I'm working on a P&L statement for a farm, so I haven't been able to find many resources online specific to this type of accounting. On permanent crop farms (fruits & nuts), there is an initial 3-4 year non-bearing period where the fruit trees are developing. In that period, there is no income from the fields - just the cost of maintaining those fields through development. As such, the farm credit system offers long-term loans to help farmers plant and manage those fields through the non-bearing period as they develop income 6-7 years down the line. The establishment materials, labor and inputs can be amortized through a loan - so my question becomes: do you include the total cost of those inputs in the P&L statement for that year or just the amortized payment you need to make + any down payment that needs to be made? Example - the total cost to plant a field is $1,000,000 dollars, however you can get an loan with an 80% LTV to plant that field. In that first year you would need $200,000 down + ~$60k for your mortgage payments. On a P&L, would that be reflected as $1,000,000 or as ~$260,000? Additionally, there are loans to cover the labor for those first non-bearing years. Same principle - am i including the total cost or just the amortized payment? I also understand that typically only interest payments are included on a P&L and the principle payments are detailed on balance sheets and cash flow statements.
P&L Theory: are amortized costs of goods sold included in P&L? (agriculture)
Answers
As a general principle - do not mix Income and expenses, which are reflected in the Profit and Loss Statement with the way the company is financing its activities. The income generated by the crop at the time of sale is reflected as a Sales in the P&L. The loan received to finance the development of the products to be sold is shown in the Balance Sheet of the company. The only part of the financing - being the interest paid on the outstanding loan - is a financing cost and as such charged to the P&L.
All expenses that are directly related to the products that will be sold are accumulated during the time the products are growing are debited to "an asset account". (inventory, prepaid production cost) until the time of the harvest and sale of such products. General expenses incurred to "run the business" such as general administration and accounting tasks are charged to the P&L when incurred. Loans received are debited to the Bank Account (Asset) and credited to the Loan Account. (Liability). Both are Balance Sheet accounts. The principle amounts of the loan repayments are credited to the Bank Account and debited to the Loan Account. Payments of interest on the outstanding loan balances are expensed as interest expenses. (during the fiscal year in which they were incurred)
At time of the sale of the finished products, the "matching principle" is applied. The amount received for the sale are debited to the Bank Account and credited as a Sale to the P&L. AT the end of that month, an adjustment is made to match these sales with the accumulated costs spent during previous periods. The accumulated cost of the products sold is credited to the corresponding Asset Account (Inventory, prepaid costs) and debited as "cost of sales" to the Profit and Loss Statement.