Page 78 - Account for Ag - 2019

12-16 Accounting for Agriculture CH 12]

CAPITAL EXPENDITURES FOR FIXED ASSETS
Expenditures for betterments and for the kind of extraordinary repairs that lengthen the estimated life of an
asset should appear on the balance sheet as increases in asset book values; and as a result, are examples of what
are called capital expenditures or balance sheet expenditures which benefit future periods.

A revenue expenditure is one that should appear on the current income statement as an expense and a
deduction from the period's revenue. An expenditure for ordinary repairs is an example of such an expenditure.

RAISED ASSETS AND LIVESTOCK DEPRECIATION
Raised Assets. Unique to agriculture is that it is possible to have on record fixed assets that were not
purchased from an outside source but born, raised, and placed into service as replaced assets to the herd, flock,
and band. A perpetual inventory system is recommended for major categories of inventory--farm enterprises over
which income and cost control is desired and storable purchased inputs having alternative uses or needing
business control. Enterprises could include grain crops, livestock, custom work and service centers. Storable
purchased inputs could include hays, grains, fertilizers, and fuels. How finely these categories are subdivided
depends on their homogeneity and intended use.

With the perpetual system of inventory accounting, it is necessary to account for the value of items leaving
the inventory (items with a new place or use on the farm or items sold out of the farm business). Items are not held
in the inventory for a profit. Profits belong to productive activities, which include storage and market growth.
Thus the value of items leaving the inventory should closely resemble the value entering the inventory.

When inventoried items are sold off the farm and the total amount of the sale is recorded as a receipt, it
becomes necessary to show a debit in the receipt account or expense account for the inventory value of the item
sold. The difference is the increase or decrease in value received while the item was held in inventory and is
posted to the appropriate enterprise or activity (if it is defined). Thus at least one "value of inventory sold" account
must be included in a perpetual system of inventory accounting.

Since adjustments are necessary to correct inaccuracies in quantities and value, it is necessary to have an
account to adjust for inaccuracies caused by measurement errors, price swings, and death and waste. To maintain
an accounting balance it is necessary to post to other accounts (normally receipt or expense) the offsetting amount.
This can be thought of as an adjustment of an amount already entered at an earlier period.

Livestock Depreciation. Livestock present a particularly unique problem to accounting in that they
appreciate in value and depreciate in value. Breeding stock such as dairy or beef cows, bulls, and sheep pass
through two distinct phases -- First, they appreciate in value as they grow up to a stage of maximum usefulness.
Market valuations are usually applied in determining inventory values during this phase.

Following this maximum stage, an animal declines in value as it approaches the end of its usefulness. Various
formulas have been applied, or at least tried, in computing this depreciation. Any one of the methods described for
machinery may be used. The period of usefulness of an animal, however, is subject to so much uncertainty that
refined methods of computation are seldom satisfactory. Consequently, while farmers recognize that breeding
stock does depreciate, in practice they usually inventory their animals at market values. Some knotty problems are
involved in this section of the inventory. Values of breeding stock have to be adjusted simultaneously to three
different influences: (1) the fluctuation in market prices, (2) the process of physical depreciation or determination
as the animal grows older, and (3) the effects of accident or sickness in individual animals.

Fattening animals presents a simpler problem since they are normally sold before they begin to depreciate.
Market prices are used directly here, since such stock is intended solely for sale (rather than to be kept for
breeding) and since meat animals are increasing in value from month to month as they grow heavier.

SUBSIDIARY FIXED ASSET RECORDS
A general ledger account for equipment usually includes all of the equipment that is used for one function of
the business. Typical accounts are Office Equipment, Store Equipment, Delivery Equipment, and Machinery and
Equipment.

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