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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

Profit and Loss Account

 

Balance at beginning

Debit

Credit

 

Assets

Liabilities

 

Net Capital at beginning

<=

 

Net Capital at beginning

Sum

Sum

Every entry, that is diminishing the Net Capital throughout the year

Every entry, that is increasing the Net Capital throughout the year

 

 

 

 

Cash Book Account

<=

Receipts

Expenditures

 

(many entries...)

(many entries...)

 

 

 

Sum

Sum

Private Consumption, etc.

Income

 

 

 

 

Balance at end

 

Assets

Liabilities

Net Capital at end

 

=>

 

Net Capital at end

Sum

Sum

 

Sum

Sum

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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

Business Account

 

 

 

Debit

 

Credit

 

Bought Animals

8704

Sold Grain

15491

Repair Machines

17619

Sold Milk

145213

Wage Paid

26515

Sold Cattle

55673

Energy

6339

Sold pigs

115221

Other Costs

165322

Increase in livestock

37925

Depreciation

30731

 

 

Business Surplus

114293

 

 

Sum

369523

Sum

369523

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Income Account

 

 

 

Debit

 

Credit

 

Paid interest

49785

Received Interest

1799

Paid Land Rent

11910

Business Surplus

114293

 

 

Surplus from Business no. 2

0

Income

54397

Wages earned

0

Sum

369523

Sum

369523

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Private Account

 

 

 

Debit

 

Credit

 

Cash Private Expenditure

42025

 

 

Cash Differences

125

 

 

Cost for car

6274

Private Consumption

48424

Sum

369523

Sum

369523

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Profit and Loss Account

 

 

 

Debit

 

Credit

 

Paid Income Tax

8916

Net Capital at beginning

307374

Investment in Buildings

17060

Depreciation Buildings

5497

Private Consumption

48425

Public Money received

28120

Net Capital at end

333211

Dotation to family

4224

 

 

Gift received

8000

 

 

Income

54397

Sum

407612

Sum

407612

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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 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.

 

Business Account

 

 

 

Debit

 

Credit

 

Bought Animals

8704

Sold Grain

15491

Repair Machines

17619

Sold Milk

145213

Wage Paid

26515

Sold Cattle

55673

Energy

6339

Sold pigs

115221

Other Costs

165322

Increase in livestock

37925

Depreciation

30731

 

 

Business Surplus

114293

 

 

Sum

369523

Sum

369523

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The Credit Column:

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.

 

Livestock at end

133250

- Livestock at beginning

-95325

= Increase in livestock

37925

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The Debit Column:

 

 

The Income Account

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

 

Income Account

 

 

 

Debit

 

Credit

 

Paid interest

49785

Received Interest

1799

Paid Land Rent

11910

Business Surplus

114293

 

 

Surplus from Business no. 2

0

Income

54397

Wages earned

0

Sum

369523

Sum

369523

 

The Credit Column­

 

The Debit Column:

The Private Account

The Private Account calculates the private consumption.

 

Private Account

 

 

 

Debit

 

Credit

 

Cash Private Expenditure

42025

 

 

Cash Differences

125

 

 

Cost for car

6274

Private Consumption

48424

Sum

369523

Sum

369523

 

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.

 

Profit and Loss Account

 

 

 

Debit

 

Credit

 

Paid Income Tax

8916

Net Capital at beginning

307374

Investment in Buildings

17060

Depreciation Buildings

5497

Private Consumption

48425

Public Money received

28120

Net Capital at end

333211

Dotation to family

4224

 

 

Gift received

8000

 

 

Income

54397

Sum

407612

Sum

407612

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

 

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

 

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.

 

Without correction of price level

 

 

 

Number of pigs at end

100

Number of pigs at beginning

100

Price per pig at end

300

Price per pig at beginning

200

Value of livestock

30000

Value of livestock

20000

Change in livestock value

+10000

 

 

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With correction of price level

 

 

 

Number of pigs at end

100

Number of pigs at beginning

100

Year's average price per pig

250

Year's average price per pig

250

Value of livestock

25000

Value of livestock

25000

Change in livestock value

0

 

 

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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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