Accounting is not about the math, it’s about the rules!
Inventory, Supplies, & COGS
I am a member of the ranching community, so this article’s purpose is to empower ranchers on the business side of ranching. Financial institutions require ranchers to submit financial statements. There are two main important financial statements, the balance sheet and the income statement.
Inventory, supplies, and Cost of Goods Sold (COGS) are terms used in accounting. Most everyone is familiar with the terms inventory and supplies. COGS is somewhat vague. All three of those terms refer to items used and paid for, in your business. When you purchase a bale of hay, or a load of hay, which of these three terms should be used. The correct answer is, with inventory and supplies, it depends. COGS is always used with inventory.
Continue reading “Inventory, Supplies, & COGS”Actual Expenses vs Imaginary Expenses
In calculus class you learned that imaginary numbers are real. They are used to find the square root of negative numbers. Of course, those same mathematicians say it is infinity to any specific point on a line. Well in the accounting world, imaginary numbers are used on the income statement to account for depreciation expense. Those same imaginary numbers are then used on the balance sheet as accumulated depreciation.
Scenario one: A business owner borrows his working capital from financial institutions. Scenario two: A business owner self-finances. Before I go any farther, let me remind you, life is not fair. Everyone has their own special advantages. Your competitor will use his advantages to his benefit, you have to do the same. Some people’s advantage is simply, they are willing to work harder. Money is a big advantage in the business world. People that are able to self-finance have an advantage over those who have to borrow.
In scenario one, Larry Leverage, financed all of his hay equipment from John Deere Credit. His annually note is $60,000. In scenario two, Richie Wells, purchased all of his hay equipment outright. Both men started their perspective hay businesses with all new equipment worth $400,000.
Larry leases a ranch with 100 acres of prime hay fields. Richie owns 300 acres of prime hay fields.
Continue reading “Actual Expenses vs Imaginary Expenses”True Cost of Baling Hay
Ranchers know baling hay is expensive, however some ranchers still sell their hay for remarkably low prices. Throughout this article, I will refer to hay balers/sellers as ranchers. To produce a bale of hay, there are variable cost and fixed cost. Hay that is sold cheap only takes the variable cost in consideration. Let me back up some. Fuel, net, wire, labor, fertilizer, and herbicide are variable costs. As we all know, not all hay is fertilized and sprayed, thus some cheap hay does not have that added variable costs.
Continue reading “True Cost of Baling Hay”True Cost of Ranching
Ranchers know their choice of livelihood may not be an easy life filled with weekly paychecks, Christmas bonuses, unlimited labor and financial resources, but ranchers choose that live because that is the life for them. Ranchers would be bored to death living in a subdivision. Where would they park all of their trailers? Ranchers know there are many benefits to ranching for a living, but the real beauty of ranching is freedom of choice.
Continue reading “True Cost of Ranching”Cash vs Accrual Accounting
My area of expertise is in the ranching industry. I suspect most ranchers use the cash method. For my ranch, I use the cash method for tax purposes. The cash method is considerably less costly than the accrual method.
The IRS graciously allows most of us to use the cash method. Small business taxpayers. Effective for tax years beginning after 2017, the Tax Cuts and Jobs Act (P.L. 115-97) expanded the eligibility of small business taxpayers to use the cash method of accounting.
With that being said, I do use the accrual method for my ranching operation’s books. Cash method for the IRS and accrual for cost control. Ranching is a very competitive market, thus the margins are small. Without through accounting it is impossible to determine what your true costs are.
No one would sell a 1500 pound round bale of hay for less than what they have in it. It is easy to determine your fertilizer and net-wrap cost per bale. Not so easy to determine all of the many other incidental cost to produce that round bale. With a good team working together to keep accurate records of daily transactions, the accrual method of accounting will allow accurate cost reports for greater decision making.
A big part of ranching is inventory control. That includes hay and feed, fuel, raised cattle, purchased cattle, and equipment use. Every revenue stream should have a corresponding cost stream. Gross Profit may then be calculated. Overhead costs is everything else. The more of your costs that you are able to put into a corresponding cost stream, the less your overhead will be. Overhead is paid for out of Gross Profit.
Cost control requires the use of spread sheets and pivot tables for analysis. This is what accountants are for.
Brett Bickham, May 24, 2020
Clifton, TX
Income?
Tax time again for most of us. We all know you are taxed on your income past a certain amount. You may not realize you are not taxed on all of the money you received from the sale of a fixed asset. Only the gains on the sale of fixed assets are taxed! Most of the time the sale of a fixed asset results in a loss, which is deductible.
Remember, money put into the bank is not always income!
Is it an expense or an asset?
When you pull out you Visa card to make a purchase, It most certainly is an increase to your liability account, but it may be an asset as well. If the purchase is to maintain a business through the purchase of a repair & maintenance item, that is an expense. If the purchase is to add a fixed asset to your business, that is an asset.
Spending money is not always a bad thing. Expenses are a fact of life. Expenses take you backwards. Assets take you forward. Assets can be better than cash. The tool you purchased with your Visa card should make you money. The lunch you paid for with your Visa card lowered your net worth.
When you log your purchases into your register, it is easy to lose track if the transaction is an asset or expense. Purchases to build or raise something you will sell later, are assets. Your check register or Visa register has know idea if the transaction is positive or negative. Registers treat all transactions as negative.
That is why it is so important to have QuickBooks.
Brett Bickham, 1/12/2020
Clifton, TX
Run It Into the Ground?
I have been asking myself this question for years. How long should I keep my tractor or any other item I am depreciating? I am not alone in this question. This debate has been around for as long as accounting has been around. Well maybe not. Accounting began in the 15th century to aid merchants in European and Mediterranean countries. Florence, Italy was a mecca for international trade back in the day. About that same time was the shift from Roman numbers to Arabic numbers. Depreciating capital assets came later.
Continue reading “Run It Into the Ground?”Accounting for Short Term Assets
Fixed costs are the overhead costs of a business.
Amortization (charging to expense of the cost of an intangible asset). …
Depreciation. …
Insurance. …
Interest expense. …
Property taxes. …
Rent. …
Salaries. …
Utilities. …
The greater quantity produced, the lower fixed cost per unit. Fixed cost will include an expense debit each month. Fixed costs may, or may not, include a cash credit each month. Fixed costs are added to the General Journal by monthly adjustments.
Continue reading “Accounting for Short Term Assets”