LECTURE XII

1. LECTURE XII RARM RECORD

2. Farm Records • Uses of Farm Records • Recognize a problem when it arises and search for its root causes. • Observe the relevant facts and gather the relevant data to solve the problem • Analyze the data with specific objectives in mind guided by the principles, the tools and the mathematical models applicable to the problem. • Select the appropriate course of action to solve the problem and achieve goals and objectives.

3. Farm Records • Uses of Farm Records • Report and document income taxes. • Make management decisions • Check whether the business is operating according to plans. • Obtain credit. • Determine whether the farm can compete with other similar farms.

4. Farm Records • Farm records can also be used as a basis to • Request for a loan • Insure a farm • Obtain government subsidies or grants • Prepare income tax returns. • The records of sales and expenses are combined with those of inventory changes to prepare the farm accounting statements at the end of a year of operations. • Accurate records help the manager to recognize and avoid losses.

5. Farm Records • The farm records provide: • Basic profit and loss statement and position statements called the balance sheet. • Input-output relationships for determining technical efficiency and selecting appropriate enterprises. • Inventory of available physical and financial resources. • Performance indicators in the form of efficiency ratios.

6. Types of Farm Records • Assets and liability accounts • Include owner’s equity. • Receipts and expense accounts • Show how cash flows into and out of the farm business. • Capital account • Record the purchases and ownership of durable assets as well as improvements made on farm facilities. • Also records depreciation and hence book values of such assets

7. Types of Farm Records • Credit account • Records sales made on the credit and purchases made on credit. • The manager has to balance credit sales and purchases against cash transactions. • Money has a cost and it is not wise to allow people to hold onto your funds for too long. • By the same token, one should not accumulate large amounts of payables or debts.

8. Production statistics • These involve: • Total hectarage of different crops • Crop output • Numbers and classes of livestock • Feed or fertilizer records • Inventory of stock in store • Labour, machinery • Amounts of fuel and lubricants consumed.

9. Production Records • Detailed production can be helpful to managers by providing information that enables them to make better decisions. • Production records include: • Crop Records • Livestock records • Labour records • Machinery records • Farm experiment records

10. Crop Records • In the form of farm maps, aerial photographs and record books. • Information recorded include: • Soil map showing type, slope and drainage outlets. • Tile map showing location, size and installation date of all tiles. • Soil-test maps or records.

11. Crop Records • Information recorded include: • Annual map or record for each field showing • Type of crop • Date planted • Seed variety • Population • Type of herbicide used • Weed problems (kinds of weeds) • Disease problems • Type and amount of fertilizer • Date and amount of lime application • Date and amount of water application • Harvest date and crop yield.

12. Livestock records • These tend to be more detailed and complex than crop records. • The most desirable amount of detail will depend on how the manager uses the records. • Keeping records that do not aid in decision-making will not make money. • A livestock producer should know the amount of feed consumed, the cost of the feed and the resulting output or product. • Information about health and breeding is especially helpful.

13. Livestock records • Livestock record information include: • Feeder livestock records for each lot or pen • Purchased animals records including date purchased, weight purchased, price, quality and seller. • Feed records including kind of feed and amount of feed. • Veterinary and health records including deaths and cause and treatments by kind. • Sales records including date sold, weight, grade, price, quality and purchaser.

14. Livestock records • Livestock record information • Breeding Livestock Records including: • Individual Records on dams and sires including birth date, sire, dam, weight at various ages, number, weight and birth date of offspring, rate of gain or production of offspring, productivity of the animal for various periods and health record. • Feed records • Kind and amount of feed • Sales records • Date sold, weight, price and purchaser.

15. Labour records • Farm labour records may be kept by enterprises or operations to provide information such as • Labour requirements throughout the year and by each enterprise and operation • Return per hour from various enterprises and operations • Labour availability.

16. Machinery records • Individual machinery expense records can be kept as a supplement to overall cost records. Individual machinery records enable the operator to be informed about: • Repair costs and rate of breakdown for different kinds and makes of machinery. • Costs of different operations. • Times to service machines • The condition of machines and whether or not they are ready for operation.

