Pig Farm Accounting *

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1 OpenStax-CNX module: m Pig Farm Accounting * Cody Zahler This work is produced by OpenStax-CNX and licensed under the Creative Commons Attribution License Challenge: Pig Farm Accounting Unit: Financial Subject: Math Description: Students will use basic accounting principles and math skills to account for several farm-related transactions dealing with a small business buying and selling pigs. Phase I Teacher Instuction: Present the students with the following problem with no explanation of the accounting process. Have the students read through the problem and attempt to answer the following questions. Encourage the students to do their best to add together the numbers and answer the questions. Give the students about 30 minutes to do this rst part. Scenario: On January 1, 2008 you decide you want to start a small pig farming business and set aside $2,000 to be used for business purposes as owner's equity. On January 3 you buy supplies totaling $500 in preparation for the pigs. Rather than paying the $500 in cash right now, you pay for these supplies on account. A week later on January 10 you purchase 3 baby pigs with cash. Each of these pigs cost $50. After a day the pigs seem very hungry already. You give them some of your family's leftover food, but that satisfy them, so on January 11 you go to the store and buy $100 of food for your pigs. On January 31, 2008 you nally get around to paying o the $500 accounts payable for the supply expense. On March 1 you run out of food and go to the store and buy another $100 of food with cash. Then again on May 1 you pay cash for another $100 of food for the pigs. Finally on July 1, 2008 you sell the three pigs at an auction. One pig was auctioned o for $250, another for $350 and another for $400. Rather than collecting the cash immediately, you sell these pigs on account. The buyers promise to pay these amounts within 30 days. On July 31, 2008 you collect the accounts receivable for the amount that the pigs were auctioned for. Answer the following questions: How much Net Income (loss) did your company make during this time period? How much cash do you have available at the end of July 2008? Assuming all of the expenses and revenues are described above, was it worth it to buy and sell these pigs? Phase II Teacher Instuction: After the students have made a good attempt at answering the questions, ask them if they thought it was easy or dicult. Have them think about and discuss any ideas that might make easier to answer these questions. Then explain that accounting is the most organized and most common * Version 1.1: Dec 5, :40 pm

2 OpenStax-CNX module: m way to keep track of business transactions. Present a lesson on the basics of double-entry accounting as described in the Content section below. Then walk the students through a couple examples lling out the table below. Explain to them that they rst need to identify the account names and account types involved in a given transaction. Then they need to explain whether those accounts are increasing or decreasing. Then show them whether that account is debited or ed (For example: if the company receives cash, which is an asset, cash increases, and assets are increased with a debit). Give the students another hour to ll out the rest of the table below. After the students have nished, review their lled out tables and help students with any problems they may have. Then once the students have lled out the table accurately, ask them to answer the same three questions: How much Net Income (loss) did your company make during this time period? How much cash do you have available at the end of July 2008? Assuming all of the expenses and revenues are described above, was it worth it to buy and sell these pigs? Discuss with the students whether they got the same answers. If they came up with dierent answers than in the rst part of this challenge ask them which answers they thought were more accurate. Discuss with the students the benets and problems with using double-entry accounting. Explain to the students that although this material may be dicult to learn, that in the long run, it makes keeping track of the business's cash, expenses, and revenues much easier. Phase III Using your basic knowledge of double-entry accounting ll out the table below for each transaction for your new pig-raising business. This activity will take approximately 1 hour. Date Transaction (1) Identify 1/1/08 You set aside $2,000 to be used by your new business. 1/3/08 You buy supplies on account to build a pig pen for the farm for $500 (2) Increase or Decrease? (3) Indicate whether an account is debited or ed. Increase Asset debit Owner's Equity Supply Increase Owner's Equity (4) By How much? $2,000 2,000 Journal Entry $2,000 Capital Stock 2,000 $200$200 Supply continued on next page

