken of separating the charge for hauling to market from the other threshing costs. In the case of oats and similar grains, the Oats account is charged with the total cost transferred from the field. This cost includes something for straw. The straw should then be separated from the oats by debiting Straw and crediting Oats account with a fair market value for straw. Straw account is then considered as more of an inventory account from which no profit is ordinarily expected. Operation of Field Accounts.—Under the principles gov- erning the contents of field accounts as presented above, the question sometimes arises as to just when and how the entries should be made. This is especially true in the case of a field from which the crop is harvested about the middle of the fiscal year, and it is desired to transfer the balance of the field account to a crop account, in order to show the .cost of the crop before it is fed or sold. E It might be said here, that the crop is fed or sold at P 4 a -. | : - f 1 VRP ea lt oot ' 248 FARM ACCOUNTING market price; hence the sale can be made and entered without knowing what the cost of producing the crop was until the close of the year. The same is true of the feed summary, although in this case the results would usually not be credited to the crop account until the close of the year anyway. As an example of the way a field account is operated in connection with the crop account, Illustration 52 presents a typical field account, figures having been taken from an Illinois farm on which corn is produced. It also presents the Corn account affected by the product of the field. From a careful analysis of Field No. 5 and Corn ac- counts presented in Illustration 52 the use of the two ac- counts may be compared. Field No. 5 account is charged with the value of seed at the time of planting and with fertilizer at time of applica- - tion. All other charges are made at the close of the fiscal year, Feb. 28, 1918. The labor and horse labor charges come from the yearly labor summaries, while the interest and equipment expense are calculated at the close of the year and constitute part of the closing entry at that time. © At the time of harvest, or on the last day of the month in which the harvest was completed, theoretically, an entry should be made crediting the Field No. 5 account and debiting Corn account with the cost of production. As a matter of fact the complete entry is not made at that time beeause the cost cannot be determined until the charges referred to above are made at the close of the year. Ac- cordingly, at the time of harvest, the Field account is cred- ited and Corn account debited, in the explanation columns only, with the number of bushels harvested. When the total costs and the labor and fertilizer inven- tories are recorded, the cost of production is caleulated as being the amount required to balance the field account. This amount, $285.56, in Illustration 52, is placed in the COST ACCOUNTING 249 eredit money column of Field No. 5 account and debit money column of Corn account on the line which previously - showed only the number of bushels transferred from the Field to the Crop account. At that time the cost of pro- duction per bushel is caleulated and recorded in the Field account in the same way that the 25.7 cents is shown in Illustration 52. This cost does not include the cost of husk- ing, as that is charged to the Corn account. The 25.7 cents represents the cost, on a basis of which one might sell his erop in the field. ; Operation of Crop Accounts.—The Corn account pre- sented in Illustration 52, typical of all crop accounts, is charged with the value of corn on the farm at the begin- ning of the fiscal year. It is charged at the time of harvest with the number of bushels from each field, the figures be- ing placed in the explanation column. The other charges are posted to the account at the close of the year, at which time also the value of the corn harvested from the several fields is recorded in the money column on the debit side of Corn account, as explained above in the discussion of Field No. 5 account. The value of corn fed to livestock is cred- ited to Corn account at the close of the year from the yearly feed summary or from the journal entry prepared from the summary. Any sales on the market are credited at the time of sale or at least are recorded in the cash journal as credits to Corn account. They may be posted at the close of the year. The inventory entry for corn on hand is made, and any balance remaining in the account thereafter is transferred to Loss and Gain account at the close of the year. In the Corn account shown in Illustration 52, it may be seen that three fields contributed to the supply of corn. The labor and horse labor charged to the Corn account represent the charge for husking. These charges, together with other costs shown in the account except the inventory 250 FARM ACCOUNTING © ILLUSTRATION 52 FiIgELD AND CrRoP Accounts Field No. & 1917 1917 Apr. 1 Fertilizer..... $36.00 | Nov. 30 1109 4 bu. to May 1Seed......... 5.10 corn a/c at 1918 25.7 cents.. $285.56 Feb. 28 Labor for year $51.90.) 1918 Feb. 28 Horse Labor Feb. 28 Labor Invty.. $14.00 for year..... 65.86 | Feb. 28 Horse Labor Feb. 28 Int. on Invest. Invty....... 17.30 for year..... 175.00 | Feb. 28 Fertilizer In- Feb. 28 Equip’t Exp.. 10.00 ventory..... 27.00 $343 .86 $343 .86 1918 Mar. 1 Labor Invty.. $14.00 Mar. 1 Horse Labor Invty....... 17.30 Mar. 1 Fertilizer In- ventory..... 27 .00 at the beginning of the year, make a total charge of $640.06, which might be considered as the cost of making this year’s crop available for sale or for feeding from the crib. This amount divided by the 1948.5 bushels harvested results in a per bushel cost of 32.8 cents, to be used as a basis for figur- ing profit per bushel if sold or fed from the crib. If sold at the elevator the 32.8 cents would be increased by the per bushel cost of hauling. The hauling cost is regularly — charged to Corn account through the labor and horse labor ~ records. | COST ACCOUNTING 251 ILLUSTRATION 52—Continued Corn Account 1917 1918 Feb. 28 Bal. onhand.. $656.00 | Feb. 28 Fed during yr. Nov. 30 From field No. 5 per feed sum- (1109% Bu.) 285.56 wery Ord eye $1,473.48 Nov. 30 From field No. 6 Feb. 28 Inventory.... 510.00 (752 Bu.).... 223.45 Nov. 30 From field No,8 7 (87 bu.)...:.... 32.20 1918 Feb. 28 Labor for year 38.92 Feb. 28 Horse labor for VOOR CS eters 33.66 Feb. 28 Equip’t Exp. . 4.50 Feb. 28 Bldg. Expense 13.77 Feb. 28 General Ex- pense propor- MOD. Leth Bs 8.00 Feb. 28 To Loss & Gain (net gain for year)....... 687 .42 $1,983.48 $1,983.48 1918 Mar. 1 Inventory.... $510.00 Silage Account.—When corn ‘is harvested and used for silage, it is necessary to make entries to show, among others, the following facts: 1, That the Field account is credited with the cost of producing the corn used in silage. 2. That Corn account is credited with the market value of the corn used in silage. 252 FARM ACCOUNTING 3. That Silage account is charged with the market value of the corn used. In order to show these facts on the books, it is necessary to consider the corn used in the silo as passing through the corn crib and being sold out to the silo, although, as a mat- ter of fact, the corn does not take such a route to the silo. This gives rise to the following series of entries, then, in charging the Silage account with the material used. (a) Debit Corn account and eredit the proper Field account with the cost of producing all corn in the field as described under ‘‘Operation of Field Accounts.’’ (b) Debit Silage account and credit Corn account at September market price with the quantity of corn used in silage. This quantity can be estimated quite accurately from the number of rows or area of corn used and the average number of bushels per acre in that field, if any is husked. These two entries (a) and (b) leave the Field account in just the condition it would have been, had all the corn been husked. It leaves the Corn account showing just the same profit it would have shown, had all the corn been fed or sold. This is the correct way to leave the Corn account, for the corn used for silage should affect the corn in the same way as does corn used for feed in any other form. The only difference is that in the case of silage, the corn is not husked nor placed in a erib. Nevertheless it should receive full credit, as a crop, for all the corn raised on the premises, regardless of its ultimate use. Also, the entries named above provide for charging the Silage account with the proper amount for the corn that enters into it. After making entries (a) and (b) as deseribed above, the Silage account stands debited with the value of the corn at September market price. The account should be charged also with the cost of filling the silo from the time the corn is taken from the field. The cost of cutting the COST ACCOUNTING 253 corn should be charged to Corn account in the same way that cost of husking would be charged. These entries are made in the regular way after the time has been recorded in the man and horse labor records. These two_elerhents, then,—cost of the corn and cost of filling—constitute the direct cost of silage. To these must be added at the close of the year, through proper entries, any charges arising from depreciation of silo, silage cutter, rent, or interest on investment in silo, and a proportion of equipment and general expense. The sum of these charges is the cost of silage. The cost per ton should be calculated in order to have the latter figure to use as a basis for charg- ing the silage to livestock. The Silage account is credited throu the feed record with the value of silage fed to livestock. After the number of tons fed has been determined in the feed record, the value is found by multiplying the number of tons fed by the cost per ton as determined from the debit side of Silage account. Theoretically, when all silage has been fed, the account should be in balance. Practically, there will usu- ally be a slight balance due to shrinkage, or to error in esti- mating the tons produced or fed. Any balance remaining in the account when no silage is on hand should be charged to General Expense. At the close of the year, any silage on hand is carried down as an inventory. If it is apparent that the quantity expressed by the book value at the close of the year does not correspond with the quantity in the silo, an adjustment should be made between Silage and General Expense account in such a way as to bring the Silage account into harmony with the physical valuation of the silage. Fodder.—The cost of corn fodder is determined and entered in the same way as described for silage, being car- ried through Corn account and charged to fodder at mar- ket price of September corn. It is credited at the cost price 254 FARM ACCOUNTING of the fodder for the quantities shown in the feed record. Seed Account.—One Seed account may be made to serve for recording values of all classes of seed. The account is used to show the value of seed on hand at any time, espe- cially at the close of the year. It is charged with the fair market value of seed at the time it is sorted from the regular crop, no matter whether it is corn, oats, wheat, clover or other product. The proper crop account is credited at that time. Seed account is credited for the book value of seed used, the Field account being charged. That is, if seed corn has been charged to the Seed account at $3 a bushel at the time of selecting seed, the Seed account is credited and the proper Field account debited with $3 a bushel at the time of planting. If seed unused for the purpose intended is fed to live- stock, the Seed account is credited and the appropriate livestock account debited with the market price of the product as feed and not as seed. This would naturally leave a debit balance in Seed account after all the seed has been used. Any balance remaining in the account may be closed into General Expense whether the balance be a debit or a credit. | The Household and Farm Products.—It has been stated elsewhere that the Household should be charged with the farm value‘ of farm products used. As a matter of practi- eal application this statement might be modified to read ‘the household should be charged with all milk and eggs produced on the farm and with all garden expenses, and with such other farm products as are used in the house.’’ The exceptions made in the ease of milk, eggs and gar- den are explained best by a slight analysis of conditions. In general they are made in order to reduce the detail required in keeping track of small quantities used by the household. *Farm value means market price minus cost of marketing. a a ede ‘eg fe COST ACCOUNTING 255 Milk.—The Household should be charged and Cattle eredited with the value of all milk produced, provided the production of milk is merely incidental to the main objects in farming. If any substantial amount of milk or cream is sold, the statement above would not apply. When all milk is charged to the Household, it follows that the Household should be credited for any milk, cream or butter subsequently sold. Also, the Household is cred- ited, and the Poultry, Swine or Cattle charged with any skim-milk or butter-milk fed to the chickens, pigs or calves. The entries for the production of milk and for the milk products fed to livestock, are made only once a month. In the meantime, memoranda are made to show quantities pro- duced,or fed. Eggs.—At the time of gathering eggs, a memorandum - shouldbe made showing the number of eggs. At the close of the month a fair average market value is placed on the eges and an entry made charging Household and crediting Poultry with all the eggs gathered during the month.. If any eggs are sold from the premises, the Household is cred- ited, and Cash (presumably) debited. This treatment places the burden for the details con- cerning eggs upon the household. It can very often be assigned to a young member of the family, thus relieving farm accounting of some of its details. As in the case of milk, this method of accounting for eggs applies to the general farm, and not to the poultry ranch. Garden.—Under a cost system, considerable detail can be avoided in connection with the garden products used, if all expenses in connection with the garden are charged to the Household, and all incomes from sale of garden truck are credited to the Household. With this arrangement it would not be necessary to keep a record of, nor make en- tries for the garden truck used by the house. The Household is charged with the cost of plowing, plant- 256 FARM ACCOUNTING ing, cultivating, ete., and with any other work performed by horses in the garden or by anyone from the household whose time might ordinarily be charged to Labor account. It is also charged with a proportion of rent or interest on investment, with equipment expense and any general ex- pense that might be pro rated over the area occupied by the garden. No entry is required when garden products are used in the house; but the household is credited when any products are sold to outside parties. It is sometimes better to keep a separate account with the garden. In such cases the Garden account is charged ‘with all the elements of cost enumerated in the preceding paragraph. It is credited with any products sold to out- siders, but not with products consumed by the household. At the close of the year any balance is closed into the Household account. Thus, the ultimate result is exactly the same whether the charges and credits are carried through the Garden account or made in the Household account direct. For the purpose of treating a garden in this way, the term should be limited to include only the plot of ground near the house, designed primarily to provide for the needs of the household. Any special plots of potatoes, sweet corn, melons, or other products ordinarily found in a gar- den, but meant in any particular case primarily for sale on the market, should be treated in the same way as a field producing farm crops. Pasture.—Following the general principles of cost ac- counting of charging all expenses and crediting all incomes to the accounts directly affected, it is necessary to treat pastures in somewhat the same way that any other field is treated. However, a pasture has some characteristics of a crop, and some of a field. Accordingly, it is permissible to have the Pasture account show a loss or gain, while it is not proper for a field account to show a loss or gain. 7" ry 5 , " COST ACCOUNTING 257 The Pasture account is charged with any deferred debits earried down from the preceding year, such as cost of seed- ing, also with rent or interest on investment and any other direct or indirect costs that might be pro rated to it at the close of the year. The account is credited with the feed obtained from it by the livestock. The value of the feed is determined by considering the average amount that an animal can consume in one day. Five cents a day for an animal is considered a fair market value for pasture. The term pasture-day is used in this connection. It means the grazing by one animal for one day. If there are twenty cattle in a pasture for each day of a standard month, there would be 600 (20 x 30) pasture days for which to make an entry. Considering a pasture-day as valued at five cents, there would be expressed a debit to Cattle and a credit to Pasture of $30 for the use of the pasture for the month. By-Products.—An account called ‘‘ By-Products’’ is used for the purpose of recording the value of crop residues con- sumed in the field by livestock after the crop has been harvested. This condition arises when livestock is turned into oats or wheat stubble or into corn stalks after husk- ing. The livestock, obviously, should be charged for the. feed they obtain in this way, since it takes the place of regular pasture or other feed. The question arises as to what account to eredit. The account with ‘‘By-Products’’ is the one which shows most clearly what the nature of the income is. It cannot be called an income from the crop for the crop cannot be considered as contributing something which it never had. If the crop account is not charged with the value of the stubble or corn stalks it should not be eredited when the latter are used to the ad- vantage of the farm. An exception to the use of this * During the year since war conditions affected prices so extensively, the value of pasture rental is nearly double the figure quoted above, 258 FARM ACCOUNTING account is found in the case of a second growth of hay pastured. The field account should not be credited, for it is merely an intermediate account for the purpose of ac- cumulating costs of production to transfer to the crop accounts, and for taking care of deferred charges for labor, fertilizer and so on. It is not the nature of the field that caused the livestock to be turned into it. It is the managing ability of the farmer. As such, his ability to take advantage of by-products of the fields should be re- corded in a separate account where its results may be seen in the aggregate, at the close of each year. The bal- ance of the By-products account is closed into Loss and Gain account at the close of the year. The value of the feed obtained by livestock in stubble fields or corn stalks is determined in the same way as the value of ordinary pasture feed. Rent Distribution—When farm rent is considered as a” element increasing the cost of production, it is essentia’ that the total rent should be distributed over the farm elements on a reasonable basis. The time and method o° distributing rent are the two important factors that need special consideration. As for the time of making the entry, it may be said that the best time is at the beginning of the year when the lease becomes effective. The method of distributing the rent depends upon the nature of the lease, whether it is on (a) a cash or (b) share rent basis. (a) Under the cash rent basis, it is definitely known what the total rent is. The rent per acre of tillable and pasture land can be calculated, also the rent of the build- ings and barnyard. After the total for each field, and for the buildings, has been determined, an entry is made crediting Notes Payable and charging the several field ac- 7 ERE ae: oa he ee eee oe Oe Sn ge es i ro. one ae eer a ee Prag COST ACCOUNTING 259 counts, Pasture, Swine, Poultry, Cattle, Horses, Corn and Household, each with its pro rata share of rent. Each class of livestock is charged with the estimated rent of the build- ing or buildings it uses. The household is charged with the rent of house and garden. Corn or other crop account is charged with the pro rated amount for use of cribs, granaries, ete., used for storage purposes. Equipment Expense account may be charged with an amount to repre- sent the use of machine sheds. The entry suggested above indicated a credit to Notes Payable. This assumes that notes are given for the amount of the rent at the time of signing the lease. If no notes are given, the landlord’s account is credited instead of Notes Payable. When notes for rent are given before the beginning of the year to which they apply, Notes Payable is credited and ‘‘19— Rent’’ account debited. The latter account is then considered as a deferred resource until the beginning of the fiscal year to which it applies. At the beginning of the year, under the last named conditions, the ‘‘19— Rent’’ account is credited and the several fields, livestock and other accounts charged as described in the preceding paragraph. The ‘‘19— Rent’’ account is made to fit the year of the operations to which it applies. For example, when a lease is signed and notes given in November, 1916, for the fiscal year beginning March 1, 1917, the amount of the rent is charged to ‘£1917 Rent’’ account. (b) Under the share rent basis it is not definitely known what the total rent is for the year. Accordingly, it pre- sents a very complex situation unless one resorts to esti- mates and makes entries similar to those explained for cash rent, above. The following procedure is suggested as the most prac- tical under the ordinary share rent agreement: At the beginning of the year to which the lease applies, 260 FARM ACCOUNTING an entry is made crediting Rent Adjustment account and debiting the fields, livestock, household and other accounts - in the same manner as for cash rent. The amount to charge to each is determined according to a fair cash rental basis for the same farm. As crops or livestock are disposed of the appropriate crop or livestock account is credited for the total sale, the Rent Adjustment account being debited with the land- lord’s share (if he takes the cash direct from the sale or if it is deposited in the bank to his credit), and cash being debited for the tenant’s share of the sale. If the cash for the entire sale remains in the hands of the tenant tem- porarily, he debits cash for the entire amount received, at the same time debiting Rent Adjustment and crediting the landlord for the latter’s share. Later, he credits Cash and debits the landlord as payment is made to the lat- ter, thus leaving both the Cash and Landlord’s account in the same condition as if the landlord had taken the cash at the time of sale. This process of charging the Rent Adjustment account is repeated as often as sales occur during the year, thus decreasing the credit balance of Rent Adjustment account from time to time. In a good year, the credit balance would probably be reduced to Zero, and a debit balance accumulated as a result of sales. This would mean that the amount of the rent was in excess of what the fair aver- age cash rent would have been in that year. At the close of the year, any debit balance of this nature remaining in the account would be closed into Loss and Gain account. It is an undistributed loss to be set against all the income from the year. It should not be considered as increasing the cost of production of any crop or class of livestock. Similarly, if crops are poor, so that the Rent Adjustment account has a credit balance at the close of the year, such eredit should be closed into Loss and Gain account, ap- COST ACCOUNTING , 261 _ pearing therein as an unexpected income—a sort of rebate because of poor crops or poor prices. It should not ‘be credited to the several crop accounts to reduce their cost of production. The cost of production is an element that should not vary with the selling price of the commodities produced. , It is because of the fact stated in the preceding sentence that share rent is treated in the way presented in the sev- eral preceding paragraphs. If any other method were. used, it would usually result in waiting until a sale was made before charging a crop account with the rent. The rent so charged would vary so much from year to year, that there would be no sound basis for comparison of _ production costs in a given field, one year with another. Likewise, there would be no reasonable basis for compar- ing production costs on a share-rent farm with a cash-rent farm, or with one operated by the owner. The foregoing treatment of share-rent assumes that the tenant owns all equipment and livestock. It also assumes that the sales of crops and livestock are made to about the same extent in each fiscal year. That is, it assumes that about the same proportions of the total crops and total livestock are sold before calculating the loss or gain of each year. If the latter assumption were not made the balance of Rent Adjustment account would not show the difference between the normal cash rent and the actual share rent of the year. It would reflect largely the selling policies, being influenced considerably in any year in which crops were held over into the succeeding year, for better prices. If the landlord owns half of the livestock, half of the equipment or both, only the tenant’s share of such live- stock and equipment is recorded in the books of the tenant. Under such conditions the Equipment Expense account is debited at the beginning of the year with an amount to 262 FARM ACCOUNTING represent the use of the landlord’s equipment. This makes _ it-possible to have about the same amount of equipment expense to charge to the various fields as when the tenant owns all of the equipment. As a result, the cost of pro- ducing crops on a share rent farm can be compared on a common detailed basis with the cost on a cash rent farm or on one operated by the landlord. Equipment Expense.