Basic Accounting Documents

1. Basic Accounting Documents

2. Accounting andAgribusiness Managers Accounting: the process of recording, classifying, and summarizing business transactions The balance sheet and the profit-and-loss statement are the starting points of most financial analysis Agribusiness managers must understand these documents in order to evaluate the financial performance of their business

3. The Purpose of an Accounting System Present an accurate picture of the firm’s current profitability Give an estimate of the firm’s current and future financial position Provide input to the firm’s management information system Provide an accurate record of past financial performance

4. The Balance Sheet A statement of the financial conditions of a business on a specific date Assets: something of value the firm owns or uses Current assets: current cash holdings or something that will turn into cash within the current accounting period Fixed assets: something the firm owns or uses that will not turn into cash within the accounting period

5. The Balance Sheet Liabilities: an obligation to pay a debt Current liabilities: a debt that must paid within the next accounting period Long-term liabilities: a debt that must be paid after the next accounting period Owners’ Equity (net worth) The accounting equation: Assets = Liabilities + Owners’ Equity

7. The Profit-and-Loss Statement Summarizes the revenue and expenses of a business over a given period Revenue: refers to the amount of money the firm earned from the sale of its goods and service this period Cost of goods sold: represents the direct costs to the business of just the goods that are sold this period

8. The Profit-and-Loss Statement Gross Margin: what remains after subtractingcost of goods sold from revenues Operating expenses: the general costs of operating and administering the business, outside of the direct cost of goods sold — Overhead Profit: equal to gross margin minus operating expenses Net profit: profit after income taxes have been paid, and is what is actually available for the business

10. Discussion Questions Explain why it is important for managers to understand financial management in order to be effective. Why does this process start with the balance sheet and the profit-and-loss statement? In your own words, describe the balance sheet and what it tells managers. What does it not tell managers about their business? In your own words, describe the profit-and-loss statement and what it tells managers about their business. Explain why the accounting period and the fiscal year may not coincide with the calendar year.