Main Menu  Terms Menu 


 Click here for Financial Statements
Return to ABM 122 Unit 1

Main Menu Table of Contents Index Help page Quit Page

Accounting and Financial Terms

 

The great enemy of understanding is imprecise language. Yet the pollution of our language spreads everywhere, like great globs of sludge crowding the shores of public thought-Bill Moyers.

Accounting Equation
The fundamental equation of accounting, that debits must equal credits. 
 
Accounts Payable
Those bills that have been received but have not yet been paid.  Accounts payable are current liabilities and typically include such things as telephone, repairs, seed, fertilizer and other bills for normal business inputs or overhead. 
 
Accounts Receivable
Money owed to you by others that is due and payable right now.
 
Accrual Accounting
Sometimes called accrual basis or accrual method accounting. The method of keeping records so the accounts show expenses incurred and income earned for a given period, although the expenses may not have been paid, or the income received, in the accounting period. They are accounted for as if they have been paid, or the income received. For instance, accrued interest on a December 31st balance sheet would be interest owed (interest that could be paid) on that date, even though payment is not until April. See also Cash Accounting.
 
Accrual Adjustments
The adjustments that are made to a cash basis balance sheet or income statement that converts it to accrual basis. On an income statement, for instance, the cash interest paid is adjusted by the difference between the ending and beginning accrued interest payable. Several such adjustments of income and expense need to be made to convert a cash income statement to the accrual basis.
 
Accrued Interest Payable
The amount of interest that has accrued on a loan as of a certain date.  In other words, the amount of interest that could be paid on a specific date.  Accrued interest on loans should be included in the liabilities on an accrual-basis balance sheet. 
 
Accrued Interest Receivable
The amount of interest that someone else owes you.  This would be listed on an accrual basis balance sheet.  
 
Amortized Loan
A loan that is repaid in equal installments. The amount of interest and principal are different each payment, but the total amount of the payment is the same through the life of the loan.
 
Assets
The property or resources owned by the business. Assets are frequently listed in two categories, current and non-current.
Current Assets
Cash or other assets that can be converted to cash through the normal operations of the business during the year. That is, checking and savings accounts, accounts receivable, inventory held for sale, securities, stocks and bonds, and the cash value of life insurance.
 
Non-Current Assets
Sometimes called fixed assets or long term assets. Non-current assets are those assets that are not intended to be liquidated during the course of the business year. Includes machinery, breeding stock, not readily marketable stocks (like stock in cooperatives and capital credit accounts), long-term contracts receivable, buildings and other permanent structures, and land.
Balance Sheet
Also called a net worth statement or financial statement, the balance sheet is a summary of the business' assets and liabilities at one specific point in time, usually at the end of the accounting term. The balance sheet has this name because assets must be in balance; assets must equal liabilities + equity.
 
Balance Sheet Equation
The equation: Assets = Liabilities + Equity
 
Book Value
The asset's original cost minus accumulated depreciation. Also called modified cost.
 
Break-Even Point
The selling price needed to cover the product's cost of production. Selling the product at this price wouldn't make money, but neither would it lose money.
 
Budget
A formal plan for spending and saving money. A budget also should include anticipated income.
 
Capital
The amount of money that can be obtained through borrowing or the selling of assets. Capital is used to promote the production of other goals.
 
Capital Assets
The non-current or fixed, tangible assets that are owned by a business or person. 
 
Capital Lease
A special type of lease of a capital asset that basically places the same responsibility on owner of the lease as if the asset was actually owned rather than leased. 
 
Cash Accounting
Sometimes called cash basis or cash method accounting, cash accounting records revenue and expense as they are received or paid, and does not included accounts receivable and accounts payable. Most farmers and ranchers use cash basis accounting for reporting their income tax information. But to really evaluate the business, we need to use accrual accounting or make accrual adjustments to cash records. See accrual accounting and accrual adjustments for more.
 