—It has been fairly established by experiment that the use of a machine on a field or other farm element is nearly in proportion to the number of horse hours spent on that field or farm operation.* For example, if the horse labor record shows that horses worked 10,000 hours during a given year, and that 1000 of those hours were charged to Field No. 1, then Field No. 1 should bear 1/10 (1,000 + 10,000) of the wear on that class of equipment drawn by horses. This rule results in a very fair distribution of machine charges over the different farm elements. An account is kept with Equipment Expense. To this is charged all repairs, depreciation, interest on investment and other expenses in connection with upkeep of farm equipment. At the close of the year the debit balance of the account is ascertained preparatory to distributing it over the farm elements. For effecting such distribution, the total horse hours worked by the proprietor’s horses, as per horse labor summary for the year, is divided into the. balance of the Equipment Expense account. This gives the machine cost per hour to be charged over the various accounts shown on the horse labor summary. This cost per hour is multiplied by the number of hours charged against each account. It assumes that for every hour a horse works on some farm element some equipment is used also. *By permission of Mr. F. A. Pearson, Dairy Husbandry Dept., University of Illinois Agricultural Experiment Station. COST ACCOUNTING 263 ILLUSTRATION 53 YearRty Horse Lasor Summary Usep As A Basis FOR DiIsTRIBUTING—EQUIPMENT EXPENSE Gen- House-|Swine| eral |Cattle | Field | Field | Total hold Exp. | No.1) No. 5 Mar.... 73 25. 26 8 . 132 Apri 74 26 35 12 | 240 30 417 PDO etc. for year Total Hours y for yr.....{1,160 | 410 | 530 | 415 | 802 | 683 | 4,000 Total Cost for yr. for | Horse Labor|$116.00'|$41 .00/$53 . 00|$41 . 50/$80 . 20/$68 . 30/$400 .00 Cost for Equip- ment use..| $58.00:$20.50/$26 . 50/$20 .75|$40.. 10/$34. 15/$200 .00 ‘See ‘‘Horse Labor Record,’’ page 232. For example, if the horse labor record for the year shows the totals indicated in Illustration 53, and the balance of Equipment Expense account is $200 at the close of the year, the machine cost per hour is $200 divided by 4000, or 5 cents. This means that for every hour horses are -used in connection with a farm element, such element is responsible for 5 cents’ worth of repairs, depreciation and interest on the equipment. Applying this 5 cent rate to the farm elements recorded in the yearly Horse Labor Summary of Illustration 53, the household is charged with 1160 times .05, or $58, for the use of equipment during the year. Likewise, the other ele- 264 FARM ACCOUNTING ments using horse labor during the year are charged at a rate of 5 cents for every hour horses were employed there- on, in order to have each element bear its share of the cost of maintaining equipment. The several charges for equipment use can be conven- iently recorded in the yearly horse labor summary as shown in Illustration 53, where the $58 charge to house- hold, the $20.50 charge to swine and other corresponding charges are shown at the foot of the illustration. The total, $200, in the lower right-hand space represents the total cost in connection with equipment. The figures on the bottom line, just mentioned, express debits and credits, © | and as such may be posted direct from the Horse Labor Summary to the debit of the accounts named at the tops of the respective columns, and to the credit of Equipment Expense account. The yearly Horse Labor Summary, then, as presented in Illustration 53, may be used at the same time as a posting medium for charging various accounts with the cost of horse labor and the use of equipment. It should be noted, therefore, that the amounts in the line next above the bot- tom line represent the cost of horse labor on the farm ele- ments named at the tops of the columns. The sum of these charges for horse labor should equal the amount credited to the Horse account. In the illustration under discussion, $400 is eredited to Horse account and $200 to Equipment Expense account. The latter credit should close Equipment Expense account for the year unless frae- tional parts of a cent are dropped in making calculations. The credit to Horse account closes the latter after the inventory is considered, unless a flat rate of, say, 10 or 12 cents an hour is used. One very essential point is to be observed in using the horse labor summary as a means of distributing equip- a ——_— a= COST ACCOUNTING 265 ment expense. It is that the horse labor figures should be calculated, and the amounts posted to the several ledger accounts before any attempt is made to calculate even the total of equipment expense. This is because all of the expenses in connection with equipment are not in the Equipment Expense account until the cost of horse labor on equipment has been posted from the horse labor summary. When all the necessary charges for the year have been made in the Equipment Expense account, then the dis- tribution of such expense is made over the several farm elements as indicated in Illustration 53 and as described above. After the distribution is made in the Horse Labor. Summary, the items are posted to the accounts affected. The method of calculating, recording and distributing Equipment Expense as described above includes all ex- penses in connection with equipment, both that drawn by horses and that used entirely by hand. In other words it includes hand tools. Theoretically it should not. Prac- tically, however, distributing expenses of hand tools on a basis of horse hours is justified very largely because such tools are used for repairing horse drawn equipment. Any expense on tools not so used is so small that the distribu- tion explained above may be used for all equipment ex- pense without fear of distorting the results. Its simplicity warrants its use without modification. Work Horses and Other Horses.—A distinction is some- times made between the cost of keeping Work Horses and the cost of keeping Other Horses. Such distinction is not necessary on the average farm where only enough colts are raised or extra horses kept to insure the keeping of work up to a general standard, without unwarranted delay during rush seasons of the year. Work Horses are kept for the purpose of assisting in the general farming operations. Work Horses account is charged with the cost of keeping horses that do farm work 266 FARM ACCOUNTING at any time during the year. Such expenses of mainte- nance are ultimately charged to the farm elements through ‘the yearly Horse Labor Summary. Other Horses are kept primarily for the purpose of mak- ing a profit from their sale. Other Horses account is charged with the cost df keeping horses that are not raised as work animals. Expenses charged to Other Horses are absorbed at the time of sale; if not, the account shows a loss. A profit results when the sale price of, or other in- come from Other Horses exceeds the cost of raising or maintaining them after considering the inventories at the beginning and close of the year. The balance of the ac- count with Other Horses is closed into Loss and Gain account. Deferred Charges.—There is a class of inventory used in cost accounting which does not represent specific units of property that can be enumerated. The items in this class, however, are inventories in the sense that they are “*sold’’ from one period to the next. They are better known as ‘‘deferred charges.’’ An example of such a deferred charge is fertilizer ap- plied to a field and charged to it on the books. If the entire cost of the fertilizer were considered as an expense of that field or crop in the year in which it is applied, the current year’s crop would be charged with something it did not use. For the same reason the following year’s crop would get the use of something for which it would not be charged. In order to place the charges where they be- long, the value of fertilizer unexhausted at the close of the year is determined with reasonable accuracy and **sold’’ to next year’s crop. The ‘‘sale’’ is recorded in the same way as the inventories of livestock; namely, a eredit above the double lines and a debit below. Other common deferred charges are interest or insurance premiums paid in advance. For the average farmer the — ee Ce an = > Shae 2 Pe ® COST ACCOUNTING 267 latter two are of so little importance that they can be ig- nored. If, however, a three-year fire insurance policy is held, arrangement should be made to charge only one-third of the total premium against the operations of each of the three years. Manure.—The java classes of livestock are given eredit for the value of the manure produced during the year. As the manure is hauled from the barn yard, the proper field accounts are charged. A fair value to place on manure for purposes of these debits and credits is one dollar a ton.? If practically the same quantity of manure is produced and hauled during a given year, the entries stated above charging the field accounts and crediting the livestock ac- counts are sufficient. When any considerable amount is produced in excess of the amount hauled away, such ex- cess should be considered as a deferred charge or inventory _ for the proper livestock account. In this way the live- stock account is credited with it in the year of its pro- duction, and it is brought down in the account below the double lines after closing, in the same way as the inven- tory of livestock. The inventory thus carried down to the debit side of the appropriate livestock account will be balanced by a credit entry when the manure is hauled away. As mentioned under the subject ‘‘Deferred Charges,’’ a given application of manure is not a cost of raising one crop but several crops. It has been ascertained * that of an application of manure 40% is consumed by the first year’s crop, 30% by the second, 20% by the third and 10% by the fourth. Extraordinary Losses and Gains.—There are some ex- penses and incomes on a farm that cannot be assigned di- *U. S. Dept. of Agriculture Bulletin 511. * Montana Agricultural College Cireular 43. 268 FARM ACCOUNTING rectly to any of the so-called productive elements. They are closed into Loss and Gain account direct, instead of being distributed over various other accounts first. Fire Loss, which has been discussed in Chapter VII, is one of these. Others are commissions earned through agencies of various sorts, income from a threshing machine, corn shredder or other similar outfit. If a farmer acts as an agent for silos, automobiles or some other articles, any commission received as a result of such agency should be eredited to an appropriate in- come account until the close of the year, at which time the balance of the latter account is closed into Loss and Gain account. Commission from the sale of silos, for example, is credited to a Silo Commission account or to a Miscel- lanequs Income account. The former account is preferable. Any expenses incurred in connection with the sales are charged to the same account that receives the credit for ~ the commission. If the farmer spends ten hours during the month of February in trying to sell silos, the labor record should show such time under the heading ‘‘Silo Commission’’ or ‘‘Miscellaneous Income.’’ The proper charge would be made from the labor summary to the aec- count named. The balance of the Silo Commission account would show the net income from the ‘‘side line,’’ and would be closed into Loss and Gain account. A Miscella- neous Income account, if used in this way, might contain several different classes of information. If so, it would have to be analyzed in order to find the net result of any specific ‘‘side line.”’ Interest as an Element of Cost.—There is no other ele- ment of cost accounting that causes so much discussion and difference of opinion as the question of interest. Some consider that interest is an element of cost just as de- preciation is. Others consider that interest is a distri- bution of the business profits, such profits having been ee a ee ~ eS — a de ANG a COST ACCOUNTING 269 ILLUSTRATION 54 Loss aND Gain Account WHEN INTEREST ON INVESTMENT Has Nor BEEN CHARGED AS A Cost OF PRODUCTION. (OTHER CONDITIONS SAME AS IN ILLUSTRATION 55) Loss and Gain Household. 265.0. i. $200 ee ee eee $300 Net Gain to Capital | oe See ae 500 ACCOUNT.) Lc, '00 8 a 1,400 Potatoes... ........: 400 Oe 5 eed an a 100 RUGS Sead wicks ieee 300 $1,600 . $1,600 determined after considering all elements of expense ex- cept interest on investment. The application of either of these principles gives the same result in the end as far as the’ net addition to the Proprietor’s Capital account is concerned. The difference between the two methods appears in the relative costs of conducting the several productive elements of the farm. If all productive elements required the same capital in- vestment in land, equipment and buildings or other prop- erty, to produce a given net income, a consideration of the element of interest would be unnecessary as a basis for determining which farm element was the most profit- able. As a matter of fact, a greater investment in land, build- ings or equipment is required to produce commodities of a given value from one productive element than from another. This being the case, it is reasonable to consider that the productive elements requiring the greatest invest- ment should be charged with some amount to represent its relatively greater requirements in the way of capital. 270 FARM ACCOUNTING ILLUSTRATION 55 Loss anp Garn Account Wen Interest on InvestMeNT Has Been CHARGED AS A Cost oF PRODUCTION (OrnER ConpiTIons SAME AS IN ILLUSTRATION 54) Loss and Gain Household........... $200 OT $250 Net Gain to Capital nen. . on aGnioe eee 400 Account.........-- 1,400 Potatoes. .....ceeee: 375 Swit... ;.ci> esc eseepee $300 Tncome from Corn <, ...0< > sss.0 0050 vecwp et +00 nema 500 Income'from Potatoes... ... soc cs bpines aw s'00 eee cee 400 Income from Swine ...:.... <<. «, alae ss eeene $800 Watt Hdw. Co........ $150 Household furnishings... 500 Mortgage Payable..... 2,000 aes 1. AGAMS:,,, ... «06 b.<: 60 L. E. Fay, Cap..... .-- 93,430 Notes Rec. (Atwood) 200 Ee Pe eae 800 EN ss 5 tiekin is sad eee 600 SIM 6 d-ccrorta hao: ag tame 350 ED aise dae «> ge aie 150 OWL Y. «0s notecn dp cwreens 30 Bran, shorts, etc. (Dr Mill Feed).......... 40 | REI 5 apy yy: Ht. 500 ERR” CGR AE 2k Se 100 SDT ae et 2 oe 250 A rey Fie 200 Equipment............ 1,000 $5,580 $5,580 In order to reduce the details of the problem, the inventory record of Mr. Fay is not to be used. 288 FARM ACCOUNTING Make the necessary entries in the books of original entry to open the books of Mr. Fay; and then proceed to record his trans- actions for the year, as detailed below. TRANSACTIONS Jan. 2. Gave two promissory notes to landlord for $250 each, in payment of year’s rent, one due Sept. 1 and one Dee. 15, 1916, without interest. Jan. 3. Spent $10 for household supplies. Jan. 16. Sold corn for $140 cash. Jan. 31. The household received during the month, $5 worth of dairy products and $1 worth of eggs. (Credit Cattle and Poultry accounts respectively.) Jan. 31. Butchered for household use, four hogs valued at $50. Feb. 1. Paid interest on mortgage for six months, $60. (Debit Interest on Investment.) Feb. 11. Bought for eash two horses at $150; and two sets of harness at $19.50. (Harness is considered as equipment.) Feb. 16. Received a 60 day note, bearing interest at 6%, from B. E. Adams to settle his account. Feb. 28. The household received during the month, poultry valued at 90c, eggs valued at $1.15 and dairy products valued at $6. Mar. 4. Sold wheat for $175 eash. Mar. 4. Paid cash for groceries, $6. Mar. 4. Paid personal taxes, $35.67. Mar. 31. The household received during the month, poultry valued at 95ce, eggs valued at $1.10 and dairy products valued at $6.40. Apr. 3. Paid for repairs to wagon and corn planter, $2.25. 1The total rent of $500, in this case, is not distributed over the farm elements until the close of tlhe year. This is made necessary by the fact that accounts with fields are not kept in Mr. Fay’s cost system. Accordingly, a distribution at the beginning of the year is not feasible, as it is not known in advance in all cases just what crops are to be planted on certain fields. Debit Rent account with $500. COST ACCOUNTING 289 _ Apr. 16. Received cash from B. E. Adams to redeem his note of Feb. 16th! and to pay interest on same. Apr. 30. The household received during the month, poultry valued at 80c, eggs valued at 90c¢ and dairy products valued — at $5.30. May 1. Arranged with Roy Wade to work by the month until December 1st for $30 a month and his board, room and laundry. It is agreed that he can draw his wages in installments of not less than $5 at any one time after he has earned them. May 5. Received cash from A. M. Atwood for note due today, with interest on same at 6% per annum from December 5, 1915. May 6. Paid Watt Hdw. Co. in full of account, $150. May 25. Decided to discontinue the raising of sheep, so sold all the sheep for $230 cash. May 25. Roy Wade drew $10 on account of wages. May 31. Sold part of the hay for $95. May 31. The household received during the month, poultry valued at 70c, eggs valued at $1.30 and dairy products valued at $7. May 31. Credited Roy Wade with wages for May, $30. May 31. The household values the board, room and laundry of the hired man during May at $20. June 1. Paid $30 for bran and shorts. June 8. Roy Wade drew $20 on account. June 10. Bought sundry supplies for house, $16.50, of which $13 was paid in cash, $2.50 in butter, and $1 in eggs. (Cr. House- hold-for the $2.50 and $1.) June 10. Bought nails, bolts, ete., for repair of equipment, $1.15 cash. June 10. Bought a new hat and suit of clothes for $27.50 cash. : June 30. The household received during the month, eggs valued. at 50¢ and dairy products valued at $5.60. June 30. Credited Roy Wade with wages for June, $30. *In figuring 60 days from February 16, it should be remembered that 1916 was a leap year. : 290 FARM ACCOUNTING a June 30. The household values the board, room iid cunaey of the hired man during June at $20. July 3. Paid for binder twine for oats crop, $19.50. July 3. Roy Wade drew $30 on account. July 4. Spent $7.40 for sundry expenses in town at holiday celebration. { July 8. Deposited $500 in- savings account at State Trust & Savings Bank. (Debit State Trust & Savings Bank; credit Cash.) July 15. Paid for extra help during the haying season, $9.30. (Dr. Labor.) July 22. Bought groceries for cash, $16. July, 31. The household received during the month, eggs valued at 35¢e, and dairy products valued at $3.40. July 31. Credited Roy Wade with wages for July, $30. July 31. The household values the board, room and laundry of the hired man during July at $20. Aug. 1. Paid interest on mortgage, $60. (Dr. Interest on Investment. ) ' ' Aug. 6. Paid for sundry small tools, $6.30. Aug. 16. Paid for threshing coal for oats erop, $4.27. Aug. 18. Sold 520 bushels new oats at $0.53 cash. Aug. 23. Sold some corn for $150 eash. Aug. 23. Bought groceries for cash, $19.50. Aug. 31. The household received during the month, eggs valued at 60c, and dairy products valued at $3. Aug. 31. Sold eggs for 90e eash during August. Aug. 31. Credited Roy Wade with wages for August, $30. Aug. 31. The household values the board, room and laundry of the hired man during August, at $20. Sept. 1. Paid $250 to redeem note held by landlord due to- day. Sept. 6. Bought bran, shorts, ete., for $29 cash. Sept. 6. Sold four calves for $85 cash. Sept. 8. Paid Roy Wade on account $15. Sept. 15. Paid for extra help during threshing season, $4.50. (Debit Labor.) COST ACCOUNTING | . 