Managerial Accounting Using QuickBooks Pro TM This manual is intended as a reference in furthering knowledge of management accounting for agricultural producers using QuickBooks Pro TM. Historically, agricultural producers (from here referred to as producers) have kept financial records only for tax purposes. We have kept lots of information, both financial and production, but have lacked a way to combine and mold this information into something useful. After many years of trial and error, Texas Cooperative Extension has developed a management accounting system that uses QuickBooks Pro TM. Although this system does require a certain amount of education on the producer s part, it is complete and affordable. Final reports using management information (versus tax information) provides producers with insight into the financial health of their businesses. Since these management reports combine financial and production information, they also provide information as to possible areas of weaknesses, as well strengths. Management accounting can be complex, especially for those without accounting expertise, but it can be accomplished. It is impossible to can any sort of accounting, but we have made this system as rigid as possible. We provide several charts of accounts from which to choose that can be uploaded directly into your new QuickBooks file. These charts of accounts include special allocation and transfers accounts, as well as other accounts that allow us to accomplish management accounting and tax accounting at the same time. Along with providing the chart of accounts, we teach producers how to use the class feature in QuickBooks to separate income and expenses by enterprise or function. By separating direct income and expenses into Profit or Cost Centers and overhead-type expenses into Support Centers, all costs can be fully absorbed by the Profit Centers. Furthermore, by adjusting the Cash-based reports into Accrual-adjusted reports, the net income reflected at the end of the year is based on what was actually sold. In other words, the statements will be adjusted to reflect net income of only those enterprises or commodities that have completed their production cycle. Management accounting is accomplished while maintaining the tax data. In order to keep you focused and moving in a forward motion, we have developed a time line. We expect the producer to take on a certain amount of responsibility, but we also know that there is a point where more accounting expertise is required to finish the accounting. The timeline breaks the list of to dos down so that this huge task becomes manageable. 1.1
Management Accounting Timeline 1. Daily Grind. These are the day-to-day transactions, like checks and deposits, broken down by account and class. (Covered in the Introduction to Management Accounting Using QuickBooks Pro TM.) 2. Classifying the Unclassified. Everything, with very few exceptions, should be classified as either a Profit, Cost, or Support Center. 3. Loan Reconciliations. By obtaining Loan Histories from each lender, all notes can be reconciled, including the break-down of principal and interest per payment. This step is very important because, in many instances, income goes directly to a creditor to pay down a note; if the notes are not reconciled, hat income could be missed. 4. Asset List Clean-up and Reconciliation. 98% of all depreciation schedules and assets lists are incorrect. 5. Book Owner labor and other resources used. Your labor is a resource used, and although it is not tax deductible, we consider it an expense and absorb it into the total cost of production. Likewise, it is important to measure other resources used, even though they may not have been paid for. 6. Is it reasonable? One important attribute of a good manager is the ability to decide if the financial output is reasonable. Does the information presented look reasonable? Does it fit the enterprises of the operation? 7. Allocate Support Centers to Responsible Cost and Profit Centers. Using the Allocation Worksheets in Excel (provided) and journal entries in QuickBooks, costs accumulated in the Support Centers are allocated. You must allocate Support Centers first. 