Agriculture Reference
In-Depth Information
much more standardized in terms of criteria (i.e., profi tability, liquidity, and solvency) and
measures (i.e., rates of return on assets and equity, solvency ratios, liquidity measures, etc.).
The reporting of this information must be in accordance with generally accepted accounting
principles and practices.
The accounting process
The record-keeping process derives largely from the original documents of the organization.
These documents include such things as sales slips, receiving tickets, checks, invoices,
employee time-cards, and bills. One could say that such original documents are the building
blocks for the entire record-keeping system.
If we look closely at Chuck Altman's fertilizer business, we will see that each day the
fi rm incurs more expenses and earns more revenue. These day-to-day transactions are
recorded in a book or computer fi le called the journal. The journal is also referred to as the
book of original entry for the business. Here, all the transactions of the business are recorded
in chronological order. The journal, then, provides a running account of the day-to-day
transactions or activities of the business. In a small business there may be only one book,
computer fi le, or general journal in which all the transactions of the business are recorded.
As a business such as Chuck Altman's grows larger in size, it is necessary to have several
specialized journals or computer fi les for particular areas of the business to record such
separate categories as sales, purchases, and available cash. While the journal records the
transactions or activities of the business chronologically, it does not put them into any mean-
ingful form by which the manager can interpret or use the information presented. This comes
from fi nancial statements that are prepared using the information recorded in the journal.
Business information must be organized
In looking at Chuck Altman's fertilizer business, it is apparent that he should have a record
of its property or assets. Such a fi nancial statement is called a
balance sheet
. The balance
sheet shows the fi nancial makeup and condition of a business at a specifi c time. It lists what
the business owns, what it owes, and what the owners have invested in the business. It shows
a balance between assets and claims against those assets.
Assets
are those things of
value that are controlled by the business. Those who are interested in a particular agribusi-
ness require such information as the amount of available cash, the amount of money that
customers owe to the business, the amount of inventory or merchandise available, and the
resources needed to carry on business activities, including buildings, land, offi ce and sales
space, and equipment.
Those who are interested in the business are also concerned with the
liabilities
of that
business. Liabilities are the sums of money that have to be paid to creditors at specifi ed dates
in the future. To put it another way, liabilities represent the sums that are owed to people
outside the business. Thus, liabilities represent claims by “outsiders” against business assets.
In addition to information about assets and liabilities, the full fi nancial picture requires infor-
mation about the amount of money that the owners have invested in the business. This sum
is called
owner equity
or
net worth
.
Then, too, there is the need for records that detail revenue and expenses in such a way
that the manager may meaningfully measure the success of the business, in terms of profi t
or loss, for decision-making purposes and various public entities for tax purposes. These
records are used to organize the information into ledger accounts for each source of revenue