291 Sept. 21. Paid fire insurance premiums, $8. (Dr. General Expense. ) . Sept. 30. The household received during the month, eggs valued at $1 and dairy products valued at $5.10. Sept. 30. Credited Roy Wade with wages for Sept., $30. Sept. 30. The household values the board, room and laundry of the hired man during Sept. at $20. Sept. 30. Paid Roy Wade on account, $15. Oct. 6. Paid for winter clothes for self and family, $86.50. Oct. 10. Bought for eash two husking hooks, 40¢; two corn knives, 60c; and one wheelbarrow, $3. (Dr. Equipment.) Oct. 21. Sold for cash, 30 shotes, 4500 lIbs., at $13 per ewt. Oct. 31. Credited Roy Wade with wages for October, $30. Oct. 31. The household values the board, room and laundry of the hired man during October at $20. Oct. 31. The household received during the month, poultry valued at $1.25, eggs valued at $1.20, and dairy products valued at $6.30. Nov. 6. One cow valued at $20 died and was buried on the ‘farm. | Novy. 20. Sold some poultry for $16.45 cash. Nov. 30. Donated to the United Charities, $10. (General _ Expense.) Nov. 30. The household received during the month, poultry valued at $2, eggs valued at $1.10, and dairy products valued at $5.90. | Nov. 30. Credited Roy Wade with wages for Nov., $30, and paid him $30 on account. Nov. 30. The household values the board, room and laundry of the hired man during the month at $20. Dee. 3. Paid cash for bran, shorts, ete., $26. Dee. 3. Paid for buggy wheel, $5.95; one pair trace springs, * $1; one wagon tongue support, $1.70; one single tree, 60c; nails, screws and bolts, 70¢; and two horse blankets, $5.90. (All are to be charged to Equipment Expense.) ~ Dee. 15. Paid $250 to redeem note held by landlord, due to- day. } Dec. 18, Sold some poultry for $6.20 cash. 292 FARM ACCOUNTING Dee. 18. Paid for incidental Christmas purchases, $10.65. Dee. 19. Paid Roy Wade on account, $50. Dec. 31. The household received during the month, poultry valued at $1.40, eggs valued at 45¢ and dairy products valued at $4.80. Dee. 31. Mr. Fay places the value of his services as a laborer at $600 for the year. The feed records kept during the year showed ‘imanditian consumed, which have been calculated as bearing the values stated below. They are to be summarized in the Feed Record for the year as in Illustrations 49 and 50 and used as bases for journal entries under date of Dee. 31, 1916. (See closing instruction 7 at the close of the problem.) JANUARY Horses: corn, $6.20; hay, $8.30. Cattle: corn, $10.30; hay, $21.60. Hogs: corn, $30. Sheep : hay, $8. Poultry: corn, $1.90; wheat, $1.95. FEBRUARY Horses: corn, $8.55; hay, $12.75. Cattle: eorn, $9.10; hay, $16.20; bran and shorts, $8. Hogs: corn, $25; wheat, $6; bran and shorts, $6. Sheep: hay, $7. Poultry: corn, $1.30; wheat, $1.75. Marcu Horses: corn, $14; hay, $16; oats, $5; pasture, $2. Cattle: corn, $7.35; hay, $11.80; bran and shorts, $7; pasture, $3. Hogs: corn, $26; wheat, $4; bran and shorts, $7. Sheep: pasture, $10. Poultry: corn, $0.90; wheat, $1. AprRIL + Se Horses: corn, $18.75; hay, $21; oats, $16; pasture, $2. Cat- tle: corn, $6.20; hay, $10; bran and shorts, $6.60; pasture, $4. Hogs: corn, $23; bran and shorts, $4. Sheep: pasture, $10. Poultry: corn, $0.60; wheat, $0.90. COST ACCOUNTING "298 May Horses: corn, $20.60; hay, $18; oats, $14; pasture, $1.30> Cattle: corn, $4; pasture, $3. Hogs: corn, $20; wheat, $5. Sheep: pasture, $8. Poultry: bran and shorts, $1.20. JUNE _ Horses: corn, $18; hay, $16.70; oats, $16.30; pasture, $1.30. Cattle: bran and shorts, $6; pasture, $5.60. Hogs: corn, $18.60; wheat, $5.40. Poultry: wheat, $1. JULY Horses: corn, $23; hay, $17; oats, $16; pasture, $1.10. Cat- tle: bran and shorts, $5; pasture, $5. Hogs: corn, $19; wheat, $7.20; Poultry: wheat, $1.05. August Horses: corn, $14; hay, $13; oats, $12.60; pasture, $1.20. Cattle: bran and shorts, $6; pasture, $4.20. Hogs: corn, $20.10; wheat, $7. Poultry: wheat, $0.95. SEPTEMBER Horses: corn, $7; hay, $10; oats, $10; pasture, $2. Cattle: bran and shorts, $4.50; pasture, $6. Hogs: corn, $25.30; wheat, $8. Poultry: wheat, $1.20. OCTOBER . Horses: corn, $9; hay, $14; oats, $21; pasture, $1.30. Cattle: bran and shorts, $7; pasture, $4. Hogs: corn, $25; wheat, $6. Poultry: corn, $1; wheat, $1.10; bran and shorts, $2. NOVEMBER — Horses: corn, $11.20; hay, $11; oats, $17; pasture, $1.80. Cattle: bran and shorts, $10; fodder (corn), $4.80; - pasture, 294 | FARM ACCOUNTING $2.50. Hogs: corn, $16; bran and shorts, $10; wheat, $4. Poul- ‘try: corn, $1.30; wheat, $1.30. DECEMBER Horses: corn, $7; hay, $9; pasture, $2.50. Cattle: bran and shorts, $8; fodder, $5.70; hay, $17; pasture, $3. Hogs: corn, $21; wheat, $4.50; bran and shorts, $8.50. Poultry: corn, $1.05; wheat, $2.10. The monthly labor records for the year show the following hours worked, to be summarized in the yearly Labor Record as - in Illustration 47, the totals of which are to be calculated? at 20 cents an hour and a journal entry made therefrom. (See closing instruction 8 at the close of the problem.) JANUARY Cattle, 45; hogs, 30; horses, 15; expense (General Expense a/e), 25; repairs (Equipment Expense a/e), 16; poultry, 21; sheep, 19; household, 40; corn, 18. FEBRUARY Cattle, 40; hogs, 27; horses, 26; expense, 30; repairs, 10; poultry, 16; sheep, 12; household, 21. Marcr Cattle, 28; hogs, 26; horses, 21; expense, 16; repairs, 15; poultry, 7; sheep, 10; corn, 8; oats, 6; household, 12; wheat, 21. APRIL Cattle, 30; hogs, 27; horses, 23; expense, 28; repairs, 6; poultry, 20; sheep, 5; corn, 15; oats, 48; hay, 16; household, 15. *The Labor and Horse Labor Conversion Table, Illustration 75, Appendix, may be used to assist in the calculation. COST ACCOUNTING 295 May Cattle, 35; hogs, 22; horses, 20; expense, 60; repairs, 9; poul- try, 15; sheep, 30; corn, 105; hay, 40; household, 28. JUNE Cattle, 37; hogs, 20; horses, 21; expense, 47; repairs, 15; poultry, 12; corn, 152; hay, 68; household, 16. JULY Cattle, 43; hogs, 18; horses, 18; expense, 23; repairs, 26; poultry, 10; corn, 175; oats, 80 of which 50 hours were worked by neighbors; ? household, 12. AvuGustT Cattle, 47; hogs, 17; horses, 19; expense, 25; repairs, 18; poultry, 7; corn, 27; oats, 165 of which 150 hours were worked by neighbors; exchange labor, 120; household, 6. SEPTEMBER Cattle, 38; hogs, 16; horses, 22; expense, 68; repairs, 2; poul- try, 6; oats, 14; exchange labor, 110; hay, 18; household, 10; corn, 5. OCTOBER Cattle, 46; hogs, 31; horses, 23; expense, 20; repairs, 5; poultry, 17; corn, 122; household, 35. . NOVEMBER Cattle, 40; hogs, 12; horses, 11; expense, 16; repairs, 6; poul- try, 17; corn, 188; household, 11. *The 50 and 150 hours worked by neighbors in July and August correspond to the 33 and 82 hours shown in parentheses in June and July respectively of Illustration 47. They are to be treated in the same way, resulting ultimately in a credit to Exchange Labor account, | 296 FARM ACCOUNTING DECEMBER Cattle, 34; hogs, 11; horses, 10; expense, 16; repairs, 14; poultry, 18; household, 12. The monthly horse labor records for the year show the follow- ing hours worked, to be summarized in the yearly Horse Labor Record similar to Illustration 47,t the totals of which are to be caleulated at 10 cents an hour, and a journal entry made there- from. (See closing instruction 9 at the close of the problem.) JANUARY Cattle, 6; hogs, 5; expense (General Expense a/c), 6; house- hold, 12; corn, 36. é FepRvaRY Expense, 7; household, 5. Marcu Expense, 3; household, 10; wheat, 42. APRIL | Cattle, 2; hogs, 3; expense, 8; household, 6; repairs (Equip- ment Expense), 4; corn, 38; oats, 126; hay, 32. : May Expense, 8; sheep, 30; corn, 260; hay, 80; household, 16. JUNE . Expense, 15; repairs, 8; corn, 304; hay, 56; household, 13. *Space is to be reserved also at the bottom of the Horse Labor - Record for showing the distribution of Equipment Expense as in Illustration 53, and in accordance with explanation given under in- struction 11 at the close of this problem. COST ACCOUNTING © 297 JULY Expense, 3; corn, 350; oats, 240, of which 100 hours were worked by neighbors’ horses; household, 22. Avueust | Cattle, 7; hogs, 4; expense, 3; corn, 54; oats, 345, of which 320 ,hours were worked by neighbors’ horses; exchange labor, 200; household, 12. SEPTEMBER ‘Expense, 24; oats, 28; exchange labor, 180; hay, 47; house- hold, 11; corn, 15. OCTOBER | Hogs, 28; expense, 25; corn, 244; household, 18. NOVEMBER Cattle, 3; expense, 12; poultry, 8; corn, 316; household, 14. DECEMBER Expense, 22; repairs, 7; poultry, 8; household, 14, INSTRUCTIONS FOR CLOSING (See also General Plan of Closing and Detailed Procedure in Closing near the end of Chapter IX.) 1. Post all entries from the cash journal to the ledger be- fore framing journal entries from the yearly feed, labor and horse labor records, but after entering the $600 for Fay’s labor. Allow enough space for the transactions of problem 2 below which require the use of the same ledger accounts.’ 2. Take a trial balance to test the accuracy of the work before closing. 3. Make a journal entry debiting the accounts named below and crediting Rent to distribute the $500 rent over the several farm elements, on a basis of the following percentages: House- 208 FARM ACCOUNTING hold 3%, cattle 4%, hogs 5%, horses 4%, sheep 1%, poultry 2%, corn 34%, oats, 20%, wheat 1%, hay 13%, pasture 10%, equipment (debit Equipment Expense) 1%, miscellane- ous elements, as barn yard, ete. (debit General Expense), 2%. 4. Caleulate, and enter interest on investment for the year as follows: (a) Debit Equipment Expense account and credit Interest on Investment with 4% of the value of equipment on hand at the beginning of the year. (b) Debit each of the several livestock accounts and credit Interest on Investment with 4% of the value of each of the several classes of livestock on hand at the beginning of the year, except as modified in the following note: Note.—Since all sheep were sold during the latter part of May, they should be charged (and Interest on Investment ered- ited) with only five-twelfths of the interest on $150 for a year. 5. Caleulate and enter depreciation on equipment for the year, debiting Equipment Expense and crediting Equipment with 10% of the book value of equipment at the beginning of the year. 6. Post all the entries made under instructions 3, 4 and 5 above. 7. Charge out the feed consumed by livestock during the year by making a journal entry for the values shown in the feed record, debiting the several livestock accounts and crediting the crop accounts. Post the items in the entry just made. 8. Use the labor record as a basis for a journal entry, debiting the several accounts indicated therein and erediting Labor and Exchange Labor, each with the proper amount. _ 9. Use the horse labor record as a basis for a journal entry, debiting the several accounts indicated therein and crediting Horses and Exchange Labor, each with the proper amount. 10. Post the entries made under instructions 8 and 9 above. 11. (a) Distribute the balance of Equipment Expense account over the various farm elements on a basis of horse labor. This distribution is to be made as described under “Equipment Ex- pense” and as shown in Illustration 53. In making these eal- culations, the hours shown in parentheses in the horse labor record are to be used. For example, if Illustration 47 contained COST ACCOUNTING | 299 figures for the horse labor record in question, the Equipment Expense account balance would be divided by 2681. Assume that this division gave a result of .053, meaning that 5 cents to the nearest integral cent was to be charged for every hour the equipment was in use. The amounts to charge to the various accounts would be: cattle, 798 times .05; Field No. 1, 284 times .05; Exchange Labor 157 times .05 and so on. (b) Make a journal entry expressing debits to the various accounts shown in the horse labor record and erediting Equip- ment Expense and Exchange Labor accounts with the amounts obtained in (a) above. Post the entry. (Since there is no inven- tory of Miscellaneous Supplies, in this problem, to affect Equip- ment Expense, the latter account would now be in balance with: no inventory to carry down, if it were not for the fact that the fractional part of a cent was disregarded in the hourly rate.) 12. Make entries in the cash journal, closing any balances remaining in Labor, Exchange Labor and Equipment Expense accounts into General Expense account. Post the entry. 13. The inventory of mill feed is $15. Record this in the ac- - count. Any balance left represents shrinkage or error in re- cording feed, and is to be transferred to General Expense ac- count by entry in the cash journal. Post the entry, rule off the Mill Feed account and bring down the inventory. ' 14. Close Interest account into General Expense. Distribute the general expenses over the various productive elements by journal entry, crediting General Expense account with enough to close it and debiting each of the accounts representing produc- tive elements with its fair share. For the purpose of securing uniformity charge the productive elements with the following proportions of the total: Cattle 5%, hogs 7%, poultry 3%, sheep 2%, oats 25%, hay 17%, corn 40%, wheat 1%. Post the entry. 15. Make entries direct in the accounts for the following in- ventories: hdusehold furnishings $500; horses, $1100; cattle, $570; hogs, $240; poultry, $25; corn, $830; oats, $350; hay, $290. Transfer any balances remaining in the productive, Household be FARM ACCOUNTING hold 3%, cattle 4%, hogs 5%, horses 4%, sheep 1%, poultry 2%, corn 34%, oats, 20%, wheat 1%, hay 13%, pasture © 10%, equipment (debit Equipment Expense) 1%, miscellane- ous elements, as barn yard, ete. (debit General Expense), 2%. 4. Caleulate, and enter interest on investment for the year as follows: (a) Debit Equipment Expense account and credit Interest on Investment with 4% of the value of equipment on hand at the beginning of the year. (b) Debit each of the several livestock accounts and credit Interest on Investment with 4% of the value of each of the several classes of livestock on hand at the beginning of the year, except as modified in the following note: Note.—Since all sheep were sold during the latter part of May, they should be charged (and Interest on Investment ered- ited) with only five-twelfths of the interest on $150 for a year. 5. Caleulate and enter depreciation on equipment for the year, debiting Equipment Expense and crediting Equipment with 10% of the book value of equipment at the beginning of the year. 6. Post all the entries made under instructions 3, 4 and 5 above. 7. Charge out the feed consumed by livestock during the year by making a journal entry for the values shown in the feed record, debiting the several livestock accounts and crediting the crop accounts. Post the items in the entry just made. 8. Use the labor record as a basis for a journal entry, debiting the several accounts indicated therein and erediting Labor and Exchange Labor, each with the proper amount. . 9. Use the horse labor record as a basis for a journal entry, debiting the several accounts indicated therein and crediting Horses and Exchange Labor, each with the proper amount. 10. Post the entries made under instructions 8 and 9 above. 11. (a) Distribute the balance of Equipment Expense account over the various farm elements on a basis of horse labor. This distribution is to be made as described under “Equipment Ex- pense” and as shown in Illustration 53. In making these ecal- culations, the hours shown in parentheses in the horse labor record are to be used. For example, if Illustration 47 contained ww.» i =e ee gts COST ACCOUNTING 299 figures for the horse labor record in question, the Equipment Expense account balance would be divided by 2681. Assume that this division gave a result of .053, meaning that 5 cents to the nearest integral cent was to be charged for every hour the equipment was in use. The amounts to charge to the various accounts would be: cattle, 798 times .05; Field No. 1, 284 times .05; Exchange Labor 157 times .05 and so on. (b) Make a journal entry expressing debits to the various accounts shown in the horse labor record and crediting Equip- ment Expense and Exchange Labor accounts with the amounts obtained in (a) above. Post the entry. (Since there is no inven- tory of Miscellaneous Supplies, in this problem, to affect Equip- ment Expense, the latter account would now be in balance with: no inventory to carry down, if it were not for the fact that the fractional part of a cent was disregarded in the hourly rate.) 12. Make entries in the cash journal, closing any balances remaining in Labor, Exchange Labor and Equipment Expense accounts into General Expense account. Post the entry. 13. The inventory of mill feed is $15. Record this in the ac- - count. Any balance left represents shrinkage or error in re- cording feed, and is to be transferred to General Expense ac- count by entry in the cash journal. Post the entry, rule off the Mill Feed account and bring down the inventory. 14. Close Interest account into General Expense. Distribute the general expenses over the various productive elements by journal entry, crediting General Expense account with enough to close it and debiting each of the accounts representing produc- tive elements with its fair share. For the purpose of securing uniformity charge the productive elements with the following proportions of the total: Cattle 5%, hogs 7%, poultry 3%, sheep 2%, oats 25%, hay 17%, corn 40%, wheat 1%. Post the entry. 15. Make entries direct in the accounts for the following in- ventories: hdusehold furnishings $500; horses, $1100; cattle, _ $570; hogs, $240; poultry, $25; corn, $830; oats, $350; hay, $290. Transfer any balances remaining in the productive, Household 300 ‘FARM ACCOUNTING and Horses accounts into Loss and Gain account, earrying the inventories down below the ruling. 16. Close any other accounts showing a gain or loss into the Loss and Gain account. Pasture and Interest on Investment are examples. 17. Close Loss and Gain account into L. E. Fay’s Capital ae- count, ruling off the latter and bringing down the balance. 18. Rule off and bring down the balance of Cash account, and of any other property or liability accounts not specifically treated above. INSTRUCTIONS AFTER CLOSING (a) Take a trial balance after closing which may be con- sidered also as a Statement of Resources and Liabilities as of December 31, 1916. (b) Prepare a Farm and Individual Income Statement for the year. (c) Prepare a Change = Wealth Statement as of Decem- ber 31, 1916. 2. You are to record in the cash journal (beginning on a new page) the transactions of L. E. Fay for the year ended Dee. 31, 1917, which were as follows: Jan. 3. Gave two promissory notes to landlord for $250 each in payment of year’s rent, one due Sept. 1 and one Dee. 15, 1917, without interest. (Debit Rent account.) Jan. 3. Paid Roy Wade eash to balance account. Jan. 4. Sold some corn for $400 cash. Jan. 15. Paid $20 for clothing. Jan. 30. Butchered a beef for family use, $70. Jan. 31. Took savings bank pass book to bank and had in- terest credited for the six months to Jan. 1st. $7.50. (Debit State Trust & Savings Bank and credit Interest.) Feb. 1. Paid interest on mortgage for six months, $60. Feb. 3. Sold beef quarter and other parts of the animal butch- ered a few days ago for $30. Mar. 1. Sold hogs for $100 cash. Mar. 1. Paid personal taxes, $39. ——— —e" 2, ae 4 7 ¥ COST ACCOUNTING 301 Mar. 20. Paid for sundry household supplies, $28. Mar. 31. The household record shows the following commodi- ties turned over to the house during January, February and March: poultry, $4; eggs, $9.20; milk, $22. Mar. 31. During the three months, the household has sold for cash part of the products as follows: eggs, $4; butter, $5. Apr. 1. Made a contract with Roy Wade similar to the one of last year, except that he begins April 1 instead of May 1, and is to receive $35 a month and his board, room and laundry, and the use of a horse and buggy. Apr. 1. Sold some hay for $150 cash. Apr. 3. Bought mill feed for $30. Apr. 18. Paid for harness repairs, $4. (Harness is part of the equipment. ) . Apr. 28. Paid horseshoeing bill of $2. Apr. 30. Credited Roy Wade with wages for April $35. Apr. 30. The household values the board of hired man at $20 for the month of April. | Note.—On the last day of each month from May to November, both inclusive, you are to make entries for the $35 wages credited to Roy Wade and for the $20 board without being told to do so each time. May 8. Paid Roy Wade $5 on account. May 10. Paid for sundry repairs to equipment, $8. June 20. Paid eash for extra labor $6. June 25. Paid Roy Wade $7 on account. June 30. The household record shows the following commodi- ties turned over to the house during April, May and June: poultry, $6; eggs, $18; milk, $35. June 30. During the three months, the household has sold for cash, part of the products as follows: eggs, $10; butter, $15. July 1. Paid Roy Wade on account $10. * Theoretically, the value placed on the use of the horse and buggy would be debited to Labor and credited to Miscellaneous Income or to General Expense because this concession is equivalent to a recognition that labor is worth more than $35 plus $20 board. Mr. Fay, however, does not wish to consider the value of labor as increased by this concession. 302 FARM ACCOUNTING July 4. Sundry expenses over the holiday amounted to $3.10. July 5. Paid cash for binder twine for 20 acres of wheat and 30 acres of oats $25. (Divide the charge between the two ac- counts on a basis of acreage.) July 18..Paid for extra labor, $7.50. July 20. Paid Roy Wade on account $8. July 21. Bought sundry household supplies for cash $11. July 21. Had interest for 6 months entered in savings bank pass book, $7.50. Aug. 1. Sold hay for $160 eash. Aug. 1. Withdrew all of savings account balance, and paid interest on mortgage $60, and $500 in reduction of the principal of the mortgage note. Aug. 1. Paid Roy Wade on account $9. Aug. 8. Paid for new small pieces of equipment, $12. Aug. 10. Sold some wheat to D. C. Robbins for $500, receiv- ing a 60-day note bearing 6% interest. Aug. 20. Sold some oats for $450 eash. Aug. 30. Bought supplies for household, $15. Aug. 31. Paid Roy Wade $8 on account. Sept. 1. Paid cash for extra labor $10. Sept. 1. Paid $250 to redeem note held by landlord, due to- day. Sept. 8. Sold two calves for $50 cash. Sept. 18. Paid Roy Wade $12 on account. Sept. 21. Paid fire insurance premiums, $12. Sept. 30. The household record shows the following commodi- ties turned over to the house during July, August and Septem- ber: poultry, $4; eggs, $16.30; milk, $27. Sept. 30. During the three months, the household has sold for eash, part of the products as follows: eggs, $9; butter, $12. Oct. 19. Reeeived a check from D. C. Robbins to redeem his — note of August 10, with interest, $505. Oct. 19. Paid $100 for Liberty Bonds (Dr. Liberty Bond ae- count). Oct. 26. Paid Roy Wade $20 on account. , Oct. 31. Sold some shotes for $300 cash. Nov. 6. Bought sundry household supplies, $15. COST ACCOUNTING 303 Nov. 15. Sold poultry for $18 cash. Nov. 16. Donated $25 to Red Cross work. (General Ex- pense). Dee. 1. Sold 400 bu. corn at $1.20 for eash. Dee. 2. Bought a half interest+ in a self-feed corn sheller for $42.50 cash. Dec. 15. Paid $250 to redeem note held by landlord due to- day. Dec. 20. Paid Roy Wade cash to balance his account. Dec. 20. Paid $30 eash for household supplies. Dee. 31. The household record shows the following commodities turned over to the house during October, November and Decem- ber: poultry, $10; eggs, $12; milk, $30. Dee. 31. During the three months, the household has sold for -eash part of the products as follows: eggs, $3; butter, $13. Dee. 31. Mr. Fay places the value of his services as a laborer at $600 for the year. The feed records kept during the year, when summarized into the Feed Record for the year ended Dee. 31, 1917, give the fol- lowing Total Values:? Charges to Animals: Horses, $574.90; Cattle, $250.10; Hogs, $400.30; Poultry, $30. Credits to Crops and Feed: Corn, $600.50; Hay, $310; Oats, $157.80; Wheat, $87; Pasture, $58; Mill Feed, $42. (See closing instruction 7 at the end of the problem.) The monthly labor records have been summarized into the Yearly Labor Record for the year ended Dec. 31, 1917, giving the total hours chargeable against the various accounts as fol- lows: Cattle, 480; hogs, 245; horses, 212; general expense, 290; equipment expense, 164; poultry, 130; household, 190; corn, 1050, of which 1010 hours were worked by regular help and 1This requires a debit to Equipment account for only $42.50. If the comparative inventory record were in use, the machine would be entered as a matter of record, with proper notation to indicate the other half-owner. ?The total values for the year are given, instead of requiring the student to compile the summarized table. These totals, however, have been determined in the same way as the totals obtained by the student in problem 1 above, 804 FARM ACCOUNTING 40 hours by the neighbors; oats, 280, of which 100 hours were worked by regular help and 180 hours by the neighbors; wheat 217, of which 82 hours were worked by regular help and 135 hours by the neighbors; hay 165; exchange labor 310. (The hours given above are to be figured at $0.20 an hour as in closing instruction 8 referred to at the close of this problem.) The monthly horse labor records have been summarized into the Yearly Horse Labor Record for the year ended Dee. 31, 1917, giving the total hours chargeable against various accounts as follows: Cattle, 20; hogs, 33; general expense, 78; equipment expense, 19; poultry, 13; household, 132; corn, 2080; oats, 604, of which 396 hours were worked by regular help and 208 hours by the neighbors; wheat, 435, of which 295 hours were worked by regular help and 140 hours by the neighbors; hay, 248; exchange labor, 330. (The hours given above are to be figured at $0.10 an hour as in closing instruction 9 referred to below.) INSTRUCTIONS FOR CLOSING (See also Instructions for Closing at the end of Problem 1, Fay’s 1916 accounts.) 1. Post.all entries from the cash journal to the ledger before framing journal entries for the feed, labor and horse labor distributions. 2. Take a trial balance to test the accuracy of the work be- fore closing. 3. Make a journal entry debiting the elements named below and erediting Rent, to distribute the $500 rent over the several farm elements on a basis of the following percentages: House- hold 3%, cattle 4%, hogs 5%, horses 4%, poultry 2%, corn 32%, oats 15%, wheat 10%, hay 12%, pasture 10%, equip-. ment 1%, miscellaneous elements (debit General Expense) 2%. 4. Caleulate and enter interest on investment for the year, considering 4% on the equipment and on each class of live- stock. 5. Make an entry for equipment depreciation during the year ealeulated at 10% diminishing value method. (Debit Equip- ment Expense, credit Equipment.) COST ACCOUNTING 305 6. Post all entries made under instructions 3, 4 and 5 above. 7. Make an entry for the value of commodities fed to live- stock during the year, using the results stated previously in this problem. Post the items in the entry just made. 8. Use the results given for the Year’s Labor Record as a basis for a journal entry, being careful to use both the debit and credit exchange labor items correctly, as in problem 1, Mr. Fay’s 1916 accounts. 9. Make a journal entry from the results of the Yearly Horse Labor Record, using Mr. Fay’s 1916 accounts in problem 1 as a guide if necessary. 10. Post the entries made under instructions 8 and 9 above. 11. Make an entry distributing the balance of Equipment Expense over the various farm elements following the sugges- tions given in instructions 11 (a) and 11 (b) in the 1916 ac- counts of L. E. Fay. Post the entry. 12. Make entries to close Labor, Exchange Labor and Equip- ment Expense accounts. Post. 13. There is no inventory of Mill Feed. Make a journal entry to close the account into General Expense account. Post the entry and rule off the Mill Feed account. 