What is Commercial Production?

Commercial production is the initial point at which production from a grove, orchard, or vineyard begins to make operations economically feasible, based on expected price points. Once perennial crops have reached the point of commercial production, all costs related to the crops (such as for cultivation, pruning, and spraying) are charged directly to expense as incurred. Prior to that point, the costs incurred to purchase and maintain the plants are recorded in the Perennial Crops asset account. These costs are charged to expense through depreciation once sales begin.

Example of Commercial Production

The apple orchard that a farm manager planted five years ago has now reached commercial production. In the current year, the farm manager pays $750 for fertilizer and $500 for pesticides. Both of these expenditures are charged to expense as incurred. The bill will be paid at a later date. The resulting journal entry is: