Page 16 - Account for Ag - 2019

1-8 Accounting for Agriculture CH 1]

property rights. These property rights have value. If an orchard is purchased for $100,000, the buyer acquires the
orchard and its subsequent bundle of rights. These bundle of rights include possession, use, and exchange. It has
also been pointed out that accounting deals with property and rights to property. For every business enterprise
the sum of the properties owned must be equal to the sum of the rights to the properties.
The properties owned by a business are called ASSETS. The right or interest of the proprietor in the assets
of the business is called PROPRIETORSHIP; CAPITAL, EQUITY, OWNER EQUITY, and NET WORTH
(these being that portion of the assets not encumbered by debt.) If there are no claims (liabilities) against the
assets of a business other than that of the proprietor, the relationship of the assets to the claim of the proprietor is
expressed by the following equation:

ASSETS = PROPRIETORSHIP (Value of Rights)

In the previous orchard purchase of $100,000 the formula numerically expressed is:

Assets (Orchard Value = Proprietorship (Value of Rights
$100,000 = $100,000

The idea in the foregoing equation is simple, but from it grows the fundamental accounting equation -- the
equation on which all double-entry accounting is based.
As an additional example, assume that John Newell decides to engage in the business of operating an
agricultural supply store. He begins operations by depositing $60,000 cash in a bank account in the name of the
business, Newell's Feed and Supply. His proprietorship in Assets and his Equity in Newell's Feed and Supply
are shown by the following equation and transaction:

Proprietorship
Assets = Equity
Transaction (1) Cash = John Newell, Capital
$60,000 = $60,000

The integrity of the accounting formula is maintained. It should be noted that the equation applies only to
the business enterprise. Newell may own his home, stocks in other companies, and other assets not connected
with the business. But he now has $60,000 of cash in the business and his proprietorship in the business is
$60,000.
The effect of various additional transactions on the equation will be shown in the next chapter.

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