14. Close Interest account into General Expense. Distribute the General Expense balance over the various productive ele- ments by journal entry according to the following propor- tions: cattle 5%, hogs 7%, poultry 3%, oats 20%, hay 15%, corn 35%, wheat 15%. Post the entry. 15. Make entries direct in the accounts for the following in- ventories: household furnishings, $500; horses, $1200; cattle, $600; hogs, $300; poultry, $30; wheat, $200; oats, $300; corn, $1250; hay, $330. Transfer any balances: remaining in the productive, House- hold and Horses accounts into Loss and Gain account, carry- ing the inventories down below the ruling. 16. Close any other accounts showing a gain or less into the Loss and Gain account. Pasture and Interest on Investment are examples. 17. Close Loss and Gain account into L. E. Fay’s Capital account, ruling off the latter and bringing down the balance, 306 FARM ACCOUNTING 18. Rule off and bring down the balance of Cash account and of any other property or liability accounts not specifically treated above. INSTRUCTIONS AFTER CLOSING (a) Take a trial balance after closing which may be consid- ered also as a Statement of Resources and Liabilities as of De- cember 31, 1917. (b) Prepare a Farm and Individual Income Statement for the year. (c) Prepare a Change of Wealth Statement as of December 31, 1917. CoMPARATIVE Stupy oF PROBLEMS After completing the statements of the business of L. E. Fay under the cost system, a comparative study is to be made of the results obtained under the cost method and under the general method. This is effected principally through a study of the ledger accounts of problems 3 and 4 of Chapter VII, together with the accounts of problems 1 and 2 of Chapters VIII and IX. This comparative study is a most important step towards the understanding of farm cost accounting. It was considered of ‘sufficient importance to warrant the repetition of L. E. Fay’s general transactions in the two sets of problems. Considerable time should be spent in class diseussion led by the instructor. It should be understood that the comparison is between the two year period under the cost and general methods, and not between 1916 and 1917 under the same method. The discussion should aim to present and answer the following ques- tions: ‘ (a) Were the transactions between the farm and outside par- ties the same under the two methods? (b) Is ‘the net gain for 1916 the same under both methods? -the net gain for 1917? . (ec) Why is there no difference, under the general and cost methods, in the following accounts: B. E. Adams, Notes Re- ceivable, Equipment, Cash, Roy Wade, Watt Hardware Co., State — Trust and Savings Bank, Mortgage Payable, Notes Payable? COST. ACCOUNTING 307 (d) In what detailed respects and why are the following ac- counts different under the two methods: Loss and Gain, Interest on Investment, Interest, Horses, Cattle, Hogs, Sheep, Poultry, Mill Feed, Corn, Oats, Wheat, Hay, Equipment Expense, Gen- eral Expense, Labor, Pasture, Exchange Labor, ‘and House- hold? (e) Why is the trial balance after closing the same under the two methods? (f) In comparing the Farm and Individual Income State- ments and the Change of Wealth Statements under the two _ methods, how do you account for any differences and similarities found therein? . (g) In general how may the fundamental differences in the results under the two systems be summarized? (h) Which method do you think is the better? Why? 3 (i) In view of the study made of L. E. Fay’s productive ac- counts under the two methods, what can you say as to the mean- ings attached to the words “gain” and “loss’’? Note.—It is the aim in the several succeeding problems to con- centrate more on the principles arising in cost accounting and the closing process, and less on the recording of the more simple entries which must always arise in the course of a year’s opera- tions. The problems which follow are adopted from the ac- counts of an Illinois farmer, but modified for the purpose of illustrating the treatment of various principles in cost account- ing. The detailed transactions with outsiders and with the House- hold are stated in aggregate form except in the case of unusual transactions. For example, a transaction showing the eash pur- chase of $310 worth of supplies for the household is stated near the close of the year. This means that, as a matter of fact, the farmer in question made a number of small purchases through- out the year, each of which caused a debit to Household and a credit to Cash. Similar examples in the reduction of the number of entries might be cited for General Expense items, Labor items, products consumed by the household, and other simple transactions in which sufficient drill has been given in problems of the preceding chapters. 308 FARM ACCOUNTING a Although in practice the Comparative Inventory Record is kept with a cost system in the same way as under the general ac- — counting system, its use is not required in these cost problems. _ The details are reduced somewhat, also, by the method of pre- ‘senting data from the feed, labor and horse labor records. The aggregate amounts for the year are stated in the problems. The figures so stated, it should be noted, are taken from the monthly feed, labor and horse labor records, which the student is not re-_ quired to prepare in regular form for the purpose of these problems. : With the simplifications noted above, there is little use for many special columns in the cash journal. Accordingly it is re- duced to the simplest type. All notations as to quantities and prices used in connection with fields, crops and livestock are to be carried into the ledger accounts for use in the problems of Chapter X. 3. (Work on this problem should not be started until after reading carefully the Note above.) | Mr. C. P. May rents a farm of 270 acres on a eash basis for - $1350 a year, from W. E. Reed. You are to keep the accounts of his operations on a cost basis from the beginning of the fiseal year Mar. 1, 1915. The farm plot at that time shows that the farm is divided into the following areas: : Field Nos 3 cits canbe acsie 6 oe 20 acres Field No. 2.4 \60i abana cet ees 40 acres Wield Noy 3 ...4 va ule dew ook 8 ere 60 acres Peels Nos 6 i... . csiciibande k's oe aoe 40 acres — Mield No: 8... . 5s aac eesienis Cite _ 40 acres Field Now ta. <.. dedi cbistccs=5 tc ame 40 acres Field No. 6 (Pasture)............... 20 acres Pie TAM us sds eran beey se ceee salah 2 acres Garden and House Lot.............. 2 acres : AOOIOTG is Soe (440) Tadad<) 2 eens { om Horse Labor Summary . ‘ Value of Hours Value . Equip. Exp. a ear ae Oa ee 105 TY ee gene Sy Shp aat 80 etc. (220) Total.:. 2 eres { 7,155 se 8. Caleulate the hourly cost of labor. This is done by divid- ing the total cost of labor for the year by 6480, the number of 316 FARM ACCOUNTING hours worked by the men whose time was charged to Labor ae- ‘count. Use the hourly rate only to the nearest cent. For ex- ample, a result of 21.6 cents would be used as 22 cents. Using the hourly rate just determined and with the assistance of the Labor Conversion Table of Illustration 75, Appendix, ealeulate the value of labor, for each farm element. Record the amounts, for convenience on the paper as described under instruction 7, above. : Note.—The values caleulated for the various farm elements are self proving to a certain extent. After finding that the value of labor spent on horses is $177.50 and so on, the sum of all the values not in parentheses should equal the total hours, 6480, multiplied by the hourly rate. Likewise the total of the values in parentheses (work by neighbors) should equal the total hours in parentheses, 440, multiplied by the hourly rate. 9. Make a journal entry debiting the various elements with the value of labor caleulated in 8 above, and erediting Labor and Exchange Labor accounts each with the proper amounts. Post the entry. 10. Caleulate the hourly cost of horse labor. This is done by dividing the net cost of keeping horses by 7155, the total hours worked by the horses for which the expense was incurred. (The cost of keeping horses includes the charges for rent, sundry eash expenses, interest on investment, bedding, feed and labor; with a deduction made for manure. It does not include the inventory value of horses on hand at the beginning nor the cost of any purchased during the year.) Using the hourly rate just determined, caleulate the value of horse labor forveach farm element. Record the amounts, for con- venience, on the paper as described under instruetion 7, above. 11. Make a journal entry debiting the various elements with the value of horse labor caleulated in 10 above, and crediting Horses and Exchange Labor accounts each with the proper amounts. Post the entry. 12. Find the net charge to Equipment Expense account for the year. (Supplies of axle grease, machine oil and other sup- plies are too small to consider for inventory purposes.) Divide this amount by 7155, the hours worked by the farm horses. This ; | | | €OST ACCOUNTING 317 result gives the approximate cost of maintaining the equipment for each hour of its use. Using the hourly rate to the nearest cent,! as just determined, proceed to make an entry debiting the various farm elements for the use of the equipment, based on the number of hours it was used on each element, crediting Equipment Expense and Exchange Labor accounts. (This process will be accomplished best by using the third column shown under Horse Labor Sum- mary under instruction 7 above before framing the journal entry. This method takes the place of the one described under “Equip- ment Expense” and shown in Illustration 53.) (See also instruc- tion 11, problem 1, Chapters VIII and IX.) Post the entry. 13. Caleulate and enter the inventories of fertilizer, labor, horse labor and other charges to field accounts, which are to be carried over to next year’s operations. In field No. 1 consider that the corn crop of the year just closing, received 40 per cent. of the benefit of the soil from its lying fallow the year before. This means that 60 per cent. of $90 (the rent for the year 1914), or $54, is to be carried down as an inventory. All of the 1915 rent remains as a charge to the operations of the current year. In fields No. 2'and No. 3 the inventories consist in each case of the three items noted in the explanation column of the ledger as Labor-1916, Horse Labor-1916 and Equipment use-1916. These should be shown as separate items both above and below ‘the rulings. All of the manure applied on field No. 3 during the year is carried over as a deferred charge, since it was ap- plied after harvesting the crop of the current year. The clover seed of field No. 4 is considered as an inventory or deferred charge. No labor is carried over for this, for it was sown with the oats. Since there were no transactions with field No. 5 after open- ing the books on March 1, 1915, all of the debit balance is to be treated as an inventory. By leaving the account exactly as’ * Dropping the fractional part of a cent results in a distribution _ of Equipment Expense amounting to about $15 or $20 less than the balance of the account. This difference is distributed later through General Expense account. See instruction 14 below. 318 FARM ACCOUNTING it is, the next year’s operations are charged with the cost of permitting the field to lie fallow. At the close of the next year, part of this expense will be carried over to subsequent years, to show the benefit they derive from having it lie fallow during the current year. After recording the inventories as outlined above, the result- ing balance of each of the field accounts on which crops were raised during the year shows the cost of producing such erops. This cost is now transferred to the Crop accounts by making entries in the money columns only, debiting the several crop accounts and erediting the respective field accounts. Notations have already been made in the explanation columns at the time of harvest. The unit cost should now be recorded in the ex- planation column also. (See Illustration 52.) Bring the in- ventories of fields down below the rulings. 14. Transfer to General Expense account by journal entry any balance (presumably quite small) remaining in Mill Feed account after entering and bringing down an inventory of $10. Also transfer the balances of Equipment Expense, Labor, and Exchange Labor into General Expense account, by journal entry. Post the entries, and rule off the accounts closed. — 15. Distribute by journal entry the general expenses over the productive elements, using the following percentages for the purpose of obtaining uniformity: cattle 20%, swine 15%, poul- try 1%, corn 15%, oats 12%, wheat 15%, barley 1%, soy beans 1%, hay 20%. Post the entry, ruling off the General — Expense account. . ) 16. Make entries for the following inventories of livestock and commodities on hand at the close of the year, transferring by journal entry to Loss and Gain account the balances of all ac- counts open on the books that show either a loss or gain. Post-the entries, making sure that all necessary accounts are ruled off and balances or inventories brought down. Inventories Feb. ‘29, 1916: Horses (13), $1625; cattle (16), $575; swine (50), $930; poultry (110), $55; eorn, 100 bu. at 38e (cost), $38; oats, 450 bu. at 49¢ (eost), $220.50; wheat, 190 bu. at 67e (cost), ~ $127.30; barley, none on hand; hay, 23 tons at $7.10 (cost), $163.30; straw, 65 tons at $3 (book value), $195; silage, 85 COST ACCOUNTING | 319 tons at $4.95 (cost), $421.30; seed, 15 bu. corn at 63c, plus cost of sorting ($1.75), a total of $11.20, being nearly 75¢ per bushel; household furnishings, $400. Note.—Do not neglect to bring down balances in the Cash and Equipment accounts; nor to close, among others, the balances of Soy Beans, Barley, Field No. 6 (Pasture), Silo Commis- sion, Interest on Investment and By-products into Loss and Gain account. The 1916 Rent account is a deferred debit to be con- sidered as a resource. INSTRUCTIONS AFTER CLOSING (a) Take a trial balance which will serve also as a State- ment of Resources and Liabilities. | (b) Study the accounts. What do they tell you about the year’s operations? _ (¢) Preserve all books, accounts and records for use in the two problems following which are continuations of this one; and for use in the problems of Chapter X which eall for further analysis of these accounts. 4. You are to keep the books for C. P. May for the year ended Feb. 28, 1917, following the same general principles used in the preceding year as in problem 3 above. Mar. 1, 1916. Distribute the rent over the several Field and other accounts affected on the same basis as at the beginning of the preceding year. (See problem 3 above.) Apr. 6. Sowed 105 bu. of oats at 50¢ a bushel in field No. 3; also, in the same field, 12 bushels of red clover at $9. (The clover seed was purchased for cash at time of sowing.) Apr. 8. Sowed 70 bushels of wheat at 90¢ a bushel in field No. 2. May 2. Planted 4 bushels of seed corn at $3.40 in field No. 1. | May 6. Planted 744 bushels of seed corn at $3.40 in field No. 5. June 4. Paid for 42 bushels of medium yellow soy beans at $2.25, and planted them in field No. 5a. 820 . FARM ACCOUNTING July 10. Took 70 tons of clover hay from field No. 4. Aug. 10. Threshed the wheat from field No. 2. It measured 960 bushels. There was estimated to be 25 tons of straw valued at $3 a ton. Aug. 10. Paid $57 for threshing expenses in connection with wheat. Aug. 20. Threshed the oats from field No. 3. They measured 2220 bushels. There was estimated to be 54 tons of straw at $3 a ton. Aug. 20. Paid $73 expenses for threshing oats. Oct. 8. Used 10 acres of corn from field No. 1 in silage. The yield was estimated by test at 50 bushels per acre, and the market price was 70e a bushel. Ninety-five tons of silage were produced. (See similar transaction in problem 3.) Oct. 15. Paid $26 for engine hire and coal in filling the silo. Oct. 15, Harvested 640 bu. soy beans from field No. 5a; also % ton of soy bean hay valued at $16 a ton and 22 tons of soy bean straw valued at $3 a ton. (Enter as in ease of wheat straw, debiting Hay and Straw accounts.) Oct. 17. Sold all of the soy bean hay and soy bean straw for eash, at the prices used in the valuation at time of harvest. Dee. 2. Corn husking resulted in the following memorandum report being submitted for entry: The remaining 10 acres of field No. 1 yielded 530 bushels. The 40 acres of field No. 5 yielded 2520 bushels. Feb. 28, 1917. Other transactions of the year, ordinarily entered from time to time as they arise, but summarized here for the purpose of reducing details to a minimum, resulted in the following aggregates: Sold 5250 Ibs. of hogs (30) at $10 per ewt. for eash. Sold 20,000 pounds of milk direct to the creamery and re- ceived $350 cash. (When sold direct to the creamery do not consider it as passing through the household. The latter is debited only for what it uses under such conditions.) Sold 300 bushels of soy beans at $2.50 cash. Sold 800 bushels of wheat at $1.40 cash. Sold 1800 bushels of oats at 50¢ cash. Sold 1700 bushels of corn at $1 cash. | COST ACCOUNTING 321 Paid $1350 to redeem the two notes held by landlord. The Household was charged with the following commodities: eggs produced, 310 dozen, at an average farm value of 25 cents a dozen; milk consumed, 3000 Ibs., at $1.60 per cwt.; poultry consumed, $16; pigs butchered, $55. Sales of eggs for cash during the year amounted to $49.30, being 170 dozen at an average price of 29c¢ a dozen. The household received $55 from the sale of fruit and vege- tables during the year. Paid cash for new equipment during the year, $20. Paid $30 for equipment repairs, oil, ete. Sundry expenses paid for horses amounted to $45. Sold two colts for $280 cash. Paid $25 for various expenses in connection with eattle. Received $35 from sale of poultry during the year. Commission for selling silos, amounting to $120, was received in cash. . Paid $15 for special poultry feed. Paid $25 for extra labor during the year. Paid $405 for household supplies, dag ig clothing and incidentals. General Expenses paid in cash amounted to $32. Paid $550 for regular labor during the year. The household supplied the hired help with board ane lodging valued at $370.. Manure hauled to field No. 5 was valued at $20, of which $14 is to be credited to horses and $6 to eattle. An old straw stack was spread over field No. 1, value $20, estimated at ten tons. Sold two calves for $46 cash. The proprietor valued his services as a laborer at $600 for the year. The time spent by his wife in caring for poultry was valued at $45. Sorted out 15 bushels of corn for seed, the market value of which was $1 a bushel. — Straw used for bedding was valued at $34.50, being 34% tons for cattle and 8 tons for horses, each caleulated at $3 a ton. The feed record for the year showed the following values, to 322 FARM ACCOUNTING be expressed as debits and credits: Debits to livestock: horses, $630; cattle, $565; swine, $586.70; poultry, $26. Credits to crop and feed accounts: corn, 300 bu. at 95¢, $285; oats 720 bu. at 48e, $345.60; hay 17 tons at $9, $153; wheat, 100 bu. at $1.30, $130; seed, 31% bu. of corn sorted but not planted, at 80c¢, $2.80; silage, 85 tons at $4.95,1 $421.30; mill feed, $10, soy beans 100 bu. at $2.50, $250; field No. 6 (pasture), 3600 days at 5e, $180; by-products, 600 days at 5e, $30. The labor record for the year showed the following hours spent on each farm element: Cattle, 730; horses, 510; swine, 460; poultry, 20; corn, 450; oats, 500, of which 190 hours were worked by neighbors; wheat, 390, of which 180 hours were worked by neighbors; soy beans, 330, of which 130 were worked by neighbors; hay, 390, of which 70 hours were worked by neighbors; silage, 400, of which 70 hours were worked by neighbors; field No. 1, 360; field No. 2, 120; field No. 3, 150; field No. 4, 10; field No. 5, 320; field No. 5a, 240; seed, 8; ex- change labor (for neighbors), 620; household, 340; silo agency, 80; equipment expense, 140; general expense, 310; field No. 2- 1917, 60; field No. 4-1917, 80. The horse labor record for the year showed the following hours spent on each farm element: Cattle, 100; swine, 100; corn, 840; oats, 360, of which 130 hours were worked by neighbors’ horses; wheat 320, of which 120 hours were worked by neigh- bors’ horses; soy beans, 420, of which 170 hours were worked by neighbors’ horses; hay, 330; silage, 240; field No. 1, 1000; field No. 2, 320; field No. 3, 400; field No. 4, 10; field No. 5, 950; field No. 5a, 700; exchange labor (for neighbors), 400; household, 300; silo agency, 30; equipment expense, 20; gen- eral expense, 260; field No, 2-1917, 240; field No. 4-1917, 260. INSTRUCTIONS FOR CLOSING — 1. Make entries in the cash journal for all transactions up to but exclusive of those for the feed record. *Note that this is the quantity and value of silage on hand at the beginning of the year, which, being shown at cost, amounted to slightly more than $4.95 per ton. — ‘ COST ACCOUNTING 323 2. Post all entries made, being sure to show details in ex- planation columns of the field and productive accounts for later analysis. 3. Take a trial balance. 4, Caleulate and make an entry in the cash journal for in- terest on investment for the year. This implies 4% on the value of each class of livestock and on equipment as at the beginning of the year. Post the entry. 5. Make an entry for depreciation of equipment at 10% for the year. Post the entry. 6. Make an entry in the cash journal to express debits and credits for feed consumed by livestock. Post the entry. 7. Place the labor and horse labor hours in order for further caleulations. This may be done as shown under instruction 7, problem 3. ) } 8. Calculate the hourly cost of labor. Using the hourly rate just determined, and with the assistance of the Labor Conversion ' Table, Illustration 75, Appendix, calculate the value of labor for each farm element. Record the amounts, for convenience, on the paper as described under instruction 7, problem 3. 9. Make a journal entry for the value of labor calculated in instruction 8. Post the entry. 10. Caleulate the hourly cost of horse labor. Using the hourly rate just determined, calculate the value of horse labor for each farm element. Record the amounts, for convenience, on the paper as described under instruction 7, problem 3. 11. Make a journal entry for the value of horse labor cal- culated in instruction 10. Post the entry. 12. Caleulate the cost per hour of maintaining equipment during the year, as explained under instruction 12, prob- lem 3. Using the hourly equipment rate as just determined, make an entry as described under instruction 12, problem 3, to dis- tribute the expense over the various farm elements. Post the entry. 13. Caleulate and enter the inventories or deferred charges to field accounts which are to be carried over to next year’s operations. ‘ , 4 : ae ha + ee . ~ en rA ‘ ° 324 FARM ACCOUNTING | In Field No. 1 consider that 30% of the original $90 rent from 1914 was absorbed by the crop of the current year and that the straw manure was applied after harvesting in the current ~ year. In Field No. 3, consider as absorbed during the year 40% of the manure applied in the preceding fall. This means that 60% or $12 is to be carried down. All of the value of clover sown is treated as a deferred charge. In Field No. 5, the $180 rent during the year the land lay fal- low, is to be distributed over the several succeeding years in the same way as an application of manure would be. The current year bears 40%, then, leaving 60% to carry down. The $20 worth of manure was applied after harvesting the crop. After crediting the inventories as suggested above, com- plete the entries in the several field and crop accounts to show the total and unit costs of producing the crops in — the fields. Bring the inventories of fields down below the — rulings. 14, ‘Transfer the balances of Equipment Expense, Labor and Exchange Labor into General Expense account, ruling off the accounts closed. 