8. Transfer Cost Centers. Using the Transfer Worksheets in Excel (provided) and journal entries in QuickBooks, costs accumulated in the Cost Centers will be transferred to responsible Profit Centers and/or other Cost Centers. 9. Inventory Incomplete Profit or Cost Centers. At the end of the year, costs accumulated to incomplete Profit and Cost Centers will be transferred to the balance sheet (via journal entry) and held in an Investment in account. The journal entry will be reversed as of the first day of the following year in order to bring those cumulative costs back to the Statement to finish the production cycle. The end result is an Statement that reflects a true net income by class, and the only classes remaining are those that have completed the production cycle. Congratulations! Your accounting is now complete, and you may begin the reporting process. 1.2
SCHEDULE F OMB No. 1545-0074 Profit or Loss From Farming (Form 1040) Department of the Treasury Internal Revenue Service Name of proprietor (99) Attach to Form 1040, Form 1041, Form 1065, or Form 1065-B. See Instructions for Schedule F (Form 1040). 2002 Attachment Sequence No. 14 Social security number (SSN) A Principal product. Describe in one or two words your principal crop or activity for the current tax year. B Enter code from Part IV D Employer ID number (EIN), if any C Accounting method: (1) Cash (2) Accrual E Did you materially participate in the operation of this business during 2002? If No, see page F-2 for limit on passive losses. Yes No Part I Farm Cash Method. Complete Parts I and II (Accrual method taxpayers complete Parts II and III, and line 11 of Part I.) Do not include sales of livestock held for draft, breeding, sport, or dairy purposes; report these sales on Form 4797. 1 Sales of livestock and other items you bought for resale 1 2 Cost or other basis of livestock and other items reported on line 1 2 3 Subtract line 2 from line 1 3 4 Sales of livestock, produce, grains, and other products you raised 4 5a Total cooperative distributions (Form(s) 1099-PATR) 5a 5b Taxable amount 5b 6a Agricultural program payments (see page F-2) 6a 6b Taxable amount 6b 7 Commodity Credit Corporation (CCC) loans (see page F-3): a CCC loans reported under election 7a b CCC loans forfeited 7b 7c Taxable amount 7c 8 Crop insurance proceeds and certain disaster payments (see page F-3): a Amount received in 2002 8a 8b Taxable amount 8b c If election to defer to 2003 is attached, check here 8d Amount deferred from 2001 8d 9 Custom hire (machine work) income 9 10 Other income, including Federal and state gasoline or fuel tax credit or refund (see page F-3) 10 11 Gross income. Add amounts in the right column for lines 3 through 10. If accrual method taxpayer, enter the amount from page 2, line 51 11 Part II Farm s Cash and Accrual Method. Do not include personal or living expenses such as taxes, insurance, repairs, etc., on your home. 12 Car and truck expenses (see page 25 Pension and profit-sharing F-4 also attach Form 4562) 12 plans 25 13 Chemicals 13 26 Rent or lease (see page F-5): 14 Conservation expenses (see a Vehicles, machinery, and equipment page F-4) 14 26a 15 Custom hire (machine work) 15 b Other (land, animals, etc.) 26b 16 Depreciation and section 179 27 Repairs and maintenance 27 expense deduction not claimed 28 Seeds and plants purchased 28 elsewhere (see page F-4) 16 29 Storage and warehousing 29 17 Employee benefit programs 30 Supplies purchased 30 other than on line 25 17 31 Taxes 31 18 Feed purchased 18 32 Utilities 32 19 Fertilizers and lime 19 33 Veterinary, breeding, and medicine 33 20 Freight and trucking 20 34 Other expenses (specify): 21 Gasoline, fuel, and oil 21 a 34a 22 Insurance (other than health) 22 b 34b 23 Interest: c 34c a Mortgage (paid to banks, etc.) 23a d 34d b Other 23b e 34e 24 Labor hired (less employment credits) 24 f 34f 35 Total expenses. Add lines 12 through 34f 35 36 Net farm profit or (loss). Subtract line 35 from line 11. If a profit, enter on Form 1040, line 18, and also on Schedule SE, line 1. If a loss, you must go on to line 37 (estates, trusts, and partnerships, see page F-6) 36 37 If you have a loss, you must check the box that describes your investment in this activity (see page F-6). 37a If you checked 37a, enter the loss on Form 1040, line 18, and also on Schedule SE, line 1. If you checked 37b, you must attach Form 6198. 37b For Paperwork Reduction Act Notice, see Form 1040 instructions. 1.3 Cat. No. 11346H All investment is at risk. Some investment is not at risk. Schedule F (Form 1040) 2002
