www.ebbemunk.dk Bookkeeping and Farm Economics

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Chapter 4: The Managerial Accounts

The managerial account is meant for the use of the farmer. It helps him manage the farm. You calculate the Managerial Accounts by combining the cash turnover, balance at beginning, and balance at end.

An Example with one Account

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This Profit and Loss Account includes all kinds of results. In the following example we will divide the account.

An Example with Four Accounts

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By dividing the profit and loss account in four accounts as shown, you achieve a more usable approach. To show how the amounts are moved, we use three sums:

• The Sum of Business Surplus
• The Sum of Income
• The Sum of Private Consumption

The Business Account

The Business Account shows, what the farmer earns in his primary business. The Business Account contains all business receipts and expenditures, in cash as well as non-cash.

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The Credit Column:

• Cash receipts like sold grain. This information comes from the Cash Book Account.

Increase in livestock value. This is calculated using the information from the balances at beginning and at end. If the result is a decrease, the figure should be shown in the Debit Column. Changes in business stocks are treated in the same way.

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The Debit Column:

• Cash expenditures like cost for bought animals, from the Cash Book Account.
• Depreciation is calculated as the difference between estimated value of assets at beginning and at end, e.g. using information from the balances at beginning and at end.
• Business Surplus: This is the result of the Business Account calculations.

The Income Account

The Income Account calculates the farmer's total income from different businesses, paid interest, etc.

The Credit Column^­

• Received interest from the Cash Book
• The Business Surplus is moved from the Business Account Debit Column to the Income Account Credit Column
• Surplus from other businesses from the Cash Book, etc.
• Wages earned

The Debit Column:

• Paid Interest on credits, paid land rent, etc.
• Loss on business, if any                 
• Income: This is the result of the Income Account Calculations

The Private Account

The Private Account calculates the private consumption.

The Credit Column contains Private Consumption, which is the result of the private account calculation. The Debit Column contains different private costs.

The Profit and Loss Account

The Profit and Loss Account collects all of the formerly mentioned movements. It offers a calculation of the Net Capital at end. If the figure calculated this way is identical with the former, the accounts are connected correctly.

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The Credit side contains all entries, that will increase Net Capital at end:

• Net Capital at beginning from the Balance at beginning
• Depreciation of Buildings is added here, if the entered values of buildings are lowered with this amount. Otherwise the Profit and Loss account will not balance.
• Money received from state, dotations, gifts from family -- all costs, that are not part of ordinary income
• Income from the Income Account

The Debit side contains all entries, that will diminish Net Capital at end:

• Paid Income Tax, from Cash Book
• Investments in Buildings are supposed not to be added in the Net Capital at end. That is why it is subtracted here.
• Private Consumption comes from the Private Account

Net Capital at end: This is the end result of the Profit and Loss Account Calculations

Improving the Quality of the Accounts

Reliability: When you at making up the accounts, you should do it as precisely as it is practically possible. When you know precisely how the result was in each period, you have better possibilities of correcting errors and make changes in composition of the production.

Correct Stocks: If you buy seed in autumn for next year's harvest, this year's result will show a too bad result, and next year's result will show a too good result. Such a cost ought to be corrected by entering it in the balance of end of this year. Equally, harvested grain ought to be entered in the accounts of the harvest year, regardless of whether sold, used for fodder, or in stock at end of the year. Only if the harvested grain somehow later is lost, you should not enter it into the accounts.

Continuous production: In animal production the production is mostly continuous. What is the value of that part of the year's production, that is not finished yet? The production value of the half-feedened calf or pig should be shown in the accounts as well as of calves and pigs sold.

Changes in price level: What if price level changes throughout the year? There will be a difference between balance at beginning and balance at end, not because you have more pigs in the stable, but only because price level went up. In reality, you did not earn the money, so there is a reason for correction. One way of doing this is to use an average-of-the-year price per pig for calculations both at beginning and at end.

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In this example, the correct change in livestock value is 0. When price level goes up, the farmer is not earning as much as the uncorrected calculation shows! The problem in using this method is, that you must decide what is the appropriate price, and to decide the degree of details.

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