Cash Flow Statement
An actual cash flow statement records monthly cash inflows and outflows over a specific period, usually one year. A projected cash flow or a cash flow budget, is a budget that tries to anticipate monthly income and expense. Most lenders require projected cash flows along with other financial information. Despite the similar names, a Cash Flow Statement is different from a Statement of Cash Flows.
 
Cash Method
See cash accounting
 
Cash Revenue
See Revenue.
 
Contracts Receivable
Money owed to you for the sale of non-current assets.  A seller who finances the sale of land with the purchaser has a contract receivable. 
 
Contributed Capital
The portion of equity that comes from outside capital sources, such as gifts, inheritances, lottery winnings, etc.
 
Cost of Production
An expression of the cost of producing one unit of product. The cost of production of wheat would be expressed on a per bushel basis, or perhaps on a per acre basis. Arriving at your cost of production is the first step in making marketing plans, since income and expense are expressed in the same terms. Cost of production must include both your fixed and variable costs. If the cost of production for wheat is $2.75 per bushel, you already know that you need at least that much to break even.
 
Credit
In accounting terms, an increase to a liability, equity, or income account, or a decrease to an asset or expense account. See A Discussion on Debits and Credits for more. In lending the term credit generally means to loan money to someone, or an operator's ability to borrow money.
 
Current Deferred Taxes
The amount of income tax an owner can expect to owe if she/he sells current assets and pays off his/her current liabilities.  In a good accrual basis balance sheet, current deferred taxes are included in the current liability section. 
 
Current Assets
 
Current Liabilities
 
Current Ratio
One of the measures of liquidity, the current ratio is found calculated by dividing total current assets by total current liabilities. Click here for more.
 
Debit
An increase to an expense or asset account or a deduction from a income, net worth, or a liability account. See A Discussion on Debits and Credits for more.
 
Deferred Taxes
The income tax that would be due from the sale of assets and retirement of debt. This liability is listed on the balance sheet to offset the asset of ownership. An older term for this is "contingent income tax liability." It is more correct to call this tax deferred, since we will pay it eventually. 
 
Depreciation
A method of expensing the cost of an asset over time. A portion of the cost of an asset is treated as expense each year of expected useful life of the asset. There are several depreciation methods and the tax laws generally specify which method should be used for the type of asset. Click here for more discussion of depreciation.
 
Direct Cost
A cost that can be allocated directly to one enterprise.  This term is used to contrast with those costs that must be assigned to an enterprise through some sort of allocation method.  The classic example in agriculture is the cost of seed.  There are no special steps involved in allocating seed expense to a farming enterprise.   Direct and indirect cost refers to the method of allocation.
 
Double Entry Accounting
A system of record keeping where every figure is entered twice. One entry is a debit, the other is a credit. This allows you to keep track of expenses by category (one entry) and keep track of the bank balance (second entry). Some accounting programs are double-entry, but the second entry is entered for you. See A Discussion on Debits and Credits for more.
 
Enterprise
Also known as a profit center or division. A specific process or activity that requires a certain degree of risk to make a profit. A rancher who owns grass and runs a commercial cow herd actually has two enterprises; grass and cows.  A Hardware store has several enterprises: lumber, hardware, and tools.  The rancher needs to know if it is worthwhile to raise the grass and the cows; the retailer needs to know wether lumber is pulling its weight. 
 
Enterprise Analysis
Enterprise analysis means to separate the whole business the different enterprises that make up the business, and analyze each enterprise for profitability. 
 
Enterprise Budget
A statement of anticipated returns and expenses associated with one production process or enterprise. This is usually for one production cycle.
 
Equity
This is the total liabilities subtracted from the total assets, and represents the proceeds that would be expected if all assets were liquidated and all liabilities were paid off. Equity is found by subtracting liabilities from assets.
Assets - Liabilities = Equity
In a good financial analysis equity is divided into retained earnings and valuation equity. Equity is sometimes called net worth or owner's equity.
 
FFSC
Acronym standing for the Farm Financial Standards Council. This task force has tried to develop a set of standard financial and profitability statements that can be used by farmers and ranchers to analyze their business. The task force had members from all sectors of the agricultural finance industry, as well as producers. The standards proposed by the task force are voluntary. Click here for more.
 