15. Distribute by journal entry the general expenses over the productive elements, using the following percentages for the purpose of obtaining uniformity: cattle, 20% ; swine, 15%; poul- try, 1%; corn, 15%; oats, 15%; wheat, 12%; soy beans, 10%; — hay, 12%. Post the entry. | 16. Make entries for the following inventories of livestock — and commodities on hand at the close of the year, transferring — by journal entry to Loss and Gain account, the balances of all — accounts open on the books that show either a loss or a gain. Post the entries, making sure that all necessary accounts are ruled off and balances or inventories brought down. Inventories Feb. 28, 1917: Horses (12), $1500; eattle (17), $610; swine (52), $990; poultry (110), $55; corn, 1100 bu. at 32¢. (cost), $352; — oats, 40 bu. at 35e (cost), $14.00; wheat, 175 bu. at 6le (cost), — $106.75; soy beans, 235 bu. at 92e (cost), $216.20; hay 75 tons at $6.07 (cost), $455.25; straw, 120 tons at $3, $360; : : COST ACCOUNTING 325 silage, 95 tons at $5.32 (cost), $505.60; seed, 15 bu. corn at $1, plus cost of sorting ($1.92), a total of $16.92, being nearly $1.13 a bushel; household furnishings, $400. INSTRUCTIONS AFTER CLOSING (a) Take a trial balance which will serve also as a Statement of Resources and Liabilities as of Feb. 28, 1917. (b) Study the accounts carefully. Compare them with the corresponding ones of the preceding year. Secrutinize the Loss and Gain accounts of the two years together. Do the same with the two trial balances after closing. (c) Preserve the books, accounts and records for use in the problem following, which is a continuation of Mr. May’s busi- ness; and for the problems of Chapter X, which call for further analysis of these accounts. 5. You are to keep the books for the farming business of Mr. May for the third successive year Mar. 1, 1917,/to Feb. 28, 1918, following the same general principles used in the two preceding years. Mar. 1, 1917. Mr. May has completed negotiations for the purchase of 170 acres of the farm from W. KE. Reed for $21,700, being at the rate of $110 an acre with an additional $3000 for the improvements. The price includes all expenses in connection with the purchase. In meeting the purchase price he pays $3200 in eash, bor- rows $10,000 on a 6% 20-year first mortgage note (interest payable annually) under the Federal Farm Loan Act, through a local National Farm Loan Association; and gives W. E. Reed a second 6% mortgage for $8500 to run ten years with the privi- lege of paying off the principal in multiples of $100 on any interest paying date. (A payment of $87.18 each year for 20 years under the amortization plan at 6% is required in order to pay off the principal and interest when the principal is $1000. When the principal is $10,000, therefore, at the same rate for the same time, the annual payment is $871.80.) The entry for the purchase should express the following debits and credits: 326 FARM ACCOUNTING Land (170 acres legal description stated) Buildings ~ Cash Mortgage Payable (6%—20 yrs. Federal) Mortgage Payable (6%—10 yrs. W. E. Reed) Not being able to finance the purchase of more than 170 acres, Mr. May did not buy the 100 acres of land designated — by him as fields Nos. 5, 5a and 6. He divided field No. 3 into two parts, one of 20 acres to be reserved as a pasture and called field No. 3a, and one of 40 acres to be used for crops and called field No. 3b. The seller W. E. Reed has rented the other — 100 acres to another man. Mar. 1. Close Field No. 3 aceount by journal entry, and open accounts with Field No. 3a and Field No. 3b. This is aceom- plished by transferring one-third of the deferred charge to the © former and two-thirds to the latter. Mar. 1. Charge the several farm elements with interest on land and buildings, crediting Interest on Investment, as follows: 4% on a valuation of $110 per acre (the cost price) is to be charged to each of the several Field, Swine, Household and - General Expense accounts on a basis of the acreage presented in problem 3, and as modified above for fields Nos. 3a and 3b. Charge 4% on the value of buildings to the several elements occupying them, crediting Interest on Investment, assuming the house valued at $1000 and all others, including the silo, at $2000. (Debit Household with the $40 and Building Expense with the $80. The latter will be distributed over the proper accounts at the close of the year, along with other items of expense in connection with buildings.) Apr. 8. Purchased 70 bushels of oats at 80¢ a bushel, and sowed them in field No, 2. May 4. Planted 4 bu. of seed corn at $3.50 a bushel in field No. 1. May 8. Planted 7 bu. of seed corn a $3.50 in field No. 4. July 14. Took 80 tons of clover hay from field No. 3b. Aug. 15. Threshed the oats from field No. 2. They measured . COST ACCOUNTING » 827 1630 bu. There was estimated to be 40 tons of straw at $6 a ton. Aug. 15. Paid $68 expenses for threshing. Oct. 10. Used ‘10 acres of corn from field No. 1 in silage. The yield was estimated by test at 40 bushels per acre, and the market price was $1.40 a bushel. Eighty-five tons of silage were produced. Oct. 10. Paid $22 for engine hire and coal in filling silo. Oct. 15. Took a second crop of clover hay from field No. 3b, estimated at 35 tons. Dec. 4. Corn husking resulted in the following memorandum report being submitted for entry: The remaining 10 acres of field No. 1 yielded 400 bushels. The 40 acres of field No. 4 yielded 2000 bushels. Feb. 28, 1918. Other transactions of the year, pudiaanily en- tered from time to time as they arise, but summarized here for the purpose of reducing details to a minimum, resulted-in the following aggregates: Sold 5420 Ibs. (27) of hogs at an average price of $13.50 per ewt. for cash. Sold 26,000 pounds of milk to the sonar receiving $520 in cash. Sold 170 bushels of wheat for $382.50. ° Sold 250 bushels of oats for $150 cash. Sold 2000 bushels of corn for $4000 eash. Paid $125 for baling 100 tons of hay from stacks and field; also paid $90 for baling 100 tons of straw. Sold 100 tons of baled hay, clover and timothy, at ¢ an average _ price of $15 a ton eash. Sold 100 tons of baled straw for $590 eash. The household was charged with the following commodities: _ eges produced, 325 dozen, at a total value of $81; milk consumed, 2000 Ibs., at a total value of $38; spay consumed $12; pigs butchered $35. Sales of eggs for cash during the year amounted to $65.25, being for 225 dozen. The household received $50 from the sale of fruit and vege- tables during the year. Paid $20, for equipment repairs, oil, ete. Sundry expenses paid for horses amounted to $35. 830 FARM ACCOUNTING caleulations. This may be done as shown under instruction 4 problem 3. 8. Caleulate the hourly cost of labor, and the total value of labor on each farm element for the year. Record the amounts, for convenience, on the paper as described under instruction 7, problem 3. | 9. Make a journal entry for the value of labor caleulated in — instruction 8. Post the entry. 10. Caleulate the hourly cost? of horse labor, and the total value of horse labor on each farm element for the year. Record the amounts, for convenience, on the paper as described under instruction 7, problem 3. 11. Make a journal entry for the value of horse labor eal- culated in instruction 10. Post the entry. : 12. Distribute, by journal entry, the building expenses over the various elements using them, according to the following rather arbitrarily selected percentages: Household, 20%; swine, 10%; eattle, 15%; horses, 25%; poultry, 5%; corn, 5%; silage, 5%; equipment expense, 5%; hay 10%. _ 13. Caleulate the cost per hour of maintaining equipment during the year, as explained under instruction 12, problem 3. Make an entry to distribute the expense over the various farm elements, disregarding any charge that might be made to ~ Building Expense. Post the entry. 14. Caleulate and enter the inventories or deferred charges _to field accounts which are to be carried over to next year’s operations. In Field No. 1 consider that 20% of the $90 original de- ferred charge was absorbed by the current year. This leaves -only 10%, or $9, to earry down. Consider also that 40% of the $20 for manure was absorbed during this the first year of its application. This leaves $60%, ‘or $12, to carry down. Do not overlook the labor, horse labor and equipment use items in Field No. 2 for 1918 crops. *In order to provide for the proportion of building expense charge- able to horses but not yet entered in the account, add one ‘eent to the hourly rate .otherwise calculated. A 21 cent rate is, therefore, the one to apply. J | ; COST ACCOUNTING $31 Disregard any deferred charges in Field No. 3a. In Field 3b, also, the charge for manure is so small that it may be disregarded. After crediting the inventories as suggested above, complete the entries in the several field and crop accounts, to show the total and unit costs of producing the crops in the fields. Bring the inventories of fields down below the rulings. 15. Transfer the balances of Equipment Expense, Labor and Exchange Labor into General Expense account, ruling off the accounts closed. 16. Distribute, by journal entry, the general expenses over the productive elements, using the following percentages for the pur- pose of obtaining uniformity: cattle, 22%; swine, 15%; poul- try, 1%; corn, 17%; oats, 15%; wheat, 5%; soy beans, 5%; hay, 15%; straw, 5%. Post the entry. 17. Make entries for the following inventories of livestock and commodities on hand at the close of the year,. transferring, by journal entry, to Loss and Gain account the balances of all ae- counts open on the books that show either a loss or a gain. This includes the balance of Field No. 5, which is an extraor- dinary loss. Post the entries, making sure that all necessary accounts are ruled off and balances or inventories brought down. Inventories Feb. 28, 1918: Horses (10), $1250; cattle (17), $610; swine (45), $900; poultry (100), $50; corn, 900 bu. at 48.5¢ (cost), $436.50; oats, 1100 bu. at 40c¢ (cost), $440; hay, 60 tons at $6.32 (cost), $379.20; straw, 40 tons at $6.00, $240.00; silage, 75 tons at $9.21 (cost), $690.92; household furnishings, $400. INSTRUCTIONS AFTER CLOSING (a) Take a trial balance which will serve also as a Statement of Resources and Liabilities as of Feb. 28, 1918. (b) Study the accounts carefully. Compare them with the corresponding ones of the two preceding years. Serutinize the Loss and Gain accounts of the three years together. Do the same with the three trial balances after closing. | (c) Preserve the books, accounts and records for use in the problems of Chapter X which eall for further analysis of these accounts. 3 332 mil i = ' 4 FARM ACCOUNTING REVIEW QUESTIONS - What is a farm plot? What is its purpose from an ac- counting viewpoint? . State three reasons for keeping an account with each field in addition to one with each erop. . With what amounts is a field account debited at the begin- ning of a year? During a year? . What items are recorded on the credit side of a field account? What are the debits made at the same time? What does the balance of a field account show after in- ventories are considered? . Distinguish between production costs and harvesting costs. . Describe the detailed operation of a field account, empha- sizing the time of making entries, and recording of in- ventories or deferred charges. . When is a crop account debited? When credited? . How is a crop inventory recorded? . What does the balance of a crop account show after con- sidering inventories? . Diseuss the handling of the Silage aceount and the rea- sons supporting its use. . What is the object of a Seed account? When and for what value is it debited? Credited? . Diseuss the theory supporting the entries for milk, eggs, gar- den and other products produced or used by the house- hold. . How is a pasture treated in the accounts? How does such treatment differ from that of other fields? Why? . What use is made of the account called By-products? . What are the two essential elements to consider in distribut- ing rent over various farm elements? . When is the rent distributed? How is it distributed? . What difference is there in the treatment of rent under the eash and share basis? . How would you handle a transaction in which promissory notes were given for rent before the beginning of the year to which they apply? 28. 29. 30. 32. COST ACCOUNTING 333 . Deseribe the operation of the Rent Adjustment account. Why is such operation justified? . Should the cost of production vary with the selling a of commodities produced? Why? . When is the Equipment Expense account debited? . How is Equipment Expense distributed over the several farm elements? State both the theory and the method. . Why is it important to post all debits and eredits arising from horse labor before effecting a distribution of Equip- ment Expense in the horse labor summary? . What distinction is sometimes necessary in the accounts in order to keep the transactions with work horses separate from other horses? Why is such distinction made? . What are deferred charges? How are they shown in the accounts? . How is manure handled in the accounts when hauled from the barnyard to the fields? . Is all of the manure applied to a field in a given year con- sidered as a cost of producing the next crop therein? How are the accounts made to show the correct state of © affairs in this respect? | What treatment is advocated for losses and gains of an extraordinary nature? Why is interest considered as an element of cost? Under what conditions would it not be necessary to consider it as such? The practice of considering interest as an element of cost has what effect on the net loss or gain as an individual as shown by the Loss and Gain account? What effect does it have on the net loss or gain of any specific produc- tive element? What effect on the income as a farmer? What effect on the income due to management? . What entry is made for interest on land? Interest on buildings? Interest on livestock? Interest on equip- ment? At what time of the year are each of the entries made for Interest on Investment? | Compare charges for rent on the books of a tenant with 334 “FARM ACCOUNTING — =, the charges to which they correspond on the books of a landlord operator. 33. What treatment is suggested for handling Interest on In- 39. vestment when the property is mortgaged? . Why is interest on working capital not considered as an element of cost in practice? Should it be theoretically? . State briefly the object of “closing” the books in the way they are closed under a cost system. . Outline the general plan of closing, emphasizing the logical order. : Why are the several steps in the detailed process of closing arranged in the order shown? . In what way may one modify his cost system in order to get reasonable results without numerous details? What should be done with the ledger accounts after closing? CHAPTER X INTERPRETATION OF COST ACCOUNTS Importance of Correct Interpretation.—It is an old say- ing that ‘‘Figures do not lie, but liars figure.’’ This would be more in accordance with facts if it read, “‘Figures do not lie, but their interpreters are inclined to make them lie.’’ A large group of figures assembled during the course of a year’s operations on a farm may be made to tell a great many different things about the farm’s condition and progress in general or in detail. What they tell depends largely upon the way they are analyzed, correlated and studied; and upon the degree of accounting intelligence used in such analysis, correlation or study. Under the preliminary discussion of cost accounting, one of the purposes of a cost system was given as the forming of a basis of constructive criticism. This is undoubtedly one of the greatest benefits to be derived from the keeping — of cost records. It takes time and patience to keep cost records. Unless some intelligent use is made of the records and accounts, the time might be considered as wasted. If the accounts and records are studied carefully, the time used in keeping them is very profitably spent. One can usually find a means of reducing expenses or increasing production in one way or another if he studies his cost accounts carefully. The benefits of a proper study and interpretation of farm records is very nicely summarized by Mr. E. L. Cur- rier, Assistant in Farm Management, Montana Agricul- 335 336 FARM ACCOUNTING tural College, when he states in Cireular 43 of the College Experiment Station that: **A careful study should be made of each account and of the business as a whole in order to learn how to improve it. Farm accounts, as stated before, are of little value un- less they teach how to organize the business so that greater profit will result. The outcome of a year’s record-keeping often furnishes many surprises. Frequently some enter- prise that was looked upon as a mainstay of the business returns a loss, while some more common enterprise to which less attention was given is the source of the real profit. Caution, of course, must be exercised in interpreting re- sults. It must be borne in mind that the figures are for one year only, and that weather, crop, and market condi- tions may not all have been normal. The normal cost and the normal value of the product must be kept foremost in mind, and if the average market price for a number of years is not above the normal cost of production the en- terprise should be discontinued. ‘*Besides the satisfaction in knowing the cost and profit from each enterprise, the records are valuable in other ways. They may be used to study the seasonable distri- bution of labor as a whole and on separate enterprises. **By keeping such records one is sure to gain a better idea of the value of labor. He sees that it is just as im- portant to save an hour’s work by man and team on an acre of oats as it is to get a yield of an extra bushel per ‘ aere, and that it is more wasteful to have a team idle than to have a man idle for the same length of time.’’ Labor Incomes of Landlord Operators.—A Farm-Man- agement Survey of three representative areas in Indiana, Illinois and Iowa’ has brought out some very interesting facts concerning the labor income of landlords and tenants. The survey includes data from about 700 farms, some be- * Bulletin 41 of the U. S. Dept. of Agriculture, INTERPRETATION OF COST ACCOUNTS 337 ILLUSTRATION 58 TABLE III—VARIATION IN LABOR INCOMES ON 273 FARMS OPERATED BY OwNeERS IN INDIANA, ILLINOIS, AND Iowa Percent- Percent- Malcocved | Farms | ‘otal || Labor Income Received | Farms | “Kotal Number umber —$500 andmore} 26 9.9 || $801 to $1,000....| 13 4.7 —$499 to -$200} 23 8.4 $1,001 to $1,500. .| 19 6.9 —$199 to $0....) 40 | 14.7 $1,501 to $2,000. .| 10 3.6 $1 to $200...... 53 | 19.4 $2,001 to $3,000. . 5 1.8 $201 to $400....| 34 | 12.4 $3,001 to $5,000. . 3 pe! $401 to $600....| 23 8.4 || $5,000andover...| 4 1.4 $601 to $800....} 20 7.3 ing operated by the landlords themselves and some by ten- ants. The quotations from the bulletin, as stated below, bring out the relation between the labor income of the land- lord operator and the tenant operator; also the relation between the amount of the total income of the rented farm that goes to the tenant and to the landlord. ‘‘The assertion that farmers are making large profits is erroneous. They are living on the earnings of their in- vestment and not on the real profits of the farm. A farmer having an investment of $20,000, with no mortgage, may receive a minus labor income, yet have nearly $1000 as in- terest on which to live. It is assumed in this discussion that capital should return 5 per cent before allowing the farmer anything for his labor. **In Table III (Illustration 58)! the farms are divided according to the labor income received. Each group gives the number of men who made labor incomes ranging from minus $500 and more to over $5000. *The Illustration numbers are’ inserted by the author and are not quoted from the bulletin. 338 FARM ACCOUNTING ‘‘One farmer out of every 22 received a labor income of over $2000 a year. One farmer out of every three paid for the privilege of working his farm, that is, after deduct- ing 5 per cent interest on his investment he failed to make a plus labor income.’’ Incomes Received by Farm Tenants.—‘‘There are few regions in the United States where tenant farming has been developed so extensively and where it plays*such an im- portant part in agricultural production as in the corn belt. The percentage of farms worked by tenants is second only to those operated by owners, and the areas farmed and the products grown compare very favorably with those of the farm owners. **In the region covered by this survey, records were se- cured from 247 tenant farmers. These men rented one farm, or land owned by one person. There were 51 other tenants who rented farms from two different parties. Their records show the same results, which have not been included in Table IV (Illustration 59). **Most tenants hope to become farm owners as soon as they have sufficient capital. The income they receive while leasing a farm is a measure of the period they will have to work before making the change. The average tenant in Indiana, with an investment of $1758, received $755 for his year’s work. In Illinois, with an investment of $2867, he received $1139 as a labor income. In Iowa, with an average capital of $2667, his labor income was $716. Owing to drought in early summer, the income of the tenant in Iowa was probably 20 per cent less than it would have been in a normal crop year. ‘‘The 247 tenant farmers maké an average labor income of $870 from an investment of less than $2500. When it is remembered that the farm owners with over 12 times this investment made less than half the labor income of INTERPRETATION OF COST ACCOUNTS 339 \ ILLUSTRATION 59 Taste JV—Averace CapitTat, Recerpts, Expenses, AND Prorirs oF TENANTS ON 247 FarmMs OPERATED BY TENANTS IN INDIANA, ILLINOIS, AND Iowa Indiana | Illinois* Iowa Average Items (83 (93 (247 Farms) Farms) Farms) Farms) -Average area (acres)........... 128 202 187 ye Average capital............... $1,758 | $2,867 | $2,667 | $2,431 Average receipts............+.. 1,335 | 2,257°| 1,605 | 1,732 Average expenses.............. 492 975 755 740 Average farm income.......... 843 | 1,282 850 992 Average interest at 5 percent. ... 88 143 134 | 122 Average tenant’slaborincome...}| 755 | 1,139 716 870 the tenants, the evidence is unmistakable that the man with small capital should rent rather than buy a farm. ‘‘For the amount invested, the tenant’s income is very much greater than that of the farm owner. The sum avail- able for the family living, however, is smaller in the case of the tenant, for the farm owner, with an average capital of $30,606 (see Table II), has $1530 interest to use, as well as the $408 labor income. Thus, if the farm owner is free of debt, as one-half of them are, he has $1938 avail- able for a living, as compared with the tenant’s $992. ‘*In addition to this sum available for a living, each has what the farm furnishes in the shape of produce. After the tenant pays his living and personal expenses out of this amount his savings can not be large. If we allow the owners 3.5 per cent on their investment instead of 5 per cent they would then receive approximately the same labor income as the tenants ($870). This percentage is the same as that received by the landlords from the rented farms, 340 FARM ACCOUNTING ILLUSTRATION 60 TABLE V—AVERAGE CapitTaL, Receipts, EXPENSES, AND PRoFITs or LANDLORDS FoR 247 Farms OPERATED BY TENANTS, _ AS SHOWN IN TaBLeE IV Indiana | Illinois Iowa | A Item (83 (71 (93 ar Farms) Farms) Farms) Farms) Average area (acres)....... 128 202 187 172 Average capital........... $18,423 | $36,479 | $20,728 | $25,210 Average receipts........... 1,002 1,538 1,014 1,185 Average expenses.......... 351 213 354 306 Average farm income... ... 651 1,325 660 879 Average profit on invest- ment! (per cent)......... 3.53 3.64 3.19 3.5 * Obtained by dividing the farm income by the average capital. Taking into consideration the results from all the farms managed by owners and by tenants, they show that a re- turn can be expected of 3.5 per cent on the investment and a labor income of $870. | Incomes Received by Absentee Landlords.—‘‘The farm, in the ease of the landlord, is a business investment. He furnishes the capital, largely in the form of land, and the tenant furnishes the necessary labor and other means for its operation. The average investment of the 247 land- lords for the three States studied was $25,210. The aver- age net income on the capital invested was 3.5 per cent. All items of expense, including repairs, seeds, taxes, and insurance, were deducted before figuring the net returns. Table V (Illustration 60) gives the average capital, re- ceipts, expenses, and returns for the landlords in each State. INTERPRETATION OF COST ACCOUNTS 341 ‘> 140.00 1 (9) Swine used by household.......... XX . XX ' (10). -"Fotal Fncomie=,. csi. cdauess>>- 140.00 . Summary (11)} Total income from swine for year. - $140.00 ; (12)} Total cost of swine sold and used during the year (Item 7)........ 150.00 (13)} Net Gain in ordinary swine opera- ete fol year. <5. .ceuteenenee.< —$10.00 (14)|} Cost per cwt. of swine handled. .... $10.10 ' (15)| Cost per ewt. of swine sold and used.| 10.30 (16); Per cent of total cost of maintenance made up of feed cost........... 81 INTERPRETATION OF COST ACCOUNTS 369 a statement designed to give facts concerning a specific class of livestock. Similar statements are prepared for cattle, sheep, poultry, or horses. In any case, the data in- cluded in the Comparative Analysis would come from the ledger account of the livestock in question. Preparation of Livestock Analysis.—By referring to II- lustrations 69 and 70, it is noticed that the operations in swine resulted in a loss 2f $10 from ordinary operations in addition to a $200 loss from disease. A comparison with the preceding year or years might tend to show what caused the loss. The preparation of the Comparative Analysis of Swine Account of Ulustration 70 is taken up below in detail by items. (1) The total cost of maintenance, $100, is the sum of the seven amounts above it, each one of which is traceable directly to the debit side of Swine account of Illustration 69. (2) Taken from the ledger account, being the first debit entry for the year. (3) The sum of items (1) and (2). (4) Taken from the credit side of the Swine account. (5) Item (3) minus item (4). (6) Taken from the eredit side of the Swine account. (7) Item (5) minus item (6). (8) & (9) Taken from the credit side of the Swine ac- count. (10) Sum of items (8) and (9). (11) Same as item (10). (12) Same as item (7). (13) Difference between items (11) and (12). In the illustration, this result is a loss rather than a gain, hence it is shown as —$10, leaving the name of the item un- changed as ‘‘net gain in ordinary swine operatiqns for year,” ’ 370 FARM ACCOUNTING (14) Item (3) divided by the number of ewt. of swine sold, used, buried and on hand. That is, the number of ewt. of swine removed from the drove during the year plus the ewt. (estimated) still in the drove at the end of the year, is used as a divisor. The result ($10.10) in the case at hand is a good figure to compare with other . years to indicate the relative cost of producing one hun- dred pounds of pork on the hoof, regardless of what the ultimate use of the animal is to be. (15) Item (7) divided by the number of hundredweight of swine sold in the market and butchered for the house- hold. This result when compared with a similar result in other years gives the cost per ewt. of producing the pork that results in the net gain or loss in ordinary swine oper- ations for the year. (16) Item (1) divided into the cost of feed and multi- plied by 100. This amount, when compared with similar amounts of other years, affords a very good indication of the relative efficiency of handling the livestock. If the per cent cost of feed remains nearly uniform from year to year, any marked variation in item (14), cost per ewt. of swine handled, would tend to show the efficiency or in- efficiency of management. Analysis of Animal Products.—In the case of dairy ecat- tle, sheep and poultry, the Comparative Analysis is pre- pared to show the income from the marketable products, separate from the income from the sale of the animals themselves. It is impractical to attempt to separate the costs between the animals and the product. For example, if one wishes to find the cost of producing a dozen eggs, he is confronted with a more or less theoretical problem. It involves a definite analysis of food, for example, finding out how much goes to produce the eggs and how much is consumed in maintaining the hens in a normal condition. It is true that one can use one or two lines at the bottom ee a INTERPRETATION OF COST ACCOUNTS 371 of a livestock comparative analysis page to show certain unit facts of interest concerning the products of the ani- mals. Care should be exercised, however, in interpreting the figures so presented. If the total cost of maintaining poultry for a year is $64 (including interest, feed, labor and all other elements of cost), and 400 dozen eggs are gathered, one should not say that it cost 16 cents (64 + 400) a dozen to produce eggs. It is so common on the average farm to use or sell poyjtry for meat that some of the cost of $64 is expended in an effort to keep the flock alive for other purposes than to lay eggs. In a Comparative Analysis of Poultry, it is a good plan to show the number of dozen eggs per hen or some similar figures. Likewise, in the case of dairy cattle, the number of pounds or gallons of milk and cream per cow may be shown. The number of pounds of wool per sheep is simi- larly shown in the Analysis of Sheep Account. For experi- mental purposes a record is made of the milk or wool taken from each cow or sheep. Such a detailed procedure, natu- rally, is not practical on the average farm. Accounts as a Guide to Management.—The preparation of analytical and comparative tabulations is one of the stepping stones to successful farm management. In con- nection with some of the tabulations on the several preced- ing pages, suggestions have been made as to the ways they might be interpreted in order to assist in shaping the poli- cies of the farmer. No attempt is made herein to state how the farmer shall remedy conditions after his attention is called to them by the accounts and analyses. A consider- ation of such remedies is a part of farm management. In general it may be stated that accounts and cost rec- ords of various sorts, including analytical tables, present facts which cause the farmer (1) to alter present methods of operation or (2) initiate new projects. This should not be interpreted as meaning that every account or cost record is oy 372 FARM ACCOUNTING prepared is to lead to some change in policy. It means, in connection with present methods, that a careful examina- tion of the accounts and records might indicate where a change in policy or method would be desirable. It means, in connection with new projects, that great care should be exercised in inaugurating any policies without first exam- ining and studying the accounts, records and analytical tables to see if such new policies will *‘ pay.’’ Altering Present Policies—A study of the accounts, together with the cost Yecords, requires special training in order to read the contents intelligently. When a certain group of figures indicates some unfavorable condition, the farmer should not seek to change the conditions without bringing all correlative facts into consideration. If the first impulse is to abandon certain operations be- cause of the excessive cost, one must not overlook the fact that some crops or livestock are raised as auziliary ele- ments of the main business. As such, they really help to reduce the cost of the other main crops because they utilize labor at times when it is not needed elsewhere. If such farm elements or operations were not conducted, the cost of labor of the main crops would be increased because the laborers’ total wages would be distributed over fewer pro- ductive hours. This would cause each productive hour to bear a higher rate. Accordingly the general crops would be charged with a greater amount of labor in the aggregate if it were not for the auxiliary element. When an auxiliary crop is charged with the full hourly rate for the labor performed on it, and is also charged with all other costs, it probably shows a loss. The account of such an auxiliary crop should be analyzed and studied very carefully before the crop is discontinued as being too ex- pensive. Some farmers advocate charging such auxiliary crops or livestock with labor at about half price, say ten instead of INTERPRETATION OF COST ACCOUNTS 373 twenty cents an hour, since the labor is used on them at a time of the day or year when it could not be used very well for any other operation. This plan is undesirable. Accounts should show the facts as they exist. Policies formed from these facts may and should be formed only after using the facts in a more or less flexible manner, in connection with one’s general knowledge of the peculari- ties of the business. A Guide in Handling Labor.—One of the biggest items of cost on a farm is labor. Man labor and horse labor con- stitute a considerable portion of the cost of each produc- tive element. The exact proportion for each of the several elements varies from about one-fifth to one-half of the total cost. This proportion for each element could be reduced as indicated above, if idle time could be reduced or eliminated. A reduction in idle time is not likely to be effected until it becomes apparent to the proprietor of a farm that idle time exists. There are graphical methods’? showing quite vividly in any particular year, or series of years that much of the time paid for is not as productive as it should be for the employer. Illustration 71 presents a Monthly Distribution of Labor for both men and horses for twelve successive months. It shows the number of hours worked on the average by each man and horse during each month of the year. The hours given to crop production are shown also. A valuable part of the table from the farmer’s point of view is that which shows the per cent of time given to crops. From figures compiled in this way from the labor and horse labor rec- ords, one can see in what months he might arrange to have other work available for both men and horses. The Illustration shows that the average man worked over 3000 hours during the year, while the average horse worked slightly over 1200 hours. Of the total time worked 1 University of Missouri Research Bulletin No. 6, 874 FARM ACCOUNTING ILLUSTRATION 71 MontTaiy DIstrisuTION oF LABOR ~- Average Hours Hours Given to Per Cent of Time Worked per Month Production Given to Crops Month Man Horse Man Horse Man Horse March........ 260.9 | 94.4) 81.3] 61.6] 31.2] 65.3 MMA ASS ceases 277.5 | 119.0} 94.2] 75.8 | 33.9 | 63.7 BERT. Soe eth 304.0 | 155.3 | 101.3 | 110.0 | 33.3 | 70.7 GU nue ces t 318.0 | 161.2 | 150.5 | 122.7 | 47.3 | 76.0 | ee See 317.0 | 152.2} 108.3 | 91.6| 34.2| 60.2 Date 2 eo ie 276.5 | 118.7| 89.3] 66.5| 32.3| 56.1 hati 22s) 271.5 | 106.3| 85.3| 61.8| 31.4| 58.2 ORS ik ¢ bs ewes, 265.5 | 100.2 | 90.2) 58.4] 34.0/] 58.3 NOT Ss dca k's 260.7 | 67.5] 56.0) 23.5] 21.5| 34.8 BOE ead ew :d's 255.2 | 64.9] 39.8/| 14.7| 15.6] 22.6 te oe 225.3 | 35.3} 16.2 6.9 7.2] 19.5 3 eee 239.2 | 41.6) 18.6] 12.4 7.8 | 29.9 Totals:....... 3271.3 |1216.6 | 931.0 | 705.9 | 28.4) 58.0 — * University of Missouri Research Bulletin No. 6. by man, 28.4% was on crops, while 58% of the total time worked by the average horse was spent on crops. The monthly distribution of labor is the record that is looked upon as the starting point in any change of policy that aims to utilize the men and horses more efficiently. It shows, for instance, that only 7% to 8% of man’s time in January and February is used in connection with crops; and that about 20% to 30% of horse’s time is so used dur- ing the same months. The first conclusion to be drawn from such a tabulation should be that an opportunity exists for giving the farm laborer something to do in the winter months and at cer- Eee Oe ae a INTERPRETATION OF COST ACCOUNTS 375 tain times during the summer months. Just what the na- ture of the work shall be is to be decided by the farmer himself. It might mean the addition of some new produc- tive element. The figures under discussion in Illustration 71 are taken from four farms in Missouri engaged in diversified farming with dairying on a small seale. The total area of the four farms is 723 aeres, or an average of 18034 acres per farm. There were 23 work animals on the four farms at the time of the investigation. This indicates that there was one work animal to about every 31.4 acres of land. It should be noted in connection with the monthly distri- bution of labor figures presented above that the total hours for man and horse represent the time spent on the farm in some recognized actwe capacity. They do not represent the average hours that nught have been worked if everyone had worked full time every day. Likewise, the per cent of time given to crops means the per cent of the total time worked that was devoted to crops. For example, the table total shows that in March the average man worked 260.9 hours, 31.2% of which was spent in connection with crops. If the average man works ten hours a day on week days, and, say, four hours on Sundays, the total time for work in March would be about 280 hours, counting 26 week days and 5 Sundays. This would result in a figure showing that 29% of the total time for which the workman was paid was spent on crops. ; Another point for the farmer to observe in studying such a Distribution of Labor, is that the horses are used much less efficiently than the men. Considering the total hours ‘shown in Illustration 71, it appears that the average man worked 3271.3 hours during the year and the average horse worked 1216.6 hours. If we consider 300 working days to the year, these totals indicate that man worked 10.9 hours and horse 4 hours a day on the average. If we consider _-—' ove ; : 376 FARM ACCOUNTING 365 working days, man worked 9 hours and the horse 3.3 hours a day. Of course, this does not imply that horses ought to work as many hours a day as a man does through- out the year. Since the four farms in this survey under discussion practiced diversified farming with dairying on a small scale, the man labor was utilized more efficiently through- out the year than it would be on a farm engaged primarily in raising corn or wheat, without any dairying operations. It should be made a practice by each farmer keeping labor and horse labor records, as described and illustrated in Chapter VIII on Cost Accounting, to study them care- fully at the close of each year. A careful study of totals by months may lead the thoughtful farmer to find some means of using men and horses in a profitable way, during the times which are ordinarily dull. * Tests of Labor and Horse Labor Efficiency.—The num- ber of crop acres per work horse and the number of crop acres per man are two figures that should be shown at the bottom of a page used for recording the monthly distri- bution of labor. They serve to indicate the efficiency with which men and horses are used on a farm. From an investigation of 700 farms in Indiana, Illinois and Iowa? it has been found that the crop acres per work horse ranged from 9.4 acres on small farms to 32.2 acres on farms averaging nearly 1000 acres. The exact figures tabulated ‘as a result of the investigation are given in Illus- tration 72. Similarly it has been determined that 75 to 80 acres per man is a reasonable allowance. ‘For other references on the utilization of labor, see Research Bul- letin No. 16, Wisconsin Agricultural Experiment Station; Bulletin No. 125, University of Missouri College of Agriculture, ‘‘Cost of Produe- tion on Missouri Farms,’’ pages 310-315; also Bulletin No. 3 of the U. 8S. Dept. of Agriculture, ‘‘A Normal Day’s Work for Various Farm Operations.’’ * Bulletin of U. S. Dept. of Agriculture, No. 41. INTERPRETATION OF COST ACCOUNTS 377 ILLUSTRATION 72 TABLE XX—RELATION OF THE S1zZE OF THE FARM TO THE NUMBER oF Crop AcRES ON WuicH A Horse CAN BE UTILIZED on 700 Farms IN InprANA, ILLINOIS AND Iowa Farms Area Average |Average| Cro Num- | Average Crop No. of |Area Per ber Size Area Work | Horse (Acres) (Acres) | Horses | (Acres) 40 acres and less.......... 45 | 36.6] 26.4] 2.8] 9.4 Alto SO acres... 5.) .4:. 114| 71.4] 56.7 | 3.6] 15.7 81 to. 120 acres.......... 120 | 107.2} 86.0} 4.5] 19.1 121 to 160 acres.......... 130 | 149.3 |} 122.4] 5.8] 21.1 161 to 200 acres.......... 93 | 183.6 | 143.4 | 6.6 | 21.7 201 to 240 acres.......... 75 | 227.4 | 184.9 | 7.8 | 23.7 241 to 280 acres.......... 35 | 262.5 | 211.2 | 8.4 | 25.1 281 to 320 acres.......... 37 | 305.6 | 2383.8 | 9.5 | 24.6 321 to 400 acres.......... 30 | 364.1 | 298.0 | 10.8 | 27.6 401 to 560 acres.......... 12 | 474.8 | 368.6 | 13.1 | 28.1 561 to 720 acres.......... 5 | 652.6 | 555.4 | 19.4 | 28.6 721 to 1,250 acres.......... 4 | 991.2 | 612.0 | 19.0 | 32.2 The standard number of work units required for per- forming various operations on the farm has been presented in Farmers’ Bulletin 661. Illustration 73 shows the work units which may be followed in determining the number of horses and men to have on a farm; or to compare with known conditions on a farm. Miscellaneous Questions of Policy.—Aside from the handling of labor there are a number of other questions of farm management that can be settled by a careful exam- ination of accounts and records. The feed records and feed summary may be used in a _ study of the relative values of different feeds; or in other ILLUSTRATION 73 APPROXIMATE WorkK Units NEEDED FOR THE PRODUCTION OF CROPS AND IN CARING FoR Livestock, ETC; A Work UNIT BEING A 10-Hour Day or MAN or Horse Laspor? Work Units (10-HourDay) Operation hen Hicews* 2 Production of Crops (per acre) Timothy, alfalfa and clover hay, per cut- j ee PEF oh a5: 1 1 Oats, wheat, barley, rye, buckwheat and THINS s,s :. s0..% 0.005 be oe eee 2 3 Corn husked from standing stalks, Corn Bolt States. .-i.0. ....34 a ee eeee ae eee 2 to 3 5 Corn husked from shock............... 6 6 Corn for silo... 2... vs 2. eee eee 4 to 6 5 to7 | Corn husked, Southern States......... 3 to 4 3 to 4 Potatoes... .... 5.3 ss epee eee emia 8 to 12 10 | COOGEORE is ns bos so a es 8 to 12 4 to 6 Sumer Boots. .... 2.1001 bb Seen iee 7 7 Ue eee 4 2 q OT 13 12 4 Poaabtie. 6. <.5 scsi cud eee eee 3 1 Sorghum sown broadcast, cut for hay. . . . 4 4 SAMINOOO 3) sdo.a os bb bcs alse eae piles 20 7 ; VN As pt eee 5 5 7 UN Sr Peres re A 15 5 . Caring for Livestock (per year) Horses, Corn Belt States. ............. 8 % Horses, Eastern States................ 12 % SUEY OOM vidi 5 kos eS hs ode be a Wace we 4 15 to 20 1 to 2 Young stock, cattle, colts, ete.......... 21% to 3. as Ten hogs, Corm Belt States............ 10 2 Ten hogs, Eastern States.............. ae 2 Ten brood sows and raising pigs to wean- DIME Sita: s ay vlalg a Ra/erk bos oat eb wk 04 30 5 SOD CWGR os gifs ote bay «ceri edgar A 50 5 100 chickens (well cared for). .......... 15 to 25 *U. 8. Dept. of Agriculture Farmers’ Bulletin No. 661. * Production in this case includes both the technical production cost and the harvesting cost. 378 INTERPRETATION OF COST ACCOUNTS 379 ways connected with the general policy of finding the best ways to do things so that the greatest net income will re- sult. Other questions that might arise to cause one to decide whether to change present methods and policies might be enumerated as follows: (a) Does it pay to hold a crop for a rise in price or to sell now and invest the money at a fair rate of interest? (b) Why does barley not pay as well as potatoes? (c) Why does wheat not pay as well as oats? (d) Why do I not make as much on hogs as Mr. A, my neighbor ? (e) Does this field produce as much corn, oats or alfalfa per acre as that one? Why? Without attempting to state specifically how each one of these questions might be answered, it may be said that the starting point in attempting to answer any such ques- tions is the account or analytical table. It is true that an- swering questions like (a) above involves considerable guesswork. However, the point to remember in that particular case is to figure the interest on the money tied up in corn. I¢ is not considered necessary to charge Corn account with interest from time to time on the amount that it might sell for. Such a calculation does not need to ap- pear in the account. It should be made as a supplementary calculation in determining the action to take when the price of the crop is known and an idea is formed as to whether the price will go up or down. Initiating New Projects.—At times, the farmer is con- fronted with propositions that cause a considerable expen- diture of time and money. Sometimes the proposed change involves the abandonment of some property that is giving good service. It is upon such occasions that a good ac- counting system coupled with a knowledge as to how to get 380 FARM ACCOUNTING the most out of it will help the farmer in making wise decisions. Below is a list of questions which are likely to arise for consideration on the average farm: (a) Does it pay to have a tractor? (b) Does it pay to have a milking machine? (¢) Would it pay to buy a limestone crushing machine for the community ? (d) Would it pay to grub the stumps out of the pas- ture and cultivate it? (e) Is pasture feedirig or pen feeding preferable for hogs? (f) Does it pay to build a shelter for farm implements? (g) Does it pay to have a husker shredder? (h) Does it pay better to pump water by hand, by wind- mill or by gas engine? (i) Does a motor truck pay better than freight or ex- press method for transporting garden truck to large mar- kets? (j) Does it pay to have water troughs for cattle in the barn in view of a reported 15% increase in milk produc- tion caused thereby? (k) Does it pay to buy a dairy barn ventilating sys- tem? (1) Does it pay to sell old apple trees for saw and tool handles or to burn them for fuel? (m) Does it pay to let a field lie fallow for a year? - (n) Does it pay to plow under a crop of clover or sweet clover? Such questions as those enumerated require a knowledge of local conditions, at times. In general, however, they require only a careful study of conditions as brought out by the accounts and records, a knowledge of the effect of various elements of cost, and some common sense. Before deciding on any questions like the ones noted above, one INTERPRETATION OF COST ACCOUNTS 381 should figure out everything possible in dollars and cents. Then he is ready for the comparison with some other re- sults. Sometimes, however, the changes involve a weighing of money expenditure against convenience. In such cases the complete cost should be calculated before an attempt is made to decide whether such cost is sufficient or insuffi- cient to warrant the resulting convenience or inconven- lence. The experience of others should be used whenever pos- sible in determining the best course to follow. The U, S. Dept. of Agriculture and the Experiment Stations of most of the State Agricultural Colleges have performed valuable experiments intended to assist the farmer and save him the time and loss that are often necessary to prove certain facts. A list of some of the more helpful bulletins and books on farm management or accounts is given in the bibliography at the close of the book. ILLUSTRATIVE PROBLEMS 1. Using the accounts of C. P. May prepared under instruc- tions of problems 3, 4 and 5, Chapters VIIT and IX, analyze the Loss and Gain account, finding the income as an individual, as a farmer, as a laborer, as a capitalist (Income from Investment), and as a manager. 2. Using the Corn account of C. P. May as kept for the three years under problems 3, 4 and 5, Chapters VIII and IX, pre- pare a Comparative Analysis of Corn Account for the years ended Feb. 29, 1916, Feb. 28, 1917, and Feb. 28, 1918. (See Illus- tration 64.) Be prepared to discuss the facts brought out by the comparison. 3. Referring again to the C. P. May accounts for the year ended Feb. 29, 1916, prepare a Comparative Analysis of Crop Accounts for the year, considering only corn, oats and wheat. (See Illustrations 64 and 66.) 4. Prepare a Comparative Corn Production and Cost Record for the three years ended Feb. 29, 1916, Feb. 28, 1917, and 882 FARM ACCOUNTING: Feb. 28, 1918, using the data in the C. P. May accounts referred to above. (See Illustration 67.) 5. Construet Comparative Field Production Reeords for C. P. May’s farming operations as follows, referring to Illustration 68: (a) Field No. 1 for the three years. (b) Field No. 2 for the three years. (ec) Field No. 4 for the three years. 6. Prepare a Comparative Analysis of Swine Account from the operations of C. P. May for the three years. ‘ (See Lllustra- tion 70.) REVIEW QUESTIONS 1. Why is a careful serutiny and intelligent interpretation of cost ‘accounts desirable? 2. Compare the labor incomes of tenant and landlord opera- tors on farms from which the Federal Department of Agriculture has collected data. 3. What average per cent profit was shown for absentee land- lords in the investigation referred to in question 2? . Does the word cost always mean the same thing? Diseuss. . Does the word profit always mean the same thing? 6. State three conditions that tend to govern or affect the meaning of the word profit. 7. A helpful comparison of costs or profits can be obtained only under what fundamental conditions? 8. How would you proceed to “read” from a Loss and Gain account all that is shown therein relative to the year’s operations? 9. What is the starting point for all analyses and comparisons of operating results for a given period? Why? 10. Deseribe the preparation of the Comparative Analysis of Crop Account. 