Chapter 3: Acquiring and Organizing Management Information
This chapter is talking about the purpose and use of records, farm business activities, basic
accounting terms, chart of accounts, basic of cash and accrual accounting, farm financial standards council
recommendations, and output from an accounting system. This information is important to learn since, in
order to succeed in business, a businessman must plan and manage his organization properly.
Purpose and Use of Records
1. Measure profit and assess financial condition
2. Provide Data for Business Analysis: a financial analysis of the business can provide information on the
results of past decisions, and this information can be useful when making current and future decisions.
3. Assist in Obtaining Credit: good records can greatly increase the odds of getting a loan approved and
receiving the full amount requested.
4. Measure the Profitability of Individual Enterprises: a record system can be designed that will show
revenue and expense not only for the entire business but also for each enterprise.
5. Assist in the Analysis of New Investments: the records from the past operation of the business can be
an excellent source of information to assist in analyzing the potential investment.
6. Prepare Income Tax Returns: in case of an IRS audit, good records are invaluable for proving and
documenting all income and expenses.
Farm Business Activities
1. Production Activities: accounting transactions for production activities are those related to the
production of crops and livestock.
2. Investment Activities: investment activities are related to the purchase, depreciation, and sale of long-
lived assets.
3. Financing Activities: financing activities are all transactions related to borrowing money and paying
interest and principal on debt of all kinds.
Basic Accounting Terms
There are several basic accounting terms: account payable, account receivable, accrued expense, asset,
credit, debit, expense, inventory, liability, net farm income, owner equity, prepaid expense, profit, and
revenue.
Options in Choosing an Accounting System
- Accounting Period: a period of time used to summarize revenue and expenses and estimate profit. It
can be either a calendar year or a fiscal year.
- Farm Financial Standards Council Recommendations: acrual-based system recommended, but cash
system accepted, with end-of-year adjustments.
Chart of Accounts
Lists and organizes all accounts used by the accounting system. It includes the broad categories of assets,
liabilities, equity, revenue, and expenses, each with subaccounts and perhaps other subaccounts under
those. The chart of accounts includes: cash versus accrual accounting, single versus double entry, whole
farm versus enterprise accounting, and basic versus complete system.
Output from an Accounting System
- Balance Sheet: report that shows the financial condition of the farm at a point in time.
- Income Statement: report of revenue and expenses over the accounting period, and other reports.
The value, purpose, and application of records as a management tool were explored in this chapter.
Records give the data necessary to assess how well a company is doing. They also give you the data you
need to make good judgments in the future. Production, investment, and finance operations must all be
handled by any accounting system. When selecting an accounting system, the intended output must be
considered.
This chapter is talking about the purpose and use of records, farm business activities, basic
accounting terms, chart of accounts, basic of cash and accrual accounting, farm financial standards council
recommendations, and output from an accounting system. This information is important to learn since, in
order to succeed in business, a businessman must plan and manage his organization properly.
Purpose and Use of Records
1. Measure profit and assess financial condition
2. Provide Data for Business Analysis: a financial analysis of the business can provide information on the
results of past decisions, and this information can be useful when making current and future decisions.
3. Assist in Obtaining Credit: good records can greatly increase the odds of getting a loan approved and
receiving the full amount requested.
4. Measure the Profitability of Individual Enterprises: a record system can be designed that will show
revenue and expense not only for the entire business but also for each enterprise.
5. Assist in the Analysis of New Investments: the records from the past operation of the business can be
an excellent source of information to assist in analyzing the potential investment.
6. Prepare Income Tax Returns: in case of an IRS audit, good records are invaluable for proving and
documenting all income and expenses.
Farm Business Activities
1. Production Activities: accounting transactions for production activities are those related to the
production of crops and livestock.
2. Investment Activities: investment activities are related to the purchase, depreciation, and sale of long-
lived assets.
3. Financing Activities: financing activities are all transactions related to borrowing money and paying
interest and principal on debt of all kinds.
Basic Accounting Terms
There are several basic accounting terms: account payable, account receivable, accrued expense, asset,
credit, debit, expense, inventory, liability, net farm income, owner equity, prepaid expense, profit, and
revenue.
Options in Choosing an Accounting System
- Accounting Period: a period of time used to summarize revenue and expenses and estimate profit. It
can be either a calendar year or a fiscal year.
- Farm Financial Standards Council Recommendations: acrual-based system recommended, but cash
system accepted, with end-of-year adjustments.
Chart of Accounts
Lists and organizes all accounts used by the accounting system. It includes the broad categories of assets,
liabilities, equity, revenue, and expenses, each with subaccounts and perhaps other subaccounts under
those. The chart of accounts includes: cash versus accrual accounting, single versus double entry, whole
farm versus enterprise accounting, and basic versus complete system.
Output from an Accounting System
- Balance Sheet: report that shows the financial condition of the farm at a point in time.
- Income Statement: report of revenue and expenses over the accounting period, and other reports.
The value, purpose, and application of records as a management tool were explored in this chapter.
Records give the data necessary to assess how well a company is doing. They also give you the data you
need to make good judgments in the future. Production, investment, and finance operations must all be
handled by any accounting system. When selecting an accounting system, the intended output must be
considered.
