FARM ACCOUNTS AND RECORDS
MEANING OF FARM ACCOUNTS
Farm accounts are statements of money paid out or received for goods and services used in a farming business. Money is received due to sales of farm produce or loans from other sources while money is paid out for purchases of farm produce or settlement of debts. At the end of a given period of time, the farmer should be able to know whether the business is yielding profits or losses.
MEANING OF FARM RECORDS
Farm records are written documents, showing major activities going on in the farming business. To enable a farmer to manage his farm very well, he must keep some records.
IMPORTANCE OF FARM ACCOUNTS AND RECORDS
Farm accounts and records are very important to the farmers because of the following reasons:
- Changes in prices of produce: It enables the farmer to monitor the changes in prices of produce bought or sold by the farm.
- It shows the financial position of the farm: It shows the financial weakness or strength of the farm.
- Whether profit or loss is made: It enables the farmer to know whether he is running the farm at a profit or loss.
- Detection of fraudulent practices: It enables the farmer to detect fraudulent practices on the farm.
- For taking management decisions: It enables the farmer to take serious management decisions.
- For procurement of loans: Good farm records can be used by the farmer for easy procurement of loans from banks.
- Determination of annual tax: Farm records make it possible for accurate determination of his annual tax.
- Determination of actual worth of farm: It enables the farmer to determine the actual worth of his farm for any given purpose.
- For comparing management efficiency: It can be used for comparing management efficiency over time.
- Farm auditing: Accurate farm account or record helps to facilitate farm auditing.
- Data for planning and budgeting: Farm account or record also helps to provide data for farm planning and budgeting.
Types of Farm Records
Farm records which a good farmer should keep are:
a) The cash book receipts and payments record
- The cash book is simply referred to as records of financial transactions (income and expenditure).
- Receipts and payments are usually of two types – those made by cheque and those made in cash.
- Receipts and payments are recorded in a cash book.
- Receipts are recorded on the left hand while payments are recorded on the right hand side.
- The cash book contains column for date on which the farmer transacted the business, the source of income received or payment made.
b) Annual valuation
- Farmers should keep statements of the value of stocks at the beginning and end of the year.
- Every valuation must be based on market value or cost of production.
- Professional valuers may be engaged to conduct valuations.
c) Farm diary
- This is the record of daily activities on the farm.
- It is also a record of events about the farm.
- It serves as a good reference book to obtain information about the farm.
- It could show movement of staff and visitors to the farm, amount of rainfall and losses to thieves.
d) Farm Inventory
Farm inventory is the listing of all assets on the farm and their money worth or value. In other words, it is a record that gives a full list of assets and liability of a farm in both physical and monetary terms.
This is normally carried out at the close of farming season and at the beginning of farming season.
The inventory book will show details such as quantity of item, date of purchase, price and other useful information.
Steps involved in the process of taking Inventory
- Identification of assets and liabilities.
- Itemizing of assets and liabilities.
- Physical counting of each item of asset.
- Assigning monetary value to each asset.
Ways in which inventory record is important in farm business
- Helps in periodical checking of the movement of farm tools and equipment.
- Helps in identifying damaged tools and equipment.
- Provides data for the preparation of Balance Sheet of a farm.
- Helps in the assessment of the net-worth of
- Assists in farm planning and budgeting.
- Assists in farm evaluation.
e) Farm Budget
- Farm budget is the estimated future income and expenditure of farm operation.
- The budgeting technique helps the farmer to select the most profitable plan from among competitive alternative plans.
- It also helps to check the profitability of any economic change in farm plan.
f) Yield or production record
- It shows the yields of crops cultivated on the farm.
- It shows the produce from livestock or poultry.
- It may help in variety selection, etc.
g) Payroll or Labour Record
- It shows the amount (number) and types (specialization) of labour hired or employed to work on the farm.
- It shows the rate and wages paid.
- It helps in the profit and loss account.
h) Farm Input Utilization Record
- It shows all input acquired and utilised during the period.
- It shows the levels of input application.
- It is used in combination with output record to determine resource productivity.
TYPES OF FARM ACCOUNTS
1) Sales Account: Sales account is also known as sales and receipt account. This account shows details of farm produce sold which should include: type of produce, the quantity, date sold, to whom and at what price.