11:21 AM TTAP Enterprises 11/04/02 Profit Loss Cash Basis (Commonly Prepared) January through December 2002 Jan - Dec 02 Ordinary / Agricultural program payments 13,260.00 Crop Revenues 63,300.00 Total Gain(Loss)-Lvstk. Disposed 1,883.33 Livestock (raised market) 178,054.80 Livestock Purchased for Resale 61,500.00 COS Purchased Stockers -50,000.00 Wildlife Revenues 35,000.00 Total 302,998.13 Chemicals 13,600.00 Custom hire (Machinery) 10,990.00 Feed Purchased 20,164.12 Fertilizer & lime 15,000.00 Gasoline, fuel & oil 12,320.00 Insurance 17,550.00 Interest (current loans) 2,401.36 Interest (non-current loans) 65,409.01 Labor (Contract) 676.00 Labor (hired) 24,000.00 Payroll s 2,028.00 Professional Fees 4,500.00 Rent or lease (land) 21,250.00 Repairs 7,930.00 Seed 9,600.00 Supplies 3,750.00 Taxes (not income taxes) 7,935.00 Utilities 6,000.00 Veterinary & medicine 17,156.00 Total 262,259.49 Earnings Before Taxes & Depreciation 40,738.64 Depreciation 26,008.69 Earnings Before Taxes 14,729.95 1.4
8:50 AM 09/14/04 Cash Basis TTAP ENTERPRISES Profit & Loss (per MA) January through December 2002 Jan - Dec 02 Ordinary / Agricultural program payments 13,260.00 Crop Revenues 63,300.00 Gain(Loss)-Lvstk. Disposed 1,883.33 Livestock (raised market) 178,054.80 Livestock Purchased for Resale 61,500.00 Wildlife Revenues 35,000.00 Total 352,998.13 Cost of Goods Sold Livestock (raised market COS) 190,530.12 Lvstk. purchased for resale COS 77,549.88 Raised Crops COS 90,257.32 Total COGS 358,337.32 Gross Profit -5,339.19 Chemicals 13,600.00 Custom hire (Machinery) 10,990.00 Feed Purchased 20,164.12 Fertilizer & lime 15,000.00 Gasoline, fuel & oil 12,320.00 Insurance 17,550.00 Interest (current loans) 2,401.36 Interest (non-current loans) 65,409.01 Labor (Contract) 676.00 Labor (hired) 24,000.00 Labor (owner operator) 30,000.00 Payroll s 2,028.00 Professional Fees 4,500.00 Rent or lease (land) 21,250.00 Repairs 7,930.00 Seed 9,600.00 Supplies 3,750.00 Taxes (not income taxes) 7,935.00 Utilities 6,000.00 Veterinary & medicine 17,156.00 Total 292,259.49 Net Ordinary -297,598.68 Other / Other Stocker Gain (Internal Only) 18,779.00 Total Other 18,779.00 Other Support Center Cost Allocation Transfer Cattle Cost -98,724.51 Transfer Crop Cost 18,779.00 Transfer Inventory Cost 108,997.16 COS Xfer Purch/Capitalized Cost -272,257.32 COS Transfer Added Value -86,080.00 Total Other -329,285.67 Net Other 348,064.67 Earnings Before Taxes & Depreciation 50,465.99 1.5
8:50 AM 09/14/04 Cash Basis TTAP ENTERPRISES Profit & Loss (per MA) January through December 2002 Jan - Dec 02 Depreciation 48,104.75 Earnings Before Taxes 2,361.24 1.6
Simpleton Farms is a sole proprietorship that grows corn and provides custom harvesting of corn for neighboring farmers. Mr. Simpleton rents 100 acres, which he plants to corn. He also harvests another 2500 acres of corn for his neighbors. He wants to know three pieces of information from his accounting system. 1) How much profit (loss) did his entire operation generate? 2) How much profit (loss) did his personal farming operation generate? 3) How much profit (loss) did his custom farming operation generate? In order to answer these questions, mark the appropriate centers Mr. Simpleton should use in his Management Accounting system. Chapter 1 Description of Activity Accounting Centers Chapter 2 Profit Center Cost Center Support Center Corn Custom Farming Labor and Management General and Administrative Machinery and Equipment Chapter 3 Allocation Criteria In order to allocate the costs accumulated in the Support Centers to the Profit Centers, Mr. Simpleton has decided to allocate by acre. Corn 100 acres 4% Custom Farming 2500 acres 96% 1.7
