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



The various uses of the term " profit" illustrate the need for a more 

 general understanding as to the nomenclature used in farm account- 

 ing studies. Doubtless the time is coming when " profit" will mean 

 just one thing to everyone interested in the farm business, while 

 "farm income," "labor income," "interest on investment," and 

 .other kindred terms will express the precise meaning intended, by 

 virtue of a wider dissemination of the correct definitions and the 

 proper use of these terms. 



In common farm-accounting practice the profit from a farm 

 business is that amount which remains after all expenses, including 

 the labor used on the farms, and interest on investment in the farm 

 business, have been deducted from the total receipts, the total 

 receipts to include cash receipts, farm products consumed on the 

 farm, and increase in inventory other than an increase in the value 

 of land owing to an unearned rise in value. If the inventory is 

 properly kept, any permanent improvement added to the farm as an 

 expense will be counterbalanced by a proper increase in the value of 

 the farm, but a more or less arbitrary increase in the value of the 

 land should not be included as a receipt in the operation of the year's 

 business. 



In commercial accounting practice, however, interest on invest- 

 ment or capital is not commonly included in the costs. The position 

 is commonly taken that profits can not be divided into "interest" 

 and "profits," but that the total remainder above all operating 

 expenses represents the profit, which may be expressed as a certain 

 percentage of the capital investment. Interest can not arbitrarily 

 be estimated and taken out in computing the costs and arriving at 

 the total profit. In comparing farming as a business with other 

 lines of business, when a total profit or net return is used interest on 

 the farm capital should not be included in the costs in determining 

 the profit. 



There is also need for distinguishing between the profit from a par- 

 ticular enterprise on the farm and the profit from the entire farm 

 business. From an accounting standpoint, for example, the field 

 crops, considered as separate enterprises, will often show a very good 

 profit, while the live-stock enterprises which consume these crops 

 may show a very small profit or an actual loss; nevertheless, the 

 returns from the farm business at the end of the year are such as to 

 be satisfactory to the farm operator. 



THE ROUTE PLAN. 



The route plan of obtaining cost of production data, as conducted 

 at the present time by the Office of Farm Management and Farm 

 Economics, involves studies of a group of from 20 to 25 farms in a 

 locality. A field statistician spends his entire time in the vicinity, 