11. In studying the Comparative Analysis of Crop Aecount what conclusions may be drawn from variations in (a) the cost of production, (b) the cost of production per acre, (e) the cost of production per bushel, (d) the total cost o> f ; Ss ae re 12. 13. 14. 15. 16. Les 21. 22. 23. INTERPRETATION OF COST ACCOUNTS 383 of producing and harvesting, (e) the total cost per acre, (f) the total cost per bushel, (g) the cost of the crop sold and used, (h) net gain for the year, (i) net gain per acre planted? What benefits might accrue from a comparative study of the analysis of several crop accounts? What are the six main parts into which a crop is divided for the purpose of preparing a Comparative Crop Pro- duction and Cost Record? State the essential points to be brought out in the prepara- tion of a Comparative Field Production Record. How can such a record be used to assist in farm management? What are the essential points to be emphasized in the Com- parative Analysis of a Livestock Account? Considering Illustration 70, state what conclusions may be drawn from any variations in each of the items num- bered (1) to (16) inclusive. What difficulties are encountered in attempting to find the net cost of producing eggs or milk? . How may accounts be used to assist in a decision to alter present policies of management? . Of what use are the cost accounts and records in an attempt to handle labor and horse labor to the best advantage? - What data should one try to obtain in order to test the economic utilization of labor or horse labor? Referring to Illustration 72, what is the average number of work horses on farms of various sizes? How many crop acres per work horse are there on the average farm in the investigation? Referring to Illustration 73, what can you say as to the relative time required per acre of each of the more prominent crops? The time required for raising various kinds of livestock? How may the accounts be used in helping to decide upon certain miscellaneous questions of policy? In initiating new projects? — a huey BREA Ws ld oe _ ale ru. haa ad ee Y a a al a a " “’ it~ i pir “ ye - cd * pn Fe = ’ . ¢ Vio APPENTTX PRICES AND RATES USED ON THE FARM Interdepartmental Transactions—In the illustrations and problems in the foregoing chapters the prices have been given for commodities; and rates of interest arbitrarily assigned almost without exception. In practical farming operations such prices and rates must be determined in other ways for each transaction as it arises. In transactions with outsiders, prices are fixed by market or special agreement. In transactions or adjustments between farm departments prices are determined according to logical principles of accounting and farm management. It has been pointed out that a profit is not a profit unless every element of cost has been properly considered—that a profit on hogs when calculated by one man might have been shown as a loss under the method of accounts employed by another. A man usually deceives no one but himself if he does not show the true profits of each of his various farming operations. It is necessary, therefore, to have good logic and sound accounting principles back of all entries that affect the profits of any department. A charge to Swine and a credit to Corn account for the feed consumed will tend to decrease the profit on swine and inerease the profit on corn. A charge to Household and a credit to Cattle or Dairy Cattle for the products consumed by the family will tend to increase the profit from dairy cattle and increase the household expenses. It follows, then, that the price at which the swine are charged for feed, and the price charged to the household for dairy products will have a considerable bearing upon the financial showing of the pro- ductive elements involved. The transactions between any of the farm elements do not 385 7 YS ee ee pee APPENDIX - : affect the profits as a farmer, however. Transactions between the household and a farm element do affect the profits as a farmer but not as an individual. Departmental Cost Method Used.—Cost accounting on the farm is operated under the departmental system as opposed to the process, product or estimating systems. ‘‘ Departmental’’ in this sense means a class of goods or commodities. Thus each crop and each class of livestock constitutes a department. One department transfers property or services to another. In order to find the result of each department or productive element, it is necessary to favor no productive element; but to make all charges and credits to each one as nearly as possible on the basis they would be made if each productive element were considered as the only one on the farm. In other words all departments should be given the same con- sideration financially because of their juxtaposition one with another. Such an arrangement in commercial accounting might bring up the question of inter-company profits, or it might raise the question of fictitious profits. Because of the simplicity of organization and the general nature of farming operations, no necessity arises for the elimination of inter-departmental profits in the way inter-company profits are eliminated before preparing a consolidated profit and loss and income statement of a corporation. Fictitious Profits—We agree with most accountants that fictitious profits should not be shown in the books of account. The method of handling interdepartmental transactions as stated above does not create fictitious profits, however. Fic- titious profits are those which show the business as making a paper profit. A paper profit is one that has not resulted from a corresponding increase of resources or decrease of liabilities — through transactions with outside parties. Charging corn to the swine at market price, for example, does not create a fictitious profit because the profits of the business are not increased as a result of the entry. It is true that the Corn account is eredited with a sale at selling price before the product leaves the premises. If the inventory of APPENDIX 387 corn at the close of the year were credited to the Corn ac- count at selling price, such an entry would result in a paper profit. The difference in effect between the two credits named is in the offsetting debit. In the case of the ‘‘sale’’ of corn to the swine, the offsetting debit to Swine account is one ’ which inereases the cost (decreases the profit) from swine. This leaves the net farm profit the same as if the corn were fed at any other price. In the case of the corn inventory entry at selling price, the offsetting debit is recorded as a charge against the operations of the next year. This inflates the profits in corn of the current year without causing a de- crease in the profits of any other farm element. As a result the net profit of the farm is inflated. Fictitious profits are not created, then, as a result of trans- ferring commodities from one department of the farm to an- other, no matter what prices are used. Fictitious profits are created by placing prices above cost price on any property for inventory purposes. Pricing Inventories.—It is hardly necessary to state any more principles concerning the pricing of property for in- ventory purposes, if one could apply the statement in the preceding paragraph to all forms of property, without any further assistance. The statement that ‘‘inventories should be recorded in the books of account at cost or market price, whichever is lower,” is a very common one in commercial ac- counting. Such a policy of pricing inventory should be prac- ticed in every department of the farm. The tendency to overvalue property for inventory purposes does not arise in the case of buildings or equipment, since the percentage method is used in these types of property. In placing a fair value on livestock, the various products ( grains and feed), household furnishings and miscellaneous supplies, however, there is usually more of an inclination toward over- valuation. A few brief principles may be stated for pricing inventories of each of the classes of property mentioned. Livestock: It is quite impossible to find the cost of raising the various animals up to a given age. Accordingly the in- 388 APPENDIX ventory price can be determined more easily by estimating downward from the market price. For example, the first time a colt or calf is inventoried it should be shown at approxi- mately 10% below its selling price at that time. The same principle should be followed in each subsequent year. After any given animal is full-grown, it should be inventoried at the same ~ unit value each year. Products: Grain and feed should be inventoried at cost price. This is determined from the Crop account in any specific instance under a cost system as described in Operation of Crop Account, Chapter IX. When the cost price of grain and feed is not available, inventory such products at approximately 10% below a fair average market price for the several months preceding the day on which the inventory is recorded. Using such an average market price tends to minimize the effect of any exceptionally high or low prices that might exist on the inventory date. Miscellaneous Supplies: Cement, nails, barbed wire, axle grease and other commodities commonly listed under miseel- laneous supplies inventory usually have a known unit cost price available. Such cost price should be used in pricing the portions of the commodities on hand when taking an inventory. Household Furnishings: The simplest way of inventorying the articles in the house is to place a reasonable nominal value on the entire lot of furnishings, say $500, $600, or some other round amount, and use the same amount from year to year. The amount used should be about 25% less than the aggre- gate cost at time of first appraisal for inventory of all house- hold furniture, carpets, rugs, pictures, clothing, jéwelry, dishes and kitchen utensils. After such appraisal, any subsequent purchases of any of the articles named above should be charged to the Household account, but should not inerease or decrease the inventory figure. This last statement is subject to modifi- cation only in ease the general scale of household furnishings is raised materially as a result of a marked refurnishing of the house with substantially better articles. The object in advocating such a simple but apparently un- APPENDIX 889 scientific way of treating the household inventory is based on three essential principles or facts: 1. The inventory valuation of household furnishings does not affect the profits of the farm nor any comparisons made among the farm elements. This means that the simplest method may be used without impairing the efficiency of the accounts through the apparently sh (Saneeaain or inaccurate treatment. 2. It is not necessary to calculate depreciation on house- hold furnishings. Such a ealeulation and entry therefrom would affect no other account. It would mean merely a debit and credit to Household account. Consequently the same pur- pose is served by leaving the inventory entry the same from year to year. The household receives approximately the same benefit from the furnishings each year. 3. The total furnishings of all descriptions as enumerated are maintained at about 75% of their efficiency over a period of years. Replacements from time to time tend to offset dishes, clothes, carpets, etc., that have been discarded as use- less. When such replacements are charged to the Household account from year to year without being eredited in the clos- ing inventory, the result is an annual cost of operating the household which may usually be considered reasonable. Such costs of replacement take the place from time to time of charges that might be made for depreciation. Seventy-five per cent efficiency as used above does not mean that the furnish- ings could be sold for 75% of their cost value. Second-hand furnishings could seldom be sold for that much. That per cent represents their value in use to the farmer’s family. Pricing Commodities Fed to Livestock—Under Fictitious Profits it was stated that the net profits of the farm as a whole are not affected by the price at which commodities are transferred from one department to another. As a result of this fact it was pointed out that a transfer of feed to live- stock at market price or more would not ereate a fictitious profit for the farm. There remains to be determined just what price should be 390 APPENDIX used in caleulating the values of the several crops fed to live- stock; and why ‘such price should be used. Market price of the crops fed has been found, after careful analysis, to be the price that results in showing the facts to the best advantage, both relatively and absolutely. By mar- ket price is meant the average market price during a month. As brought out in the description of the Feed Record in Chap- ter VIII, the quantities of the various grains and other feed consumed by livestock are ascertained by estimate or actual measurement. At the close of each month the average market price of the grain or feed is determined by a perusal of the market quotations of the papers. Such market price is used in caleulating the total values for the feed record at the close of the month (See Illustrations 49 and 50). There are several factors that cause us to conclude that mar- ket price is the most reasonable one to use in erediting the crop and debiting the livestock accounts with the commodities fed on the farm. Most of the reasons are presented on a com- parative basis with the idea of showing why market price is better than cost or than market price minus cost of marketing. These latter two bases are the only other ones that seem to have any supporters. The reasons are divided into. two main classes, for (A) Livestock kept for profit, and (B) Livestock kept for work, as horses. (A) Livestock Kept for Profit.—The statement that it ‘‘pays better’’ to feed corn to hogs than to sell it means that the farm profit is greater, when taking all results of farming opera- tions together. This cannot be construed as meaning that corn is responsible for the increased profits. The inereased profits come as a result of the additional capital, labor and risk re- quired to keep a drove of hogs, in addition to the raising of the corn erop. The three principal reasons for using market price in valu- ing the crops fed to livestock that is kept for profit may be stated as in (1), (2) and (3) below: (1) It permits of a. comparison of costs of raising livestock on different farms in the same year. Unit costs of production of crops are influenced so largely APPENDIX 391 by weather conditions that livestock costs in auterent locali- ties would be greatly influenced by crop failures, if cost price were used. Cost of marketing is not at all uniform through- out a state, county or even smaller area. The cash market price is uniform throughout a very large area. Accordingly, a charge of market price to livestock for feed consumed affords a uniform element of cost in livestock of a given class. A comparison of other costs of producing the livestock would then tend to indicate to some extent the degree of efficiency in management. Of course, it may be said against the market price, in this respect, that it does not afford a good basis for comparison of costs of raising a given class of livestock in two or more suc- cessive years on the same farm. This is because of the fluc- tuation of market price of feeds from year to year. However, the same objection may be made to the cost price, since the cost per bushel of raising a crop may vary greatly from year to year. (2) Using market price permits the crop account to show a profit commensurate with its nearness to market regardless of whether it is all fed or all sold, or part fed and part sold. If cost price were used, and the crop were all fed, it would appear that no profit was made on the erop. (3) Market price gives both the crop and the livestock ele- ments the same advantage because of their juxtaposition on the farm. As a hypothetical case, assume that a 70-cents per bushel market price of corn is made of the following parts: * Cost of producing and harvesting........ $.55 Cost of marketing.................. I | Net profit on the crop................. .10 Market price per bushel................ $.70 What becomes of the corn when it is sold? The grain dealer uses it to make a profit for himself. This additional profit * These figures are taken merely for illustrative purposes and should not be considered indicative of what the figures ought to be under normal conditions in practice. 4 392 APPENDIX does not benefit the farmer in the least. All that he gets is the 10 cents net profit as shown in the analysis above. When he sells it to ‘‘Mr. Hog’’ instead of to the elevator man, he still gets his 10 cents net profit by selling it at market price minus the cost of marketing, 5 cents. In other words he can sell it to ‘‘Mr. Hog’’ at 65 cents a bushel and still make 10 cents net profit on the corn because of the saving of the 5 cents for cost of marketing. He prefers, perhaps, to sell it to ‘‘Mr. Hog’’ because in selling to the elevator man he has no opportunity of deriving a benefit from the subsequent transactions in which his corn is interested. When he sells it to ‘‘Mr. Hog,’’ he as a bene- ficiary expects to receive any profits that may accrue as a result of ‘‘Mr. Hog’s’’ subsequent transactions with the corn. Thus, by paying 65 cents (market price minus cost of mar- keting) ‘‘Mr. Hog’’ allows the farmer just as great a profit on the corn as does the elevator man. In addition, he allows the farmer the benefit of profits resulting from subsequent use of the corn. Assume, on the other hand, a rather extreme case, that the farmer raises hogs, but buys all his feed on the market—say corn only, for the sake of simplicity. In this case the hogs are charged with market price’ plus the cost of bringing the corn from market. This is approximately equivalent to market price plus the cost of marketing or 75 cents (70 plus 5). From the foregoing statements it is apparent that 10 cents a bushel more is charged to hogs for feed when it is bought on the market than when it is bought from the eorn crib at market price minus the cost of marketing. In other words, while the corn is not benefited at all the hogs are benefited ten cents a bushel when corn is fed at market price minus cost of marketing (65 cents in this case). Is this fair and reasonable that one productive element should receive all the benefit from the. juxtaposition of two *In this case the market price is not quite the same as when the farmer sells the product. The term as used here includes a slight profit for the dealer. This is ignored in the theoretical case at hand, however. : APPENDIX 393 or more elements that can and should codperate for their mutual benefit? We think not, as long as each element in question is operated with the view of making as much profit as possible. As stated previously, it makes no difference financially with the farmer whether this apparent favoritism exists or not. He should be interested, however, in seeing each element dealt with fairly. | A charge of the corn to the hogs at market price is the way to relieve the apparent favoritism referred to above. It also results in an even distribution of the advantage arising to each productive element because of its juxtaposition to the other. This is analyzed in the four possible cases below: (a) If corn is sold on the market at market price it brings 65 cents (70 minus 5 for marketing), to be used in paying the cost of 55 cents, leaving 10 cents net profit. (b) If corn is sold to the hogs at market price it brings 70 cents (there being no cost of marketing), to be used in paying the cost of 55 cents, leaving 15 cents net profit. (c) If the hogs buy corn on the market at market price, they pay 75 cents (70 plus 5 for bringing from market). (d) If the hogs buy corn from the corn crib on the farm at market price, they pay 70 cents (there being no cost of bringing from market). By comparing (a) and (b) above, it is seen that corn makes 5 cents a bushel more by selling at market price to the hogs rather than on the market. By comparing (ce) and (d) above, it is seen that the hogs save 5 cents a bushel by buying at market price from the corn crib on the farm rather than on the market. Conclusions: + Conditions in other classes of productive live- *The conclusions drawn ignore any element of storage of grain on the farm. It might be said that the crop should be credited with more than market price because it is charged with building expense; also that the crop might be sold, thus bringing in cash that could draw interest. Such a statement does not have much weight in a discussion of this sort, because market conditions are so uncertain that the crop might have been held anyway. 394 | APPENDIX stock and farm crops are such as to make them applicable to the conditions cited for hogs and corn. Therefore, livestock raised for profit should be charged with farm erops consumed at market price in order to apportion fairly the advantages caused by the juxtaposition of the productive elements on the farm. (B) Livestock Kept for Work.—In crediting the several crop accounts and, debiting work horses with the commodities fed, market price of the commodities should be used. Thus, it might be stated that all entries for the quantities shown in the feed record should be ealeulated at the market price of — the crops concerned, regardless of whether they are fed to livestock kept for profit or for work. | The only reason for treating the two classes of livestock separate in this diseussion is that different principles govern the use of market price in the two cases. In the ease of horses, market price for feed is supported by the first two reasons given under “Livestock Kept for Profit” above, namely, to permit a comparison of results with other farms with respect to the livestock and the crop. The third reason named, that of sharing the effect of the juxtapo- sition of the elements on the farm, does not necessarily apply as between the horses and the crops fed. It does apply, how- ever, as between the crops that are fed to horses and the crops that are not. For work horses, a third reason for using market price for feed is based on the fact that some crops that get the benefit of horse labor do not contribute anything to the upkeep of the horses. If cost price were used in valuing the crops fed to horses the cost of keeping horses would be less than if market price were used. Accordingly, the cost of horse labor to be charged to the farm elements would be less. Such con- dition would permit the wheat, barley or other erops not usually fed to horses to share in the benefits of the cheaper horse labor without contributing anything to make such labor cheaper. If, on a given farm, only one crop were raised, it would not make any difference in its net profit whether it was fed APPENDIX 395 at cost or market price, provided any feed purchased was charged at the same price under each of the two methods. In order to present the effect of feeding horses at cost and market price of farm crops, four assumptions are made under the headings, Case I (a), Case I (b), Case II (a) and Case II (b) respectively, all of which are shown in Illustration 74. Case I considers that corn is the only crop on the farm. Under (a) it is fed to horses at cost price. Under (b) it is fed at market price. Case II considers that corn, hay and wheat are raised on the farm, corn and hay being fed to horses while wheat is not. Under (a) corn and hay are fed at cost price. Under (b) they are fed at market. price. For purposes of comparison it is assumed that market price of both corn and hay is 50% over cost price, that when three crops are raised the horse labor and other expenses are divided equally among them, that horses work only on erops, and that the market price of each of the three products raised is the same. Inventories of both the horses and crops are ignored. None of the assumptions named affect the conclusions. They are made only for the purpose of simplifying the comparison. A possible exception is the assumption that horses work only on the crops. This assumption tends to decrease the profit relatively as compared with the profit under normal conditions. From an examination of the accounts and Summary of Illus- tration 74, it may be seen that when only one crop is raised on a farm and it is all fed to horses the net gain on that crop is the same whether it is fed to the horses at cost or market price. Thus, Corn shows a gain of $440 under either method, as shown in the Summary of Results and in the ac- count under Cases I (a) and I (b). It is seen in Case II (a) that the wheat crop is benefited considerably to the detriment of corn and hay when the latter crops are fed at cost price and all other conditions are equal. Under this case Corn and Hay each show a net gain for the year of $166.67, while Wheat shows $216.66. In Case II (b) when corn and hay are fed at market price, they return the same net gain that wheat does, $183.35 in each 396 APPENDIX ILLUSTRATION 74 CoMPARATIVE Errect oN Net Prorits or Crops WHEN THEY Are Fep to Horsgzs at Cost AND AT MARKET PRICE CASE I (a) Corn THE ONLY Crop RAISED ON THE FARM CHARGED TO Horses at Cost Price Horses Corn fed at cost...... $100.00 | Horse Labor cost, to Other feed at market.. 