2) Purchase Account: Purchase account is also known as purchase and expenses account. It shows details of all items purchased for use on the farm. It includes name of input, date purchased, number of input or quantity as well as the cost of such input.
3) Farm Valuation: Farm valuation is carried out in order to get a time value of the farm. It is carried out at the beginning and the end of the accounting or production period, usually a year. The valuation of the farm at the beginning is known as opening valuation while valuation at the end of the production period is known as closing valuation.
Farm valuation involves a complete list of all livestock, crops, machinery, building and store products. The value of each item in stock is estimated. Changes in the value of the farm should be included to get the true value of the farm profit or loss.
Importance of Farm Valuation
- A good valuation will assist in determining the disposable value of the farm, if the need arises.
- It is also useful for tax assessment.
- It is used to prepare balance sheet for the farm.
4) Cash Analysis Account: The cash analysis account shows the details of income and expenditure of a farm over a given period of time. In preparing the account, sales and receipts are entered on the left hand side containing columns for date, name and details or particulars and a number of cash columns. The first of these cash columns is headed “Total received” and is followed by columns for the main products sold and other receipts.
Purchases and expenses are entered on the right-hand side. The first cash column is headed “Total paid” and is followed by columns for items purchased and other costs.
Importance of Cash Analysis Account
- It helps in planning of farm activities.
- It is useful in preparing balance sheet.
- It is also used in the preparation of profit and loss account.
5) Farm Income Statement: It comprises all the farm receipts (sales) and expenses carried out on the farm over a specified period of time. Farm income statement gives an accurate idea of the profitability of the farm.
Income Statement for Don Steve Farms for the Month of October, 2021.
6) Balance Sheet or Net-worth Statement: The balance sheet shows the capital or financial position of the farm at the end of the accounting period, usually a year. In balance sheet, list of assets is on the right-hand side and the list of liability or debts is on the left-hand side.
It is concerned with the value of the assets that would remain if the farm business was liquidated and all outstanding claims against the farm paid.
Importance of Balance Sheet
- Balance sheet assists in future planning purposes.
- It also assists in assessment of management performance.
Don Steve Farms Balance Sheet as at 31st December, 2020.
7) Profit and Loss Account: This is the type of account prepared at the end of a business period, usually a year, by the farmer with the purpose of knowing whether his business is making profit or loss.
In this account, all expenses and purchases are listed on the left-hand side, i.e, debit side and all receipts or sales are recorded on the right-hand side, i.e, credit side.
Closing valuation is also put on the right while the opening valuation is put on the left.
The two tables are normally made equal by adding the profit or loss. Profit is added to the left-hand side while loss is added to the right-hand side.
Importance of Profit and Loss account
- It helps to detect if the farm enterprise is making profits or losses.
- It helps to determine the overall performance of the farm at the end of the accounting period.
- It aids future planning of the farm for better results.
Example 1: Prepare a profit and loss account for Don Steve farms for the year which ended 31/12/2021, using the following data:
- Cost of feed – N500.00
- Cost of drugs – N200.00
- Sales of eggs – N2,000.00
- Eggs for domestic use – N200.00
- Loss due to mortality – N300.00
- Value of stock left – 600.00
- Farm wages – N400.00
- Sales of spent layers – N1,000.00
- Transportation cost – N300.00
- Depreciation – N200.00
- Electricity bill – N300.00
- Net profit – N1,600.00
Don Steve Farms Profit and Loss Account as at 31st December, 2021.
Example 2: Prepare a profit and loss account for Don Steve Farms for the year ending December 2020 using the following information.
- Cost of maize seed – N750.00
- Cost of fertilizer – N800.00
- Cost of insecticides – N500.00
- Tractor hiring – N500.00
- Cost of herbicides – N600.00
- Cost of cassava stems – N650.00
- Sales of maize – N15,000.00
- Sales of yam tubers – N5,250.00
- Sales of cassava tubers – N7,500.00
- Transport cost – N750.00
- Costs of processing cassava tubers – N1,250.00
- Sales of cassava stems – N1,100.00
- Wages of workers – N4,000.00
- Miscellaneous expenses – N1000.00
- Maize consumed – N250.00
- Yam consumed – N400.00
- Opening valuation – N22,500.00
- Closing valuation – N7,500.00
What is the net profit or loss of the farm?
