Page 25 - Account for Ag - 2019

CH 2] Accounting Equation 2-1

CHAPTER TWO: THE ACCOUNTING EQUATION
AND THE AGRICULTURAL BUSINESS UNIT

THE AGRICULTURAL BUSINESS UNIT

Every business concern, whether owned by a single individual or by a group of individuals, is a business unit.
This is also true of the agricultural firm and the family farm. However, besides being a business unit, the
agricultural firm may also be the place where the owner makes his home. This fact brings a complication into
agricultural accounting and records, since the personal items must be kept separate from those of the farm business
unit.
From the standpoint of bookkeeping, the agricultural firm is a separate entity, separate from its single or 2
several proprietors. It owns the assets, owes the debts, and is responsible to the owner for his equity in the
business. The first requirement of any adequate set of records is the separation of firm business activities and items
from personal activities and items. For good management, records should show the net profit or loss of the
business, as well as the owners contributions to and withdrawals from the business in labor, goods, and money.
In chapter one the use of property in the operation of a business was emphasized. In accounting, the
properties of a business, something that is owned, are known as its ASSETS, and rights in assets are called
proprietorship. ASSETS are the Sum Total of All Things a proprietor has title to. EQUITY is that portion of Asset
that is not encumbered by debt. Proprietorship has access to both ASSETS and EQUITY; proprietorship is
ownership. In this chapter we will introduce the student to the Accounting Equation and the manipulations in this
formula as it relates to property and property rights.

TRANSACTIONS: THE EXCHANGE OF ASSETS

Every business transaction involves two or more assets, usually an EXCHANGE of assets. Thus, if a farmer
acquires some land, he gives in exchange either cash, some other item of value which he owns, or a promise to pay
at a future time. This exchange of assets in a business transaction is fundamental to correct procedure in record
keeping and accounting for the agricultural business.
Previously we examined John Newell's beginning an agricultural supply store. The financial effect was that
John deposited $60,000 cash in a bank account in the name of the business, Newell's Feed and Supply. His
proprietorship in assets and equity in Newell's Feed and Supply were shown by the following equation and
transaction:

THE EFFECT OF TRANSACTIONS ON THE ACCOUNTING EQUATION

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

The effect of various additional transactions on the equation are shown in the next series of illustrations.

Newell's next step in establishing his business is to purchase shelving, counters, and showcases for which he
pays $2,500 in cash. This decreases his asset cash by $2,500, but he acquires other assets called store equipment.
The transaction changes the nature of the assets, but it does not alter the total value of the assets nor the amount of
the Equity. The effect of the transaction, in terms of the our equation, is as follows:

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