1920.] Farm Accounts, Profits, and Costs. 167 



{g) Market Basis. — This method is customary and in many 

 ways convenient, especially when live stock is concerned, and it 

 will probably remain the one most frequently adopted. 



The effect of putting the market price of unsold produce 

 into the accounts is that the produce is treated in effect as if it 

 had been sold, and the accounts show the profit at the time the 

 valuation is put in. The profit is thus anticipated before its 

 actual realisation, and becomes for that year a paper profit. 

 It is probable that some farmers have been paying Income Tax 

 on profits which are not reahsed profits, but which arise from 

 the upward movement of the market. Further, it is sometimes 

 found in practice that owing, say to corn threshing out badly, 

 or damage being done by rats, or other similar causes, the valua- 

 tion price is not reahsed, and in that event a loss ensues which 

 has to be borne by the following year's account. The pro- 

 babiHty of this is of course lessened when, as is often the case, 

 the valuation is made in a prudent and conservative manner, 

 and temporary or abnormal fluctuations are discounted. 



It will be seen that, even with the circulating assets which 

 are intended to be sold, the insertion in the accounts of the 

 market value of unsold produce tends to obscure the profit 

 which is eventually realised in cash. 



But whatever reasons of practical convenience may support 

 the valuation of the " circulating " assets at market prices,, 

 the position is not the same with the valuation of the " fixed " 

 assets. Profits thus arising from the changing values of this 

 fixed property are not only paper profits, but paper profits 

 arising on fixed or capital assets which must remain on the farm. 

 The earning efficiency of these assets is unaffected by market 

 movements ; they are kept on the farm to produce, the work- 

 horses and implements producing the crops, the breeding stock 

 their offspring — and the dairy herd also producing milk. This 

 being so, their efficiency as producing instruments is the measure 

 of their value to the farm as a going concern. 



In the course of the proceedings of the present Royal Com- 

 mission on Income Tax, reference was made to the fact of these 

 changing " capital " values appearing as profits in farm ac- 

 counts, and it was argued that it was therefore inequitable to 

 assess farmers for Income Tax on the amount of the profits 

 shown by the annual accoimts, as they would thereby be paying 

 tax not only on the true annual profits from the produce sold, 

 but al^o on these capital profits, to which Income Tax was not 

 meant to apply. 