210.00 i, RRR pis $460 .00 Other upkeep expenses. 150.00 $460.00 $460 .00 Corn Horse Labor......... $460.00 | Fed to horses at cost.. $100.00 Other expenses of pro- duction, harvesting, Sold or fed to other an- imals at market price 1,600.00 $1,700.00 J —_— eet eee APPENDIX 397 ILLUSTRATION 74—(Continued) CASE I (b) Corn THE ONLY Crop RAISED ON THE FARM CHARGED TO Horses AT MARKET PRICE Horses Corn fed at market... $150.00 | Horse Labor cost, to Other feed at market.. 210.00 MINIS 2's Soy S60 bare be $510.00 Other upkeep expenses. 150.00 $510.00 $510.00 Corn Horse Labor......... $510.00 | Fed to horses at mar- Other expenses of pro- ket price.......... $150.00 duction, harvesting, Sold or fed to other an- Go dors cacoree ees 800.00 imals at market price 1,600.00 Net gain for year..... 440.00 $1,750.00 $1,750.00 398 APPENDIX ILLUSTRATION 74—(Continued) CASE II (a) Corn, Hay anp Wueat RAISED ON THE FARM Corn AND Hay Cuarcep To Horses at Cost Prick; WHEAT Nor Fep, But Sop Horses Corn fed at cost ...... $100.00 | Horse Labor cost, to Hay fed at Cost...... 100.00 NS as $153 .33 Mill feed at market... 110.00 ON Ee 153 .33 Other upkeep expenses. 150.00 \ 8 aS Pe i 153.34 $460 .00 $460.00 —— Corn Horse Labor......... $153.33 | Fed to horses at cost $100.00 ‘Other expenses of pro- | Sold or fed to other an- duction, harvesting, imals at market price 470.00 | GE 250 .00 Net gain for year..... 166.67 $570.00 $570.00. Hay Horse Labor......... $153.33 | Fed to horses at cost.. $100.00 Other expenses of pro- Sold or fed to other an- duction, harvesting, imals at market price 470.00 eee 250.00 Net gain for year..... 166 .67 $570.00 $570.00 Wheat Horse Labor......... $153.34 | Sold at market price.. $620.00 Other expenses of pro- duction, harvesting, OUR oceans oak 250.00 Net Gain for the year. 216.66 $620.00 $620.00 APPENDIX 399 ILLUSTRATION 74—(Continued) CASE II (b) Corn, Hay anp WuHeEat RAISED ON THE FARM Corn AND Hay CHarcep To Horses at Market Prick; WHEAT Not Fep, But Soip Horses Corn fed at market price $150.00 | Horse Labor cost to Hay fed at market price 150.00 ROME So ci eek owas aes $186 .67 Mill feed at market price 110.00 | a aa le ea Nee 186 .67 Other upkeep expenses. 150.00 \ he Iria ae es 186.66 $560 .00 $560.00 Corn Horse Labor......... $186.67 | Fed to horses at mar- Other expenses of pro- ROG. DPICE 2 a. sii e.ceis $150.00 duction, harvesting, Sold or fed to other an- QU. ccitiles doa cactus 250.00 imals at market price 470.00 Net Gain for year..... 183 .33 | $620.00 $620.00 Hay Horse Labor ......... $186.67 | Fed to horses at mar- Other expenses of pro- ket price.......... . $150.00 duction, harvesting, Sold or fed to other an- Pe Foc 250 .00 imals at market price 470.00 Net gain for year..... 183.33 $620 . 00 $620 .00 Wheat Horse Labor. ........ $186.66 | Sold at market price.. $620.00 Other expenses of pro- duction, harvesting, COC se iis:) ) Pr) ao int v= lae ow Ae - et vi ; ? cP ee | . { ; a a ‘ ht = . t a t “eu “ee INDEX Abbreviated entries, 97 Accounting, bibliography, 411 defined, 1 guide to management, 371 reasons for, 3 Accounts, analysis and illustra- tion of, 20, 21, 23, 40, 41, 44, 49, 67, 91, 95, 100, 136, 180, 181, 193, 250, 251, 269, 270, 306, 331, 347, 351, 352, 367 classification of, 54. (See ‘‘on account. ’’) closing, 48, 57 defined, 18 in balance, 30, 50, 54 no subtractions in, 26 Accounts Receivable, 17 Account Sales, 176 Acres farmed, per man, 376 per horse, 377 Addition, checking for errors, 103 usual errors of, 105 Advertising expense, 167 Agencies, 268, 312, 319 Agricultural economics, bibliog- © raphy, 413 Allen, illustrative problem, 33 Analysis of Ledger accounts, 349 Analytical statements, conclu- sions from, 358 Anderson, Frank, illustrative problem, 202 Appendix, 385 Appreciation of land, 122 Articles of co-partnership, 186, 188, 204 Assessments against land, 121 Asset, 3 Attorney’s fees, 121 Auction sales, 176, 201 Average acres worked, statistics of, 377 Balance, brought down, 53 debit and credit, 30 defined, 26, 30 ‘method of transferring, 48 Balance Sheet, 3 Balancing an account, 65 Bank, reconciliation statement, 108, 110. (See also ‘‘sav- ings bank.’’) Bank charges, 166 Bedding, 314, 321 Beef cattle, 126 Bees, 184 Bibliography, 411 Binder twine, 214 Black-illustrative 10 problem, 9, 417 418 Block, Eddie, illustrative prob- lem, 59 Bly, Edward, illustrative prob- lem, 78 Board, average cost of, 131, 132 debit to Labor account, 132 Bookkeeping, abbreviations, 15 defined, 1 doctor’s 130 Books of account, object of, 8 purpose, 1 rulings, 1 Books of Original Entry, express debits and credits, 85 postings from, 85 reasons for, 83 Borrowing money (See ‘‘notes’’ and ‘‘Farm Loan Act’’) Buildings, depreciation, 152, 155, 279, 281 account entries, 121, 123 interest on investment, 274 expense account, 155, 167, 270, 279, 281 Butter fat, 160. milk) By-products, 257, 314, 319 (See also, Capital, accounting definition, 17 as a liability, 24 as net worth, 4 economic definition, 17 interest on partner’s, 186 proprietor’s, 18 Capital account, after closing entries, 51, 53 defined, 18 entries, 27 increases and decreases in, 29 loss and gain account closed into, 51, 284 INDEX Capital account, partnership, 185 reason for, 38 subdivided, nominal accounts, 43 Capital expenditures, 122 Capital income, 271 Cash account, verifying balance, 63 Cash balance, agree with bank, 108 Cash Book, alone, 95 as a journal, 97 entries in, 93, 94 posting procedure, 96 reconciliation with bank, 110 totals posted, 97 transactions affecting, 93 Cash Journal, columnar arrange- ment, 99, 102 defined, 97 equality of debit and credit, 98 posting procedure, 101 special columns, 98 use of sundry columns, 98, 101 Cash rent, 194, 258 Cattle account, entries 126 illustrated, 148 Change of wealth statement, 196 Changes in capital, L & G state- ment, 31, 32 Checking account, 108 Check stubs, errors on, 110, 111 Checks outstanding, 110 Claim against railroad, 166 Clearing land, cost of, 121 Closing, before or after state- ments, 76 process under cost system, 278 cannot be used ae = INDEX / Closing, separate steps, 279 Closing entries, balances remain- ing after, 52 cost accounting, 280 defined, 48, 57 equality of debits and credits, 50 field accounts, 247, 248 Loss & Gain to Capital, 51 partnership, 186 posted from journal, 156 rules for, 49, 50 Columnar books journal’’) Commercial fertilizer, 135 Commissions, 268, 312, 319 Comparative inventory record, 140, 142 Comparative statements, 196 Comparative tables, use of, 348, 357, 360 Compound entries, 93 Consignee and _ consignor, 176 Consignments, entries, 176 title to goods, 176 Constructive criticism, 223 Contracts, crops sold under, 168, 180, 200 in writing, 181 Conversion table, feed, 407, 408 wages, 404 405 Co-partnership articles, 188 Corn, profit in feeding, 392 Corn account, 148 fodder, 253 illustrated, 249, 251 inventory, 147 silage credited, 252, 311 stalks fed, 257 planting, 310 (See ‘‘cash 175, 419 Corporation stock, 200 Correcting errors, 107 Cost accounting, benefits trans- ferred, 223 defined, 218 departmental system, 386 general accounting compared, 219 labor entries, 228 purpose of, 221, 222 Cost data, analysis and compari- son of, 348, 379 collection of, 225 interpretation of, 223, 335 statistical system, 222 use of, 221 Cost of harvesting, 247, 353 Cost per ton, silage, 253 Cost of production, effect of selling price on, 261 feed prices and the, 391 interest an element of, 268 items included in, 246, 247, 353, 362, 366 rent an element of, 258 Cost of silage, 251, 252 Cost system, closing process, 280 defined, 218 modifications, 284 purpose, 222 Cost records, use, 335 Costs, assembling at year end, 279 effect of prices on, 391 elements of, 220 meaning of, 342 Credit balance, Liability or In- come, 74 Credit, defined, 18 Crops, production and costs, 360 inventories, 136, 145, 147 420 Crops, sold under contract, 168, 180, 200 selling price from crib, 250 selling price from field, 249 Crop accounts, analysis of, 349, 353 entries, 129, 311 illustrated, 46, 148, 156, 251, 352 inventories, 136, 145, 147 method of keeping, 249, 282, 317 seed, 254 Crop residues, 257 Crop rotation on farm plot, 245 Cross posting from cash book, 97 Dairy cattle account, 126, 127 Dairy products, 127 Death of livestock, 138, 179, 180 Debit balance, resource or ex- pense, 74 Debits, defined, 18 Debits and Credits, equality of, 24, 62 reasoning out, 27 Debts, considered property, 3 Deductions, not made in ac- counts, 26 Deferred charges, application of, 282, 317 defined, 266 manure, 267 Departmental cost accounting, 386 Depreciation, buildings, 155 deducted in inventory, 146 defined, 151 entry in accounts, 152, 164 INDEX not offset by appreciation, 123 reserve for, 155 table of, 154 theory of, 155 substitute for inventory, 151 Diminishing value, depreciation, 152 Distribution of partnership losses and gains, 186 Division of labor in account books, 84 Donation, exchange labor as, 234 Double entry, defined, 23, 59, 87 Drawing accounts, partner’s, 187, 204 Dredging, charges for, 121 Efficiency of labor and horse labor, 373, 376 Eggs, accounting treatment, 128 entries for, 255 price to household, 400 sold from farm, 209 Elements of costs, 220 Entry, defined, 19 eash book illustrated, 94 eash journal illustrated, 99 journal illustrated, 87 Equipment, depreciation, 152, 153, 154, 279, 281 entries for, 128 expense, inventory, 150 expense in cost accounting, 262, 263, 270, 279, 281, 282, 316 interest on investment in, 276 inventory, 143, 146, 151 INDEX Equipment, proportionate to horse labor, 262 Errors, check stubs, 110 correction of, 107 in transactions, 80 not detected by trial balance, 63 opportunities for, 103 prevention of, 84, 103 rules for locating, 105 types of, 104 unavoidable, 103 Exchange labor, 234, 318 balance not a resource, 234 horse, 239 journal entries for, 239 recording, 235, 236, 237 Expenses direct and indirect, 278 (See also General Expense) Extra labor, 210, 312 Extraordinary losses, sales, 176, 201 death of livestock, 138, 179, 180 effect on cost of production, 344 fire losses, 178, 202 treatment of in accounting, 267 account, 233, auction Fair exhibits, 175 Family’s labor, 131, 133, 162, 237, 279, 280, 313 Farm accounts, purpose, 336 Farm and individual income statement, 197, 198, 199 Farm investments, rate of re- turn, 401 Farm Loan Act, 325, 328 Farm plot, 245, 308 421 Farm products, value to house- hold, 132, 254, 400 Fay, L. E., illustrative problem, 207, 287, 345 Feed, account, 135 arbitrary distribution of, 285 calculations for, 406 entry in cost system, 243, 292, 312 inventory prices, 388 pasturage, 256 prices of, consumed, 389 seed used for, 254 silage, 251 stubble and stalks, 257 Feed records, illustrated, 241, 242 journal entries from, 243 purpose of, 240 Feeding tests, 240, 285 Fencing, charges for, 121, 122 Fertilizer, account, 135 a deferred charge, 266, 282, 317 manure, 267 Fictitious profits, 386 Field accounts, analysed and compared, 364 closing, 248, 282, 317 entries in, 246 illustrated, 250, 351 inventory, 147, 317 methods of keeping, 247 reasons for, 245 seed charged to, 254 Finance and Credit, bibliography, 413 Financial advantages, 380, 381 . Financial condition, shown by ‘statements, 8 judging, * 422 INDEX Financial progress, shown by | Hives, inventory of, 184 statements, 8 Hogs, corn marketed ha, 392 Financial Statements, analysis | Honey, 184 of, 7 Horse, account, 125, 259 defined, 8 credited with horse labor 232, prepared from trial balance, 241, 265 (See also ‘*‘Live- 72 stock’’) relation to trial balance, 74 Financial worth, defined, 4 Fire losses, 178, 202 Fiscal year, 33, 140 Flat rate, horse labor, 233 man labor, 232 Fodder, 253 Folio, defined, 103 Freight on consignments, 176 Furnishings, household, 131, 309 inventory, 388 Gain, not necessarily in cash, 33 Garden account, 255, 313 Gardening, market, 180 General expense account, closing under general system, 44, 45, 50 closing under cost system, 280, 282, 283, 318 illustrated, 41, 45 inventory, 149 tile replaced, 161, 164 Grain accounts (See ‘‘erop ac- counts’’) Grain, inventory prices, 388 Graphical methods, 373 Hail losses, 178 Half-interest in equipment, 215 Harness (See ‘‘ Equipment’’) also p. 208 Harvesting costs, 247, 249, 353 Hired man’s account, 118, 166 Horse labor, average acres per horse, 377 average cost per horse, 232 effect of feed prices on, 394 journal entries for, 232, 316 records of, 232 Horses, for work, 265 for sale, 265 traded 201 Hourly cost, horse labor, 232, 316 labor, 231, 315 Household, and the inventiey record, 159 account in farm ledger, 130, 131 charged for interest, 326 charged for rent, 259, 310 eost of board, 131 ; effect on farmer’s profit, 197 family labor, 131 furnishings inventory, 388 income from garden, 255, 313 milk and eggs, 209, 255, 320 price of farm products used, 400 value of farm products used, 131, 208 Idle time, reduction of, 373 Illustrative problems ‘Problems’ ’) Implements (See ‘‘ Equipment’’) (See INDEX 423 Improvements to land, 121, 122 Income, as a farmer, 271, 346 equivalent expressions, 39, 42 from capital, 271, 348 from labor, 347 from management, 348 | statistics of, 338-342 Individuals’ profit, 197, 272, 273, ' 346 Inherited buildings, 123 Inherited land, 121, 123 Insurance, adjustment of loss, 178 paid in advance, 266 premium paid, 34 Interdepartmental 385 transactions, Interest, debits and credits, 27, 41, 45, 78, 79, 80, 160, 212, 299, 319 buildings, 274 deducted from note discounted, 119 distinguished from rent, 275 element of cost, 268 equipment, 262, 276 field account entries, 246 land, 273 livestock, 276 on investment, 270, 279, 281, 298, 300, 326 on mortgaged property, 275 orchards, 182 partner’s capital, 186 pasture, 257 rate of, 385, 401 silo, 253 working capital, 277 Interpretation, importance of, 335 of Loss and Gain account, 346 Inventories, crop, 136, 145, 147 defined, 136 depreciation a substitute for, 151 effect on loss or gain, 135 entries for, 136, 141 household, 388 livestock, 138, 147 miscellaneous supplies, 145, 149 pricing, 387 recording, 139, 202 taking, 139 Inventory record illustrated, 142, 143, 144, 145 relation to accounts, 140, 141 under share rental, 193 Investment, 23, 29, 35 Jones, John, illustrative problem, 165 Journal, compound entry in, 93 closing entries, 107, 108, 156 entries illustrated, 87, 89 posting procedure, 90 posting references, 88 sole book of original entry, 86 Junk, 178 Labor, arbitrary distribution of, 284, 285 average acre per man, 376 contract crops, 180 cost includes board, 132 daily report of, 228 efficiency, 376 entries for, 132 extra, 210, 312 family, 133, 162, 313 handling, 373 statistics, 374, 377, 378 424 Labor, typical entries, 133 under partnership, 188, 189 Labor cost, hourly, 231 Labor hours, statistics of, 374, 377, 378 Labor income, 271 statistics of, 337 Labor of proprietor, 131 Labor records, horse, 232, 263, 296 illustrated, 226, 227, 236, 237 journal entries from, 228, 239 U. 8S. Dept. of Agric., 228, 229 use of, 225, 294 Land, account, 121 appreciation of, 122 fluctuating value of, 122 interest on investment, 273 sale of, 122 Landlord, share rental, 192, 259, 260, 288, 310 statistics of income, 336, 341 tenant and, 191 Law, bibliography, 415 partnership, 186, 188 Lease, entry for, 258 rental provisions, 258, 261 share rental, 191 Ledger (See also ‘‘ Accounts’’) can be used alone, 14, 83 closing, 48 contains all essential data, 83 defined, 18 importance, 12 posting references, 88 ruling, 19 used with other books, 83 Liabilities (See also ‘‘State- ments’’) credit balances, 30 INDEX Liabilities defined, 3 of partners’, 188 Liberty bonds, 302 Livestock (See also ‘‘Swine,’’ **Cattle,’’ ** Horses,’’ ‘«Poultry’’ and ‘‘Sheep’’) analysis of preducts of, 370 comparative analysis of, 366 comparison of costs, 391 death of, 138, 179, 180 insurance on, 178, 179 interest on investment, 276 inventories, 138, 147 prices, 387 manure, 267 natural increases, 125, 138 price of feed, 389 silage fed to, 253 Loan on a note, 80 Long, A. E., illustrative problem, 113 Loss and Gain account, closing to capital account, 51 contents of, 51 illustrated, 47, 269, 270 reading a, 346 sale of land, 122 similarity to Loss and Gain Statement, 47, 57 summary of nominal accounts, 44, 47 Loss and Gain Statement, an- alysis of L & G account, 7, 76 explains changes in net worth, 7 relation to Statement of Re- sources and Liabilities, 76 taken from capital account, 32 Losses (See also ‘‘ Extraordi- nary Losses’’) INDEX 425 Losses, not always decrease of | Mortgage, interest, 275 cash, 32 Machinery (See ‘‘ Equipment’’) | Management, aided by account- ing, 371 policies, 363, 373, 379 Manager’s ability, 257, 348 Mansfield, Harry, illustrative. problem, 35 Manure, 2, 67 Map of farm (See Plot’’) Market gardening, 180 Market prices, use in cost ac- counting, 390 use in inventory, 387 Marketing and_ selling, graphy, 415 May, C. P., illustrative problems, 308, 319, 325, 381 Merchandise account, criticism, 124 entries, 124 subdivided, 124 Milk, entries for, 255 price to household, 400 skim, for young stock, 313 sold from the farm, 209, 320 Miller, W. L., illustrative prob- lems, 158, 161 ~ Mill-feed (See ‘‘Feed’’) Miscellaneous income account, 42, 46 commissions, 268 Miscellaneous supplies inventory, ‘¢ Farm biblio- 145, 149 Mixed accounts, commercial, 123 farm, 124 penis Modifications of cost systems, 284 note, nature of, 25 See also (‘‘ Notes’’) Natural increase of farm ani- mals, 125, 138 Negotiable instrument ** Notes’ *) Neighbors (See ‘‘Exchange of Labor Account’’) Net Resources, as capital of pro- prietor, 18 Net worth (See also ‘‘Capital’’) changes in, 8 defined, 4 New projects, cost of, 379 Nominal accounts, defined, 43, 54 transferred to L & G, 48 Normal cash rent, 260 Notes, entries, 119 payable entries, 24, 120, 169, 208 receivable, 163 receivable and payable dis- tinguished, 120 Numbers for fields, 245 Nursery stock purchases, 182 (See discounted, 119, On account, defined, 58 Opening entries, from inventory record, 141 partnership, 185 procedure, 24, 89 Operation of several farms, 194 Orchards, cost before bearing, 182 entries in account, 182 expense and income, 183 Organization and management, bibliography, 412 426 Other horses, 265 Outstanding checks, 109 Over and short, 63, 111 Paper profits, 386 Partner, liable for firm debts, 188 Partnership, agreement, clauses in, 188, 204 closing entries, 186 dissolution, 190 division of profits, 186 drawing accounts, 187, 204 interest on capital, 186 landlord and tenant, 191 legal difficulties, 188 opening entries, 185 salaries, 187 share rent under, 191 vs. single proprietorship, 184 Pass book, 109 Pasture, entries in account, 256 interest on investment, 274 woodland, 184 Pasture-day, defined, 257 Percentage, inventory by, 151 Permanent improvement to land, 121 Personal accounts, defined, 55 Personal property, class of, 17 Physical inventory, 139, 140 Planting (See ‘‘Corn’’) Plot of farm, 245, 308 Policies of management, 363, 371, 372 Posting, cash book, 96 cash journal, 101 defined, 85 journal, 90, 92 precaution against errors, 104 references to pages, 88 INDEX Poultry (See also **Tdvestock?”) account, 127 products, 128 Prices, determination of, 224 discussion of, 385 effect on profits, 386 feed consumed, 240 inventory, 387 products harvested, 248 products used in household, 400 silage, 252 vs. cost of production, 224 Problems, illustrative, Chapter I, 9 Chapter IT, 33 Chapter III, 56 Chapter IV, 77 Chapter V, 112 Chapter VI, 158 Chapter VII, 199 Chapter VIII, 286 Chapter IX, 286 Chapter X, 381 Production and costs, analysis of crops, 360 analysis of livestock, 369 bibliography, 414 Productive elements, 218 Products, inventory prices, 388 Profits, equivalent expressions, 32 fictitious, 386 individual’s, 197, 272, 273, 346 meaning of, 344 relation to manager’s ability, 460 Property, legal classes of, 17 resources, 3 rights to, 3 transfers between departments, 386 INDEX Proprietor, value of his labor, 131, 347, 348 Pruning orchards, 182 Questions (See ‘‘Review Ques- : tions’ ’) — Questions of policy, 371, 372 Railroad claim, 166 Rate of interest (See ‘‘Inter- est’’) Real accounts, defined, 56 Real property, 17 Reconciliation, check book and bank, 108 Records, feed, 240 horse labor, 232 inventory, 139, 142, 145 labor, 225, 231 Red ink entries, labor records, 236 Rent adjustment, 258 Rent, cash or share, 191, 258 distribution in accounts, 258, 288, 310 household, 130 notes given for, 208 pasture, 257 share, 191 vs. interest, 275 Replacements, furnishings, 389 Resources (See also ‘‘State- ments’’) . debit balances, 30, 73, 74 defined, 3 Returned purchase, 80 Revaluation, inventory by means of, 151 Review Questions, Chapter I, 12 Chapter II, 36 427 Review Questions, Chapter III, 60 Chapter IV, 81 Chapter V, 115 Chapter VI, 171 Chapter VII, 216 Chapter VIII, 243 Chapter IX, .332 Chapter X, 382 Risk of operations and owner- ship, 348, 403 Rodgers, Frank, illustrative prob- lems, 79, 112 Rotation of crops, effect on cost, 246, 366 plotted, 245 Ruling on account in balance, 54 Salaries, partners, 187 Salvage, 178, 202 Savings bank deposit, 209 interest, 212 Seed account, 254 Services’ between departments, 386 Several farms, operation of, 194 Share rent, 191, 258 inventory record and, 193 Sheep account (See also ‘‘Live- stock’’), 128 Shrinkage, grain, 362 silage, 253 ‘*Side lines,’’ 258 Silage, entries for, 251, 311 Silo, depreciation, 281, 329, 330 Sketch of farm, use of, 245, 308 Slaughtered swine, entries, 126, 131 Smith, illustrative problem, 11 Sowing seed, 310 “—— 428 Special columns, eash-journal, 98, 102 Statements, change of wealth, 196 . copied in ledger, 77 Farm and Individual Income, 197 Resource and Liability, after closing, 52 comparison, 6 defined, 3 from trial balance, 72 illustrated, 75 prepared from ledger ae- counts, 30 supplemented by Loss and : Gain Statement, 7, 76 Stock of corporation, 200 Straight line, depreciation, 152 Stubble for feed, 257 Student’s accounts, 59 Subscriptions to periodicals, 168 Subsidiary records, 225 Subtractions not made in ac- counts, 26 Supplies, in inventory record, 145, 149 inventory prices, 388 Swarm of bees, 184 Swine account, entries, 126 (See also ‘‘ Livestock’’) Taxes, real and personal, 200 special assessments, 121, 200 Temporary accounts, 43 Tenants, and landlord, 191 statistics of income, 339 Tiling, charges for, 121, 164 Time-sheet, U. 8. Dept. of Agric., 228, 229 161, INDEX Timothy seed, 167 Tools, 265 loaned, 140 Tornado losses, 178 Tractor account, 129 hours, entry for, 233 Trading account, 124 Transactions, analysis of, 23 defined, 16 double effect of, 16 equality of Dr. and Cr., 24 essentials of, 2 omission of, 63, 107 written record necessary, 2 Transplacement, defined, 106 Transposition, defined, 105 Trial Balance, before and after errors undetected by, 63 financial statements from, 64, 72, 77 illustrated, 71, 72, 73 not an absolute proof, 63 ‘fout of balance,’’ 62 preparing for statements, 73 procedure in taking, 65 purpose, 62 relation to statements, 74 when taken, 64 Uniform accounts, 194 Unit cost of production, 246 3 Units of work, 378 Unprofitable elements, 224 U. S. Dept. of Agric. daily labor record, 228, 229 ; Utensils, household, 130 INDEX Value, defined, 17 Verifying cash book balance, 108 Wages, average rate 231, 315 calculation of, 403 Warner, J. W., illustrative prob- lem 199 | Wear and tear, 151 Weld, illustrative problem, 10 per hour, 429 White, illustrative problem, 11 Work horses, 265 price of feed for, 394 Work units, 378 Working capital, 277 Woodland, 185 Woods, George, illustrative prob- lem, 33, 56, 57 Wool, 128 interest on, (3) on i : s . - = a “ a : 2 Py > . i- ’ er » "= é K r > * coal 7 ~ “ \ _ ’ ‘ ” Sew : . » P : nw z _ . “ - - ; ‘ 4 me i —* ‘ . “ . y « ~ : i A e , Se Eec G4 uae 7 ||] University of Toronto eT Library DO NOT REMOVE THE : CARD a : F FROM f E THIS = 3||| POCKET Z ° Acme Library Card Pocket < =| ae iaieny. pied | EE eS ee s~etecesers 2.52 me a = ee eee = pee em + eee + 9 8a ne eee eee ~e ——— =~ Sunebpen acer aewen ° onan meupesese a ee Oe See ene ee ee ee 8 ee " ED 6 a a eee ee - 2 OE FOS ee Ot OS OS a | Oe ESOP = ——. een aaes = SE EAE Pe nt RR 2 ee (NN ae ee es ee eee ne ee ae oe eeys —- ———— ———— ~_ ae te ——- ————— ss ———. -_—— Se ae ee wa es + ee ~