3 OpenStax-CNX module: m Table 1 Finally on July 1, 2008 you sell the three pigs at an auction. One pig was auctioned o for $250, another for $350 and another for $400. Rather than collecting the cash immediately, you sell these pigs on account. The buyers promise to pay these amounts within 30 days. On July 31, 2008 you collect the accounts receivable for the amount that the pigs were auctioned for. Correct Answers for Teacher's Reference: Date Transaction (1) Identify 1/1/08 You set aside $2,000 to be used by your new business. (2) Increase or Decrease? (3) Indicate whether an account is debited or ed. Increase Asset debit Owner's Equity Increase Owner's Equity Up = (4) By How much? Journal Entry $2,000 2,000 $2,000 Capital Stock 2,000 1/3/08 You buy supplies on account to build a pig pen for the farm for $500 Supply Payable IncreaseIncrease debitliability $200$200 Supply 500 Payable 500 continued on next page

4 OpenStax-CNX module: m /10/08 You purchase 3 baby pigs to raise and sell later. Each pig costs $50. Pig Inventory Asset $150$150 Pig Inventory $150 $150 1/11/08 The pigs are hungry, so you buy $100 of food for the pigs with cash. Food $100$100 Food $100 $ 1/31/08 You pay o the accounts payable for the $500 of supplies purchased earlier this month. Payable- DecreaseDecrease Liability $500$500 Payable $500 3/1/08 You buy another $100 of food for the pigs with cash Food $100$100 Food $100 5/1/08 You buy another $100 of food for the pigs with cash Food $100$100 Food $100 $100 7/1/08 You sell the three pigs on account for at total of $1,000. ReceivableRevenue IncreaseIncrease Asset Up = debitrevenue $1,000$1,000 Acc. Receivable $1,000 Revenue $1,000 7/1/08 As part of the sale the pigs are handed over to the buyers Cost of Goods SoldInventory $150$150 Cost of Goods Sold $150 Inventory $150 continued on next page

5 OpenStax-CNX module: m /31/08 You collect the $1,000 in cash from the sell of the three pigs. Receivable Asset $1,000$1,000 $1,000 Acc. Receivable $1,000 Table 2 How much Net Income (loss) did your company make during this time period?net Income = Revenues - s s = 500(supplies) + 300(food) (Cost of Goods Sold) = $950 Revenues = $1,000 (Sale of Pigs) Net Income = $1,000 - $950 = $50 How much cash do you have available at the end of July 2008? Ending = $2,000(initial investment) - $150 (buying baby pigs) -$300 (food purchases) - $500 (paying payable for supply expense) + $1,000 (Sale of Pigs) = $2,050 (It may also be benecial for the students to show these in the form of T-tables as shown in the resources) Assuming all of the expenses and revenues are described above, was it worth it to buy and sell these pigs? The company made $50, so on the surface it appears like it was probably worth while. However, the farmer would have to decide if receiving $50 for all of his personal work is worth his work and time. Ask the students if there is something else he could do to make more than $50 in that time. Encourage the students to critically think of other ways he could have spent his time and money, or ways that he could have reduced costs or made more money from raising these pigs to make it more worth it. Competencies Core Competencies Use mathematical approach to nd solutions to real-life problems Make simple multiplication and addition calculations Use double-entry accounting methods to determine protability Identify transactions and accounts within a story problem Cross-Curricular Competencies Utilize general business knowledge Utilize Decision Making skills Content Basic Denition of Account Types: Asset - a possession of value Examples Used:, Inventory, and Receivable Liability - an amount owed by the company Examples Used: Payable Owner's Equity - owner's amount invested in company Revenue - Inows of assets, sales

6 OpenStax-CNX module: m an outow or using up of assets, costs Examples Used: Supplies, Food Basic Knowledge of double-entry accounting (debits and s) and journal entries Debit means on left and means on right General Accounting Equations: * Assets = Liabilities + Owner's Equity * Net Income = Revenues - s Assets increased by debits and decreased by s Liabilities increased by s and decreased by debits Owner's Equity increased by s and decreased by debits Revenues increased by s and decreased by debits s increased by debits and decreased by s Open Educational Resources General Accounting Overview: or Debits and Credits Tutorial: