Livestock in Accounting: Understanding the Role and Financial Impact

When you hear the word “livestock,” what comes to mind? For many, it may evoke images of cows, sheep, pigs, or chickens. However, for accounting students and professionals, livestock refers to more than just animals on a farm; it is an important asset category that must be correctly accounted for in financial statements. This tutorial will dive deep into what livestock is in accounting, how to treat it in your books, and how to calculate and report its financial impact.

What Is Livestock in Accounting?

In accounting, livestock refers to animals that are owned by a business primarily for agricultural, commercial, or breeding purposes. Livestock can include cattle, sheep, pigs, poultry, and other animals. In terms of accounting, these animals are considered “biological assets,” which means they are living creatures with an intrinsic value that is expected to generate income.

Under the International Financial Reporting Standards (IFRS), particularly IAS 41 (Agriculture), livestock is recognized as a biological asset. These assets are subject to fair value measurement at the point of harvest or sale, and changes in their value over time are reflected in the income statement.

The Accounting Treatment of Livestock

To understand the accounting treatment of livestock, let’s break down its treatment in several key areas: recognition, measurement, valuation, and classification. These are crucial concepts that every accounting student should grasp.

Recognition of Livestock in Financial Statements

Livestock is recognized as an asset in a business’s financial statements if it meets two criteria:

1. It is controlled by the business – The company must have ownership or the ability to control the animal.
2. It is expected to bring future economic benefits – This means that the livestock is either being raised for sale or used for production purposes, such as milk or wool, which will generate future cash flows.

Measurement and Valuation of Livestock

According to IAS 41, livestock must initially be measured at fair value less costs to sell. Fair value is determined based on the price the business would expect to receive if it sold the livestock in an open market. This measurement also includes transaction costs, such as sales commissions or transport fees, which should be deducted from the sale price.

It’s important to note that for livestock, the costs to sell might include expenses like the cost of transporting animals to the market or slaughterhouse, and any commission paid to agents or brokers.

The fair value of livestock is also subject to change over time due to market conditions, animal growth, and other factors. Therefore, the value of livestock should be reassessed periodically. The impact of these changes is recorded in the income statement.

Livestock as a Biological Asset vs. Inventory

Livestock can be classified as a biological asset when it is still alive and in production. However, once livestock is sold or harvested (for meat, milk, wool, etc.), it is transferred from being a biological asset to being classified as inventory in the financial statements. Inventory is then reported as part of the current assets and valued at cost or net realizable value, whichever is lower.

For example, if a farm sells cows for beef, those cows are initially classified as biological assets. After they are sold, the proceeds from the sale will be recorded as inventory until it is sold to a customer.

Journal Entries for Livestock Transactions

Now that we have a foundational understanding of livestock in accounting, let’s walk through a few examples of how to record livestock transactions in the general journal.

Example 1: Purchasing Livestock

Imagine a dairy farm purchases 50 cows for $10,000 each. The farm expects these cows to produce milk, which will generate revenue over the next few years. Upon purchase, the farm records the cost of the cows as biological assets at their fair value.

Journal Entry for Purchase:

In this case, the Biological Assets (Cows) account is debited to show the increase in livestock. The Cash/Bank account is credited to reflect the outflow of cash for the purchase.

Example 2: Recording the Growth of Livestock

Over time, livestock may grow in value as they mature. This growth in fair value should be recognized in the financial statements. Let’s assume that after six months, the cows have increased in value by $5,000.

Journal Entry for Revaluation of Livestock:

Here, the Biological Assets (Cows) account is debited, and the increase in value is credited to the Gain on Revaluation of Biological Assets account. This gain is recognized in the income statement as other income.

Example 3: Selling Livestock

After the cows are sold, their fair value will be transferred from biological assets to revenue or inventory. If the farm sells the cows for $600,000, the journal entry would look as follows:

Journal Entry for Sale of Livestock:

In this entry:

• The Cash/Bank account is debited to show the receipt of money from the sale.
• The Biological Assets (Cows) account is credited to remove the livestock from the books.
• The Gain on Sale of Livestock account reflects the difference between the sale price and the book value of the cows (i.e., $600,000 sale price minus $500,000 book value).

Impact on Financial Statements

Now that we’ve covered journal entries, let’s look at how livestock impacts the financial statements. The key areas where livestock influences the financial statements are:

1. Balance Sheet – Livestock is listed under non-current assets, specifically as biological assets, until it is sold. Once sold, it moves to current assets under inventory.
2. Income Statement – Changes in the fair value of livestock (such as revaluation gains or losses) affect other income. Additionally, the sale of livestock affects revenue and may result in a gain or loss depending on the difference between the sale price and carrying value.
3. Cash Flow Statement – The purchase and sale of livestock influence the cash flow from operating and investing activities.

Practice Questions

To help reinforce what you’ve learned, here are three practice questions along with their answers:

Question 1:

A sheep farm purchases 100 sheep for $8,000 each. How should the journal entry look for this purchase?

Answer 1:

Journal Entry for Purchase of Sheep:

Question 2:

If, after one year, the fair value of the sheep increases by $10,000, what is the appropriate journal entry?

Answer 2:

Journal Entry for Revaluation:

Question 3:

The farm sells all 100 sheep for $900,000. How should the sale be recorded?

Answer 3:

Journal Entry for Sale of Sheep:

Conclusion

In this tutorial, we have explored the concept of livestock in accounting. We discussed how livestock is recognized, measured, and valued according to accounting standards, and how to account for it through journal entries. By understanding the accounting treatment for livestock, you can confidently handle transactions involving biological assets in your financial statements.

As you continue your studies, be sure to practice and become familiar with these entries and concepts. Understanding how to account for livestock and biological assets will be essential for working with agricultural businesses or industries that deal with living assets.