Fixed Cost
An expense that will be incurred independent of production. Land taxes, for example, must be paid whether a farmer chose to plant a crop or not. Seed expense, on the other hand, depends on whether you plant a crop.
 
GAAP
Generally Accepted Accounting Practices.
 
Income Statement
Sometimes called a Profit and Loss Statement, the income statement lists all income and expense over a specified period, usually a year. Income statements come in two flavors; cash and accrued. Cash income statements are more common, but need to be converted to accrued income statements to be more useful in analyzing the business.
 
Indirect Cost
Those costs that are allocated to multiple enterprises through some sort of allocation system.  This is in contrast to direct costs.  Direct and indirect refer to the method of allocation.  Fuel expense, a fixed cost,  could be an indirect cost in terms of allocation if the business has multiple enterprises and uses some sort of percentage or other method to assign a fuel cost  to the enterprises.  
 
Inflows
A term used in the discussion of cash flows; money coming into the business from any source: operating, investing, or financing.
 
Inventory
The product or products that are being produced or sold by the business.  Normal inventory is the product that is to be sold, such as a manufactured or grown asset.  Other assets that are not intended to be sold are sometimes thought of as inventory, such as cow herd that produces the calves that are sold.  These assets that are used to produce the product are better considered capital assets. 
 
Investment in Growing Growing Crops
The expense of farming, seed, fertilizer, etc. invested in growing crops.  A producer should only not how much money has been spent in the production of the up to the date of the balance sheet. 
 
Liabilities
All the debt obligations of the business. Liabilities are usually listed in two categories on a balance sheet, current and non-current.
 
Line of Credit
See operating loan.
 
Current Liabilities
Current liabilities are all debts due within the operating year of the business. They include: operating notes, accounts payable, rents, taxes, interest and the portion of longer term debts due within the operating year.
 
Non-Current Liabilities
Those liabilities that are for a longer term, such as machinery, breeding stock, and real estate loans, and the deferred tax liability on the sale of non-current assets.
 
Liquidity
A measure of the ability of a business to make enough cash to pay bills without disrupting or curtailing business operations. Liquidity is frequently expressed as a ratio.
 
Management Accounting
add definition here.
 
Market Value
The current value of an asset or what an asset could be sold for at the time a balance sheet is prepared.
 
Marketable Securities
Those investments, such as stocks traded on major exchanges, that are easily converted to cash. 
 
Modified Cost
 
Net Worth Statement
 
Non-Cash Income
Something that should be considered an income for analysis purposes, though cash is never received. For example, a corn enterprise should receive income from pasture rent for letting the cow herd pasture the corn stalks. A beef finishing enterprise should receive income for the value of a beef butchered for home consumption. [More on non-cash income and expense]
 
Non-Cash Expense
something that should be considered an expense for analysis purposes, though no cash is spent. A cow-calf enterprise should have an expense charged against it for the value of corn stalks. Family living should have an expense charged against it for the value of a fat steer butchered for home consumption. Frequently the dollar amount is arrived at by looking at the opportunity cost associated with the non-cash income or expense. [More on non-cash income and expense]
 
Non-Current Assets
 
Non-Current Liabilities
 
Operating Loan
A loan taken against current assets that will come due within twelve months. An operating loans are sometimes called a line of credit
 
Opportunity Cost
The return a given resource can earn when put to its best alternative use. For a rancher deciding between buying more cows or running more calves on grass, the opportunity cost of the additional cows would be the gain she could realize by running more calves. The opportunity cost of running more calves would be the gain she could realize by running more cows.
 
Opportunity cost is a way of saying that there is no free lunch, that there are always costs associated with decisions we make. The opportunity cost for someone farming might be expressed as the income that could be earned in a different job. Opportunity cost can also be expressed as the wages one could expect if he were not engaged in the business. For any business decision there is an alternative opportunity cost associated with the next-best choice. [Another example]
 
Outflows
A term used in the statement of cash flows meaning money that flowed out of the business, whether toward operating expense, financing, or investing.
 