Profit and Loss Account for Don Steve Farms, for the Year Ending December, 2020.
DEFINITIONS OF SOME ACCOUNTING TERMS
1) Farm Asset: A farm asset is anything of value in the possession of a farm business. In other words, assets are resources possessed by a farmer which enable him to produce.
Assets are grouped into two classes:
- Fixed Assets: These are assets which are not used up during production. Examples are landed property, farm buildings, motor vehicles, tools and implements, incubator and milking machine.
- Current Assets: These are assets which are used up during the process of production, e.g. water, feed, drugs, chemicals, fertilizers, seeds and cash in bank.
An evaluation of the assets gives the net worth of the farmer. Farm assets can assist in obtaining bank loans for development.
Fixed Cost and Variable Cost
Fixed Cost: This is the component of the total cost of production which does not vary with the level of production.
Examples of Fixed Cost: Cost of farm buildings, Cost of structures (e.g. silo, barn etc), Cost of equipment, Cost of machinery.
Variable Cost: This is the other component of total cost which varies directly with the level of production.
Examples of Variable cost: Wages, Salaries, Cost of feed, Cost of Seeds, Cost of Fertilizers, Cost of agro-chemicals.
2) Liabilities: Liability is the money owned to external persons or corporate bodies, e.g, loan from banks. In other words, liabilities are the properties of other people or things which the farm owes. Liabilities are grouped into two classes:
- Current or Short-term Liabilities: These are debts that must be paid back within one accounting year, e.g ., creditor’s loan and accrued expenses.
- Long Term Liabilities: These are debts which cannot be paid back within one accounting year, e.g ., long term loans from banks.
3) Net Capital, Net Worth or Owner’s Equity: This is the total amount of money supplied by the owner of the farm business.
Assets – Liability = Owner’s Equity or Capital
4) Liquidity: Liquidity is the ability of the farm business to meet its financial commitment as they fall due.
5) Solvency: This is the ability of the farm business to cover the liquidation of the asset.
6) Appreciation: Appreciation refers to increase in value or worth of an asset as the asset is being used over time. Examples of assets that can appreciate are, growing young farm animals and cash crops, land.
7) Depreciation: Depreciation refers to the loss or reduction in the value or worth of an asset as the asset is being used over time. In other words, depreciation is a loss in value of capital asset as a result of wear and tear or obsolescence over a period of time. Fixed assets like farm buildings, motor vehicles, tools and implements and normally depreciate.
8) Salvage Value: This is the amount at which an asset is sold off when it is no longer economical to keep or when the cost of maintenance of the asset is too high. Salvage value can also be referred to as the amount of money received from the disposal of fixed assets after its normal useful life. An asset can depreciate to an extent that it attracts little value. When there is no value on an asset, it is called obsolete and therefore, sold off as scrap. Assets like machinery, motor vehicle, equipment and implements which depreciate can have salvage value.
9) Useful Life of an Asset: This means the number of years a piece of farm equipment can effectively serve a farmer.
CALCULATIONS OF DEPRECIATION AND SALVAGE VALUE
There is a relationship between depreciation and salvage value of fixed assets.
Methods of calculating depreciation of farm machines
- Straight-line method or fixed instalment method.
- Annual revaluation method.
- Unit of production or output method.
- Declining/reducing balance method.
- Sum-of-the-years-digit method.
- Salvage value.
- Total depreciation.
- The annual depreciation.
- Appreciation of an asset, e.g, plough, which was purchased in 1985 at the cost of N6,000.00 and sold off in 1990 at a cost of N1,000.00.
(iv) Appreciation: The plough suffered a loss or reduction in worth. Therefore, appreciation is nil.
(a) A commercial farmer bought a second hand combine harvester for N100,000.00 in 1990, and sold it for N30,000.00 in 2000. For the combine harvester, calculate the
- salvage value;
- total depreciation;
- annual depreciation.
Calculation of salvage value, total depreciation and annual depreciation of the combine harvester