16 BULLETIN 994, U. S. DEPARTMENT OF AGRICULTURE. 



are similar in all plans and these will be touched upon before con- 

 sidering specific plans or methods. 



PRINCIPLES OF FARM-ACCOUNTING PRACTICE. 



The first step in starting the detailed accounting study on farms 

 is to make a detailed inventory at the beginning of the farm year. 

 It is essential that the farm year start before active field work on 

 the season's crops begins, and it is a common practice to start either 

 January 1, February 1, or March 1. Particular emphasis should be 

 laid upon the accuracy of taking the opening inventory. Cost 

 studies are usually organized on a five-year basis, and it is essential 

 that a proper start be made, with a careful, accurate, detailed inven- 

 tory of all the forms of capital that enter into the farm business. 

 Because of its importance it is felt that it is worth while to mention 

 a few of the principal items that often cause difficulty in making a 

 satisfactory farm inventory. 



REAL ESTATE. 



The term "real estate," as it is commonly used in investigational 

 work, includes the land, buildings, and land improvements such as 

 drainage systems, water systems, fences, and other physical im- 

 provements. 



The question at once arises as to the most serviceable basis of 

 valuing the land. The productive capacity of the land is often 

 advocated as the proper basis, but all farm business analyses indicate 

 that considerably lower values result when the earnings are capital- 

 ized at going rates of interest than obtain when going sale values 

 are used. For example, in parts of the corn belt the farm earnings 

 net 2\ to 3 per cent to the owner-operators of land with a valuation 

 of $250 per acre. With the values of land arrived at by capitalizing 

 the earnings at 5 or 6 per cent the land values would be correspond- 

 ingly reduced. 



The weakness of capitalizing a cash land-rental charge to arrive 

 at a value lies in that thus we capitalize only the current year's 

 rent, leaving out of consideration the future earnings, which should 

 be considered. Theoretically, this method might be used if land 

 were' more stable in production, with long-time records of per- 

 formance available. It should be kept in mind that the values 

 arrived at on a sale basis may involve unearned income which has 

 been added to the price in anticipation of future advances in value. 

 Thus, in arriving at the net farm earnings, interest on unearned 

 capital is involved as a factor. Also, in showing the farm earnings 

 in the form of a certain per cent of the capital value, or in the form 

 of labor incomes, there is ample opportunity for misinterpretation 

 of the results and for a wide variation in the results, depending upon 

 the value placed on the land. The common practice is to carry the 