Profit && Loss January 1, XX thru December 31, XX TOTAL Crop Revenues 39,600.00 Machine Work 125,000.00 Gross Profit 164,600.00 Chemicals 4,500.00 Depreciation 24,099.00 Fertilizer 5,600.00 Fuel 23,332.00 Insurance 2,600.00 Labor (owner operator) 24,700.00 Rent (land) 6,500.00 Repairs 50,892.00 Seed 3,000.00 Utilities 10,067.00 Total 155,290.00 Net Ordinary 9,310.00 1.8
Profit & Loss by Class January 1, XX thru December 31, XX CORN CUSTOM L & M G & A M & E PC PC SC SC SC TOTAL Crop Revenues 39,600 39,600.00 Machine Work 125,000 125,000.00 Gross Profit 39,600 125,000 0 0 0 164,600.00 Chemicals 4,500 4,500.00 Depreciation 24,099 24,099.00 Fertilizer 5,600 5,600.00 Fuel 23,332 23,332.00 Insurance 2,600 2,600.00 Labor (owner operator) 24,700 24,700.00 Rent (land) 6,500 6,500.00 Repairs 50,892 50,892.00 Seed 3,000 3,000.00 Utilities 7,967 2,100 10,067.00 Total Ordinary 30,167 0 24,700 2,100 98,323 155,290.00 Net Ordinary 9,433 125,000-24,700-2,100-98,323 9,310.00 OTHER EXPENSE Support Center Allocation L & M 0 G & A 0 M & E 0 Total SC Allocation 0 0 0 0 0 0 NET INCOME 9,433 125,000-24,700-2,100-98,323 9,310 1.9
Profit & Loss by Class January 1, XX thru December 31, XX CORN CUSTOM L & M G & A M & E PC PC SC SC SC TOTAL Crop Revenues 39,600 39,600.00 Machine Work 125,000 125,000.00 Gross Profit 39,600 125,000 0 0 0 164,600.00 Chemicals 4,500 4,500.00 Depreciation 24,099 24,099.00 Fertilizer 5,600 5,600.00 Fuel 23,332 23,332.00 Insurance 2,600 2,600.00 Labor (owner operator) 24,700 24,700.00 Rent (land) 6,500 6,500.00 Repairs 50,892 50,892.00 Seed 3,000 3,000.00 Utilities 7,967 2,100 10,067.00 Total Ordinary 30,167 0 24,700 2,100 98,323 155,290.00 Net Ordinary 9,433 125,000-24,700-2,100-98,323 9,310.00 OTHER EXPENSE Support Center Allocation L & M -988-23712 24700 0 G & A 0 M & E 0 Total SC Allocation -988-23712 24700 0 0 0 NET INCOME 8,445 101,288 0-2,100-98,323 9,310 1.10
Profit & Loss by Class January 1, XX thru December 31, XX CORN CUSTOM L & M G & A M & E PC PC SC SC SC TOTAL Crop Revenues 39,600 39,600.00 Machine Work 125,000 125,000.00 Gross Profit 39,600 125,000 0 0 0 164,600.00 Chemicals 4,500 4,500.00 Depreciation 24,099 24,099.00 Fertilizer 5,600 5,600.00 Fuel 23,332 23,332.00 Insurance 2,600 2,600.00 Labor (owner operator) 24,700 24,700.00 Rent (land) 6,500 6,500.00 Repairs 50,892 50,892.00 Seed 3,000 3,000.00 Utilities 7,967 2,100 10,067.00 Total Ordinary 30,167 0 24,700 2,100 98,323 155,290.00 Net Ordinary 9,433 125,000-24,700-2,100-98,323 9,310.00 OTHER EXPENSE Support Center Allocation L & M -988-23,712 24,700 0 G & A -84-2,016 2,100 0 M & E 0 Total SC Allocation -1,072-25,728 24,700 2,100 0 0 NET INCOME 8,361 99,272 0 0-98,323 9,310 1.11
Profit & Loss by Class January 1, XX thru December 31, XX CORN CUSTOM L & M G & A M & E PC PC SC SC SC TOTAL Crop Revenues 39,600 39,600.00 Machine Work 125,000 125,000.00 Gross Profit 39,600 125,000 0 0 0 164,600.00 Chemicals 4,500 4,500.00 Depreciation 24,099 24,099.00 Fertilizer 5,600 5,600.00 Fuel 23,332 23,332.00 Insurance 2,600 2,600.00 Labor (owner operator) 24,700 24,700.00 Rent (land) 6,500 6,500.00 Repairs 50,892 50,892.00 Seed 3,000 3,000.00 Utilities 7,967 2,100 10,067.00 Total Ordinary 30,167 0 24,700 2,100 98,323 155,290.00 Net Ordinary 9,433 125,000-24,700-2,100-98,323 9,310.00 OTHER EXPENSE Support Center Allocation L & M -988-23,712 24,700 0 G & A -84-2,016 2,100 0 M & E -3,933-94,390 98,323 0 Total SC Allocation -5,005-120,118 24,700 2,100 98,323 0 NET INCOME 4,428 4,882 0 0 0 9,310 1.12
Profit & Loss by Class January 1, XX thru December 31, XX CORN CUSTOM L & M G & A M & E PC PC SC SC SC TOTAL Crop Revenues 39,600 39,600.00 Machine Work 125,000 125,000.00 Gross Profit 39,600 125,000 0 0 0 164,600.00 Chemicals 4,500 4,500.00 Depreciation 24,099 24,099.00 Fertilizer 5,600 5,600.00 Fuel 23,332 23,332.00 Insurance 2,600 2,600.00 Labor (owner operator) 24,700 24,700.00 Rent (land) 6,500 6,500.00 Repairs 50,892 50,892.00 Seed 3,000 3,000.00 Utilities 7,967 2,100 10,067.00 Total Ordinary 30,167 0 24,700 2,100 98,323 155,290.00 Net Ordinary 9,433 125,000-24,700-2,100-98,323 9,310.00 OTHER EXPENSE Support Center Allocation L & M -988-23,712 24,700 0 G & A -84-2,016 2,100 0 M & E -3,933-94,390 98,323 0 Total SC Allocation -5,005-120,118 24,700 2,100 98,323 0 NET INCOME 4,428 4,882 0 0 0 9,310 1.13