Chapter Four

Accounting Transactions
Learning Objectives

Upon successful completion of this chapter, participants

will be able to:
Identify the different types of accounting transactions
and how they are recorded.
Describe contra accounts and how they are used.
Introduction
The farm accountant will likely find that certain
transactions will be repeated many times over the
course of a year. In this chapter, we will discuss the
journal entries needed to record these transactions.
The journal entries in this chapter are clustered
into three transaction types:
The first is financing activities transactions as owner
investments, withdrawals and obtaining a loan.
Second investing activities, such as the purchase or
sale of assets, asset exchanges, and asset leases.
And finally, the operating activities. These activities
are mainly the essential activities directly
associated with the core farm operations including
entries for the purchase of livestock and crops, feed
purchases, and supplies .
We then address more general operational
entries, such as the record of payroll and taxes. We
finish with a discussion of the entries related to farm
revenue.
First: Financing Activities
The owners of farms will probably need to invest
funds and other assets in a farm when first started, and
possibly at intervals thereafter. They may also withdraw
funds from the business for various reasons.
In addition, a farm manager may borrow money from
a lender in order to pay for various operations or assets, as
well as, pay back these loans over time. All of these actions
are financing activities.
In this section, we describe a number of journal
entries related to financing activities.
1.1. Owner Investments
The owners of a business may invest cash or other
assets in the farm. The accounting entry is to debit the
asset accounts to which the owners are making additions,
and to credit the equity account to show the amount being
invested in the business. For example, a $10,000 cash
investment in a farm would result in the following entry:
Debit Credit
Cash 10,000
Contributed capital (Equity Account) 10,000
 The owner may invest in the business assets
other than cash. For example, an owner might
acquire a used truck and employ it for farm activities.
The truck worth $15,000. The entry to record such a
truck in the accounting records of the farm is:

Debit Credit
Vehicles 15,000
Contributed capital (Equity Account) 15,000
EXAMPLE (Multiple assets)
Tom Mayberry plans to start a farm. He invests $150,000 of
his personal savings in the new operation. He also contributes a
used truck that is worth $20,000, plus $5,000 of computer
equipment and 50 breeding cows that have a market value of
$30,000. These investments result in the following journal entry:
1.2. Associated Liabilities
The owners may contribute an asset to the farm business that
has a liability associated with it. For example, a tractor with a value
of $50,000 is contributed to a farm; the owner had originally
purchased the tractor with a $20,000 loan. The amount of the
liability is recorded on the books of the farm along with the tractor
asset. The two amounts are netted together to arrive at the
$30,000 of contributed capital that is recorded as part of the
transaction. The resulting journal entry is:
Example
The owners have purchased a $3,000 computer on credit, and
now contribute the computer to the farm. The associated liability
to pay for the computer has not yet been paid. The resulting
journal entry is for the computer asset and an offsetting account
payable. Since the two entries net to zero, there is no additional
entry into the contributed capital account. The journal entry is:
1.3. Owner Withdrawals
For example, an owner does not have enough cash in
his personal checking account to make the $2,000 monthly
mortgage payment on his house, and so elects to pay the
bank from his farm’s checking account. The entry removes
cash from the business and reduces the owner’s equity in
the business by a similar amount. The journal entry is:
1.4. Loans
Farmers routinely borrow money from lenders to finance
a farm’s operations and/or fixed asset purchases. This involves
signing a promissory note in which the loan amount is stated,
as well as the interest rate that will be charged. When the loan
is initiated, the lender sends cash to the farm, which results in
an increase in the farm’s cash balance and an offsetting loan
liability. In the following sample journal entry, we assume that
the loan amount is $250,000. The entry is:
 In the last entry, we assumed that the loan would be long-term, where
loan repayment would continue for several years. If the loan had instead
been a short-term one (as would be the case for a loan intended to cover
short-term needs until the next harvest) the liability would instead be
credited to a short-term notes payable account.
The farm manager will make a series of monthly payments to pay
down the amount owed under a promissory note. Each of these payments is
comprised of two components, which are principal and interest. The amount
of interest paid is the interest rate multiplied by the remaining principal
balance. For example, a farm manager receives a loan statement from the
bank, noting that a loan payment is due in the amount of $1,200. Of this
amount, $750 is interest and $450 is principal repayment. The associated
journal entry is:
Second: Investing Activities