Partial Budget
A partial budget is an estimate of the economic effects of some change in the farm or ranch business; usually the addition or subtraction, or increase or decrease in scope, of a particular enterprise. Partial budgets are usually presented as side-by-side comparisons of two decisions or choices. Click here for more.
 
Pro Forma
Term meaning projected, usually used in connection with a financial statement; a pro forma balance sheet is a projected balance sheet.
 
Profit Margin
The difference between the cost of production and the market price and is usually expressed as percent.  If your cost of production for wheat is $2.75 and the market price is $3.75, your profit margin is $1.00 or 26.66%.
 
Ratio
The result of measuring one item against another. Ratios are used by financial institutions, among others, to get a quick grasp of the business' financial condition. If a farm's balance sheet shows totals assets at twice the total liability, then the asset to debt ratio would be 2:1. This is sometimes expressed as just 2. The calculation would be the total assets divided by the total debt.
 
Reconciliation
A series of steps that prove that a financial statement is in balance or correct. For instance, we can prove that a balance sheet is in balance by seeing if total assets equals total liabilities + equity. Other statements such as the statement of owner equity and the statement of cash flows prove that we have accounted for all the inflows and outflows of the business over an accounting period.
 
Retained Earnings
The portion of equity that represents profit that has been reinvested in the business after personal draws and family living expenses are taken out.
 
Revenue
Proceeds received from current business operations.  Revenue is divided into two categories; cash and non-cash.  Cash revenue is the cash received from the sale of the business' products.  Non-cash revenue is found in the change in accounts receivable between two balance sheets. 
 
Solvency
A measure of a business' ability to repay all financial obligations if all assets are sold. If there are more dollars in assets than in liabilities, a business is said to be solvent. Solvency is most frequently measured by a ratio. Two measures of solvency are the debt : asset and equity : asset ratios.
 
Statement of Cash Flows
A statement of cash flows (sometimes called a "sources and uses statement") shows the actual cash flow of the business separated into the three categories of operating activities, investing activities, and financing activities.   The separation of the flow of money into these three categories will give the manager a better understanding of what made the business cash flow.  Did the business cash flow from realized income from the operation of the business, from the sale of assets, or from financing activities. 
 
Tangible Asset
An asset that has physical substance. 
 
Trend
A series of numbers that compares conditions over time. Trends can be useful for projecting future situations. For example, in 1776 about 75% of the population was engaged in production agriculture. Now, about 1.5% of the population is engaged in farming. From this trend you would imagine that in the coming years there would be a still smaller percentage of people involved in production agriculture. Charts are frequently used to show a trend.
 
Valuation Equity
A portion of the business equity that is there because of how the assets are valued. Cost or basis figures are frequently used in net worth statements to remove the effect of inflation or deflation. When market value is also used, valuation equity is the difference between market value and cost or basis.
 
Variable Cost
The test to determine whether a cost is fixed or variable is to see if the cost would still be incurred if the business chose not to be engaged in the enterprise.  For example, if a farmer chooses not to grow wheat in a particular year, then their seed wheat expense would be zero.  However, their family living expense would still need to be paid. 
 
Whole Farm Budget
A physical and financial plan for the entire farm or ranch business for a specific period of time. It can be thought of as the sum of the various enterprise budgets.
 
Work Unit
A work unit is the average accomplishment of a worker in a ten hour day, working on crops and livestock at an average efficiency. If a crop of wheat requires .35 work units per acre to go through the entire production cycle, a single worker could provide in one day's time enough labor to grow 2.857 acres of wheat (1/.35). If he works 300 days a year, he theoretically could produce 857.1 acres of wheat (2.857 X 300). Of course, the catch is that the demand for labor from the crop isn't constant. Harvest will demand much more labor than checking the field for pests. But work units provide another way to allocate expenses to enterprises. Allocating expenses by work units is one way to do an enterprise analysis.
 
Working Capital
One of the measures of liquidity, working capital is found by subtracting current liabilities from current assets. Click here for more.