Agriculture Reference
In-Depth Information
Liabilities (aa)
Liabilities
consist of money that the business owes to “outsiders” (other than capital invested
by the owners). Liabilities are claims against the business's assets, but they may not be
claims against any specifi c asset, except for some mortgages and equipment liens. This
means that unless a creditor holds a lien or mortgage (legal claim) against a specifi c fertilizer
truck, spreader, or parcel of land, that creditor has no claims against individual assets; his or
her only claim is against a specifi c dollar portion of the total value of the company's assets.
Essentially, liabilities are divided into two classes: current liabilities and long-term liabilities.
Current liabilities (bb)
Current liabilities
describe those outsiders' claims against the business that will fall due
within one normal operating cycle, usually one year. Some of the more important current
liabilities entered on the balance sheet are the following:
Accounts payable (cc)
:
Accounts payable
represent the amount that BF&G owes to ven-
dors, wholesalers, and other suppliers from whom the business has bought items on
account. This category also includes any items of inventory, supplies, or capital equip-
ment that have been purchased on credit and for which payment is expected in less than
1 year. For example, when BF&G purchases 100 tons of hog supplement from their
supplier on short-term credit at $270 per ton, accounts payable immediately increases
by $27,000. The total amount of accounts payable for BF&G on December 31 is
$800,000.
Notes payable (dd)
:
Notes payable
is sometimes labeled as short-term loans or liabilities.
This category represents those loans from individuals, banks, or other lending institu-
tions that fall due within a year. Also included in this category is the specifi c portion of
any long-term debt that will come due within a year.
In highly seasonal agribusinesses, short-term loans are a very important part of fi nancial
management (see
Chapter 11
)
. Cash needs intensify during the peak season, when the
agribusiness must pay for increased inventory and for fi nancing accounts receivable.
This situation requires careful cash management. BF&G shows $1,000,000 in
short-term credit as of December 31.
Accrued expenses (ee)
: The
accrued expenses
account represents the aggregation of several
individual accounts such as wages payable and taxes payable. Each may be reported
separately or one account may include all of these obligations. They include those obli-
gations,
accruals
, that the business has incurred for which there has been no formal bill
or invoice. An example of this would be accrued taxes. BF&G knows that the business
has the obligation to pay $5,000 in taxes, an amount that is accruing or accumulating
each day. The fact that the taxes do not have to be paid until a later date in the operating
year does not diminish the daily obligation. Another example of accrued expenses
would be BF&G's wages of $30,000. Although they are paid weekly or monthly, they
are being earned daily or even hourly, and they constitute a valid claim against
Brookstone's assets. An accurate balance sheet refl ects these individual obligations.
Advances (ff)
: Sometimes fi rms receive payment for goods in advance. BF&G shows a
$27,000 balance for this account. This means that the fi rm owes its customers $27,000
worth of product/services. A proper balance sheet will illustrate the payments from
customers as advances or deferred income.