Any farm requires a certain amount of ongoing

investment, either to replace worn-out equipment or to
expand its operations. In this section, we describe a
number of investing activities and the related journal
entries.
2.1. Asset Acquisitions
Farm manager may acquire a number of assets to
support farm operations. An asset account is credited for
the purchase price of the asset. There are two choices for
where to credit the offsetting amount. If the purchase was
made in cash, then the cash account is credited. If the seller
is financing the sale, then a notes payable account is
credited. For example, a farm manager buys a tractor for
$80,000, using cash. The journal entry is:
If the dealer had been willing to
finance the purchase, the farm
manager could instead have
bought the tractor under the
terms of a promissory note, which
would have resulted in this entry:

What if the dealer had

required a 25% down payment?
Then the entry would have
involved both a reduction in cash
and the incurrence of a note
payable. The entry would be:
2.2. Assets Sale
When an asset is sold, the farm receives cash or a note in
exchange. If the amount of this payment from the buyer is greater
than the book value of the asset, then the farm experiences a gain.
If the payment is less than the asset’s net book value, then the
farm incurs a loss. Net book value is the amount at which an asset
is recorded in a farm’s accounting records, minus the amount of
depreciation already charged against the asset. The concept is
expanded upon in the following example.
 Hillside Farms owns a tractor that originally cost
$85,000. Since its purchase, Hillside has recorded $62,000
of depreciation expense on the tractor. This means the net
book value of the tractor has now been reduced to $23,000
(calculated as $85,000 purchase price - $62,000
depreciation). The farm manager finds a buyer for the
tractor, who is willing to pay $29,000 in cash. The resulting
journal entry is:
Loss on sale of assets

If The tractor was in unusually poor condition, so the

buyer was only willing to pay $14,000 for it. The result
would be a loss of $9,000, as noted in the following journal
entry:
2.3. Assets Exchange
A farm manager might trade in an asset as part of the purchase of a
replacement asset. The trade-in allowance offered by the seller is essentially
the sale price of the old asset, so there is likely to be a gain or loss on the
transaction, calculated in roughly the same manner just described for an
asset sale.
Example: A farm manager wants to trade in a truck for a new model. The
new truck will cost $38,000. The dealer offers an $8,000 trade-in allowance
on the old truck, which leaves $30,000 to be paid by the farm manager in
cash. The book value of the old truck is $11,000, which is calculated as the
original purchase price of $33,000 minus $22,000 of depreciation. The
journal entry to record this transaction is:
2.4. Investments in Perennial Crops
Perennial Plants, such as are found in an orchard, are usually
purchased and then cared for during a multi-year period before
they begin commercial production. During this development
period, the costs incurred to purchase and maintain the plants are
recorded in the Perennial Crops asset account.
A number of costs may be incurred to acquire and maintain
perennial plants, including the following:
 Purchase price of the plants
 Farm supplies
 Hired labor
 Payroll Tax
Example:
Omar acquires apple rootstock for a new apple
orchard that it is developing. The development period is
five years. The following costs were incurred during that
time: $15,000 for apple rootstock, $1,000 for fertilizer,
$20,000 for hired farm labor , $1,800 for payroll taxes.
The journal entry to record this transaction is:
Third: Operating Activities
Operating activities occur far more frequently than the
financing and investing entries. These activities include the
of payment liabilities to buy the farm supplies and related
items, which later translate into the sale of crops and
livestock.
This section, will tackle a number of journal entries
related to the farm purchases, as well as, the different
transactions involved with product sales to third parties.
3.1. Purchases of Market Livestock and Crops
A farm manager may elect to buy market livestock, poultry, or
grain and then sell them at a later date. When these purchases are
made (perhaps at auction or from a dealer), the price at which the
transaction is recorded is the amount paid to the seller. The
purchase is made into inventory, from which the items will later be
sold.
Example: A farm manager attends a local auction and pays $10,000
for market livestock, as well as $2,500 for wheat. The resulting
journal entry is:
3.2. Annual Costs for Producing Perennial Crops
Once perennial crops have reached the point of commercial
production, all costs related to the crops (such as for cultivation,
pruning, and spraying) are charged directly to expense as incurred.
Example: The apple orchard that a farm manager planted five years
ago has now reached commercial production. In the current year,
the farm manager pays $750 for fertilizer and $500 for pesticides.
Both of these expenditures are charged to expense as incurred. The
bill will be paid at a later date. The resulting journal entry is:
3.3. Feed Purchases
A farm manager may buy feed, such as hay or pellets. This
amount can be recorded as inventory but involves tracking the
amount of feed still on hand at the end of each reporting period to
determine how much feed has been used, and therefore should be
charged to expense. An easier solution is to charge the cost of feed
directly to expense. The latter approach is especially relevant when
the amount of feed kept on hand is relatively low.
Example: A farm manager spends $1,500 for feed at the local farm
supply store and buys it on account; that is, the farm will pay the
bill at a later date. The resulting journal entry is:
3.4. Supplies Purchases
If a farm has purchased on credit from the local farm supply store or pays with a
credit card, it is incurring an account payable whenever it makes a purchase, rather than
paying cash up front. EXAMPLE: A farm manager spends $400 on spare parts at the local
farm supply store, as well as $550 on fertilizer and $25 for lubricating oil. The resulting
journal entry is:

If the items in the preceding entry had instead been paid with cash, the final row
in the journal entry would have been changed from accounts payable to cash. Once items
on account are paid with cash, the accounts payable account is reduced with a debit
entry, while the cash account is reduced with a credit entry. Thus, if the payables amount
in the preceding example were to be paid at a later date, the entry would be:
3.5. Billed Expenditures
A farm will be billed for any number of services and administrative items,
such as veterinarian charges, crop insurance fees, and utilities. All of these
invoices are dealt with in the same way – by recording them as expenses
that are offset by the accounts payable liability account.
Example: A farm manager receives three bills in the mail. One is from the
farm’s veterinarian, for $250 of services. Another is for the farm’s monthly
$300 crop insurance, while the third invoice is a $525 electricity bill from the
local utility. He records these invoices in the accounting system with the
following entry
3.6. Prepaid Expenses
A farm may sometimes buy something in advance and use it over a period of time.
For example, a farm manager may want to acquire crop insurance, which is payable in
advance of the coverage period. This expenditure is initially recorded as an asset, since
the coverage period has not yet begun. During the coverage period, the asset is gradually
charged to expense.
Example: A farm manager elects to pay $12,000 in advance for crop insurance, which will
cover the farm’s crops for the next 12-month period. The initial entry to record this
payment is stated in the following entry:

In the first month of the coverage period, 1/12th of the total insurance amount is
consumed, which results in the following entry: (The same entry is used in each of the
next 11 months to charge the remaining amount of the prepaid expenses asset to
expense.)
 3.7. Taxes
In addition to the preceding expenditures, a farm must also pay income and
property taxes. Income taxes may need to be submitted to the government
on a quarterly basis, based on the estimated amount of total income that will
be earned for the year. This is usually recorded at the same time as the
payment, so the format of the entry is:

The exact structure of real estate taxes will vary by county. A common
approach is for the county to send out a billing once a year, for payment
several months later, perhaps with an option to pay in several installments.
In this case, cash is not paid at once, so the accounts payable account is
credited instead. The format of this entry is:
3.8. Sale of Farm Products
A farm sells livestock and crops on an ongoing basis,. The price that the farm
receives will depend on the market price as of the sale date, which may be further
adjusted for the quality of the product. When payment is received, the farm accountant
debits the cash account to record the receipt of cash, while crediting the applicable
revenue account that best classifies the nature of the sale. If the farm does not receive
payment at the time of sale, the debit is not to the cash account, but rather to the
accounts receivable account.
Example : A farm manager sells his farm’s wheat for $10,000. Payment in cash is made at
the point of sale. The resulting journal entry is:

Later in the month, the manager sells feeder livestock for $18,000, with final payment to
occur at a later date. The resulting journal entry is:
 Near the end of the month, the manager sells $2,500 of wool
from the farm’s herd of sheep, with payment in cash. The resulting
journal entry is:

A farm may raise crops that are intended to be fed to

livestock, and then the farm manager decides to sell the crops
instead. The accounting treatment for these sales is identical to the
sales for other types of farm products.
Receipt of Payment from Customers
A farm may sell livestock or crops to customers on credit, which means
that payment to the farm is delayed. Under these circumstances, an account
receivable is recognized as an asset. When the customer eventually pays the
farm, the cash receipt offsets the receivable, so that the receivable is
eliminated from the accounting records of the farm.
Example: A farm manager has sold $4,000 of crops to a neighboring
farm, and has secured a promise that payment will be made in 10
days. The initial entry to record the sale is:

The payment arrives on time, so the farm accountant records the

following entry:
3.9. Crop Insurance Proceeds
Farms routinely pay for crop insurance, which protects them
from crop damage, such as from a hail storm. When damage
occurs, the farm sends a claim to the insurer. Upon receipt of the
insurance proceeds from the insurer, the farm records it as
revenue.
Example: A farm experiences crop damage from a massive hail
storm and submits a claim to its insurer for $43,000. The insurer
agrees with the claim and pays the full amount requested. The
resulting journal entry is:
The End