INTEREST AND DEPRECIATION CHARGES IN FARM ACCOUNTS.

New Zealand Journal of Agriculture, Volume XVIII, Issue 4, 21 April 1919, Page 206

INTEREST AND DEPRECIATION CHARGES IN FARM ACCOUNTS.

By

A.D. PARK, A.I.A.N.Z.,

Accountant to the Department.

INTEREST.

The matter of interest on capital and to what extent it should be taken into account in farm-cost accounts may be first considered. Some authorities advocate that interest should be debited to each farm trading account in proportion to the amount of capital involved in that particular operation. There are many reasons, however, why such practice should not be followed. The chief of these are, —

(i.) Interest represents income to the one who receives it and a deduction from the income of the one who pays it. This being • the case, interest on invested capital cannot properly be charged in the cost of production, because no cash transaction actually takes place. (2.) Interest on capital invested bears the same relation to the farmer as do the profits from the farm, and to ensure such profits it is quite necessary to have the farm properly equipped. It is therefore unreasonable to charge up to the individual farm operations interest on the value of the necessities to carry on those operations.

(3.) Cost accounts for farming operations in order to be reliable and useful should be based on absolute facts, and therefore should not have included any element of doubt or of a variable nature, especially when such costs are subjected to comparison. Cost charges usually are based on an increase in (a) some liability, such as wages, &c., or (b) a decrease in some assets, such as manures, seeds, &c., used. If the charging of interest is justified, how are we to arrive at a fair rate ? Opinions would surely differ, with the result that farm costs for similar products on different farms with otherwise equal charges would show considerable discrepancies. ..

(4.) Taking the case of a crop unharvested at the end of the farmer's year any interest included at stocktaking in the value of such crop directly anticipates profits from' the crop and therefore inflates the inventory. . Interest charges on capital may, if considered necessary, be debited to an “ Interest Account,” or an “ Interest, Rent, Rates, &c., Account,” and at the end of the year closed into profit and loss account. Or, as an alternative, such changes could be provided for in the closing journal entries by a direct debit to profit and loss and a like credit to capital account.

DEPRECIATION.

The matter of depreciation chargeschiefly in relation to farm implements and machinery now be briefly considered. Flocks and herds of live-stock and crops are generally treated as floating assets, and as such are not subjected to depreciation. It is by the sale or use of the floating assets on a farm that profits are made, but it is by the use

of the fixed assets, such as implements and machinery, that the chance of making a profit is brought about. The main points to be considered in charging depreciation are(i) The cost price ; (2) the probable life of the asset ; (3)' repairs and renewals during life of the asset; (4) the residual value of the asset. There would probably be no difficulty in ascertaining the original cost. The probable life of the asset should be estimated by those thoroughly experienced in its use, but it is also necessary to take into consideration the possibility and effect of new discoveries , or later models' which might compel the scrapping of the original asset. Repairs and renewals during the life of the asset should be charged, as they occur, to the work on which the asset is employed, when such repairs or renewals become necessary. The residual value is that which may remain in the asset when it is no longer useful for the purpose for which it was bought, and this. can be determined by experts.. -

Having ascertained these facts, the probable cost of repairs and renewals is added to the original cost, and from this is deducted the residual value. The balance represents the amount of depreciation to be provided over the probable life-period, and by simple division may be obtained the amount of depreciation to be charged for that particular asset each year. This method writes off the same amount each year, and to this there is an objection, for while the depreciation charge remains stationary the cost of repairs, &c., will yearly increase as. the asset gets older. The more favoured method, therefore, is to write off a slightly higher percentage from the reducing value of the asset, and not from the - fixed original value. The result is that the depreciation at the start is higher, and is gradually reduced towards the end of the life of .the asset. As the charges for repairs and renewals operate, on the reverse scale, the profit and loss account. under this method bears a more fixed yearly charge when both are considered. The principle aimed at is to provide a rate of depreciation which will, at the end of the life of the asset, reduce the book value to what may be expected as the residual value.

Sale of Moumahaki Ayr shires. — The Department held its first sale of surplus pedigree Ayrshire stock at the Moumahaki Experimental Farm on 18th March. Breeders were well represented in the large attendance, and bidding was keen. In all forty-six animals were sold, averaging 20 guineas per head, this including eighteen calves. The seventeen cows offered averaged 33 guineas, seventeen heifers 18 guineas, and twelve bulls yj guineas. Among the cows the highest price, 58 guineas, was paid by Mr. F. Mills, of Hawera, for Agnes III ; while Mr. Lawton, of Waiuku, paid 56 guineas for Dominion Fenwick Maggie. The buying ensures that this valuable stock will be well distributed in the North Island.

. The best means of getting rid of the common field-daisy on lea land where it is present excessively is to sweeten the ground by draining and liming, afterwards plough the grass-sod well under, and then resow with a good mixture. ’ ...