MODULE 1.5

• Bookkeeping

  • A systematic recording of the financial transactions of an enterprise.
• Bookkeeping

  1. Formal
  2. Informal
• Formal Bookkeeping

  1. Single Entry
  2. Double Entry
• Formal Bookkeeping (Double Entry)

  1. Cash Accounting
  2. Accrual Accounting
• Informal Bookkeeping System

  • convenient and may serve the purpose as far as the farmer is concerned.
  • But:
  • The records of financial importance are kept together with other family events or purely personal matters.
  • Some items of financial importance may not be recorded.
  • Hence, this system is not reliable for purposes of giving an accurate picture of the farm business.
  • E.g. writing of transactions on walls or doors of the house, calendars, or small notebook.
• Basic Accounting Terms

  1. Cash
  2. Notes Receivable
  3. Accounts Receivable
  4. Merchandise Inventory
  5. Prepaid Expenses
  6. Marketable Securities
  7. Notes Payable
  8. Accounts Payable
  9. Accrued Liabilities
  10. Unearned Income
  11. Mortgage Payable
  12. Bonds Payable
  13. Non-cash Income
  14. Cash Expense
  15. Non-Cash Expense
• Cash

  • Any medium of exchange that a bank will accept at face value on deposit such as currency, checks, bank drafts or money orders.
  • They may be:

  • Cash-on-hand

  • Cash-in-bank
• Notes Receivable

  • Represent money owed to the business because of loans granted or services rendered with a written promissory note received from a debtor which can be readily converted into cash.
• Accounts Receivable

  • A claim against a certain person or business that usually arises from a sale of merchandise or account, not evidenced by a formal written promise to pay.
• Merchandise Inventory

  • Consists of goods purchased or produced for sale such as rice stocks, livestock, and livestock products such as milk, meat, poultry and poultry products like eggs that are intended for sale.
• Prepaid Expenses

  • Anything paid in advance which will be consumed in the near future in the normal operations of the business such as supplies on hand, or insurance paid in advance that will become an expense at the passage of time.
  • Other examples of prepaid expenses are expenses on livestock feeds, seeds, fertilizer, and farm chemicals to be used in the near future.
• Marketable Securities

  • Debt and equity securities
• Notes Payable

  • “short-term debt”
  • Promissory notes given by the business to a creditor from whom it has purchased merchandise, or to a bank from which it borrows money.
  • the counterpart of notes receivable
• Accounts Payable

  • Financial obligation usually arising from a purchase of merchandise on account for which no notes has been given.
  • the counterpart of accounts receivable
• Accrued Liabilities

  • Expenses that are incurred / amounts that are owned but not yet due/paid such as salaries of employees, taxes, and interest payments on debts.
• Unearned Income

  • Collections / income received in advance for which goods or services will be given in future periods, like cash advances received by farmers from dealers.
• Mortgage Payable

  • represents a debt owned by a business for which the creditor possesses a secured claim through a mortgage on an asset.
• Bonds Payable

  • Long-term obligations of a corporation evidenced by formal certificates known as bonds. Bonds may or may not be secured by corporate assets.
• Non-cash Income

  • Form of income wherein the farmer does not receive any cash payment.
  • Includes the increase in the inventory of crops, market livestock or raised breeding stock, and the value of farm products consumed at home, given away, or used as payment in kind for the services done in the farm are examples of non-cash income.
  • At the time of inventory, standing crops should be treated as an asset and not as a revenue item.
• Cash Expense

  • “out-of-pocket” costs
  • includes cash payments for inputs used in the business operations (e.g., fertilizer expense, feed expense, purchase of market livestock, etc.), hired labor cost, fuel and oil expenses, repairs and maintenance expense, land tax, interest on borrowed capital, and crop/livestock insurance expense.
• Non-Cash Expense

  • include inputs used in the business operations wherein no direct cash outlay is involved.
  • include depreciation, value of unpaid family labor, payment in kind for services, and decrease in inventory of crops, market livestock and raised breeding stock.
• Formal Bookkeeping – Single Entry

  • Refers to the entry of transactions in only one account.
  • Organized in multiple columns
  • Instead of a page for each specific source of income and expense, parallel columns are provided for various expense and income items except that receipts are grouped together and separate from expenses.
• Formal Bookkeeping – Double Entry

  • Provides a more complete method of keeping track of financial transactions
  • All the financial transactions of an enterprise are recorded in a manner to show the effect of each on the assets, the liabilities, the owner’s equity, the revenue items, and the expense elements
  • Recognizes that for each transaction, there is both a source and destination, hence each transaction is recorded twice to reflect this fact
• ASSETS - What the farm business OWNS
• LIABILITIES - what the farm business OWES to outsiders
• OWNER’S EQUITY - what the farm business OWES to the owner
• Double Entry Bookkeeping System – Cash Accounting

  • Records transactions only when cash is either received or expended.
  • The accounting period when the actual transaction was made (e.g., sale of product, purchase of assets, and use of inputs) is NOT recognized.
• Double Entry Bookkeeping System – Accrual Accounting

  • Involves a more detailed treatment of transactions, in such a way as to maintain the balance in the fundamental accounting equation. Transactions are recorded in periods when these are specifically made.
  • Revenues are recognized when earned regardless of when received and expenses are recognized when incurred regardless of when paid.
  • Matching principle: Costs and expenses incurred in earning revenue should be reported in the same period.
• Matching principle: Costs and expenses incurred in

  earning revenue should be reported in the same

  period.
• Formal Bookkeeping System: Single-entry bookkeeping and Double-entry bookkeeping