Wisconsin Risk Management Basic Financial Definitions

Current Asset: An asset expected to provide an economic benefit to the company within 12 months from the date of the initial transaction that generated the asset.

Current Liability: A liability that has to be paid within 12 months.

Intermediate Liability: Liabilities whose repayment schedule is spread over a two to ten year period. Intermediate assets may be used as collateral for current liabilities. To provide adequate collateral in later years, the life of the asset should be longer than the term of the loan.

Intermediate Asset: Farm assets are conventionally divided into current, intermediate and long-term assets. Farm liabilities are classified similarly and are conventionally listed opposite their assets.

Long Term Asset: Depending on the type of security, a long-term asset can range from one year to 30 years.

Long Term Liability: Liabilities whose repayment schedule is spread over a 10 to 40 year period. Long-term or real estate loans (mortgages) are usually secured by long-term assets. To provide adequate collateral in later years, the life of the asset should be longer than the term of the loan.

Operating Expense: All the expenses normally incurred in running a business, during an accounting period, excluding the cost of goods sold.

Depreciation Expense: Gradual reduction of the value of a fixed asset and gradual application of this cost to the expenses of a business over the useful life of the asset.

Interest Expense: Cash interest paid plus or minus any change in accrued interest.

Gross Farm Income: Farm income before taxes, deductions and allowances have been subtracted.

Non Farm Income: Many agricultural operations still retain the characteristics of a small, sole proprietor, family-operated business enterprise. It is currently the most common practice for a sole proprietorship to present farm financial statements which combine personal assets, liabilities, income, and expenses, together with those related to the farm business.

Family Living: Family living expense may be a reasonable value. Some suggest an estimate of the wage or salary that a farmer could be receiving from a fulltime job off the farm.