17. Farm experiment records • Because management and other resources are unique to each farm, a manager is likely to find that comparisons on his/her own farm of different seed varieties, fertilizers and tillage are very useful.

18. Records for Taxes • Farmers must keep records to report and sometimes substantial their income tax declarations. • To minimize taxes for a given level of income and to minimize frustration and concern should farm records be audited, records should be accurate and well documented. • Many farmers do an inadequate job of tax management by: • Failing to record expenses • Failing to classify qualifying receipts for capital gains income • Fail to take full advantage of such provisions of the law as investment credit.

19. Records for Taxes • Income taxes may be reported using the cash method or accrual method. • For cash method, only transactions for which payment has been actually or constructively received or made are reported. • For the accrual method, all transactions are reported whether or not payment has been made or received.

20. Records for Securing Credit • Lenders are much more likely to provide financial support to businesses that have demonstrated good and growing earnings as well as growth in net worth. • For instance, balance sheets for the past three years will show the net worth change as well as debt in relation to assets. • Farm-operating profit and total farm profit show earnings and earning trends. • Balance sheets and income records are the two main types of records of interest to lenders.

21. Farm Financial Records • They include: • Balance sheet • Records for measuring farm profit.

22. Balance Sheet • One of the most important indicators of financial progress of a farm business or of an individual is the balance sheet, sometimes called the net worth statement or a financial statement. • The balance sheet is a listing on a particular date, of all the assets and their value, all the liabilities and the difference between assets and liabilities, which is the net worth.

23. Balance Sheets • Assets and liabilities are listed according to whether they are current, intermediate or long-term. • Current assets are cash and other resources that are expected to be realized in cash, sold, or used up within one year. • Current liabilities are debts expected to be paid back within one to ten years while intermediate assets are resource that are expected to last from one to ten years. • Long-term assets and liabilities are those that last more than ten years.

24. Balance Sheet • Current assets are usually valued at market value or cost of production. • Finished product inventory should be valued at sale or market value minus marketing costs. • Products in process (growing wheat, cattle raring etc) should be valued at either cost of production as of the date of the inventory or at market value if there is a competitive market for such products.

25. Balance Sheet • A series of balance sheets over time will show trends in the financial worth of a business or an individual. • On farms where one individual or family is involved, the business and personal balance sheets are often the same. • When businesses are owned or operated by several persons, the business and each person may have separated balance sheets.

26. Records for measuring farm profit • There are several records including: • Farm operating profit or income statement

27. Farm operating profit or income statement • This is the return to operator’s/family’s labour and management and the equity that the operator has invested in the business. • It is receipts minus expenses plus inventory increase minus inventory decrease. • Farm Operating Income = (Receipts – Expenses) + Inventory increase (or – inventory decrease).

28. Farm operating profit or income statement • Farm operating profit is computed for a particular time period usually one year and is determined by Receipts, Expenses and Inventories. • The receipts and expenses are a series of transactions that occur during the accounting period. • Receipts should be from farm production items only e.g. maize, wheat, beans, soybeans, milk etc.

29. Farm operating profit or income statement • Gifts from others, money borrowed for the farm business and off-farm income should be excluded. • If capital items are sold at a higher price than they were valued because they were depreciated rapidly, the gain above book value should be included.

30. Farm operating profit or income statement • Products sold but for which payment is yet to be received should also be included. • Expenses should be for farm production items and depreciation only. • Family living and other personal expenditures, principal payments on debts and purchase of capital items should be excluded.

31. Farm operating profit or income statement • Interest payments on farm debts, depreciation of capital items and production items purchased but not paid for should be included. • If capital items are sold at a lower price than they were valued because they were depreciated too slowly, the loss below book value should be included.

32. Farm operating profit or income statement • Inventory is a listing of farm products and production resources on hand and their value on a particular date. • If the ending inventory is greater than the beginning inventory, this indicates an increase in value and is similar to receipt; it is thus added to income. • If the ending inventory is less than the beginning inventory, this indicates a decrease in value and is similar to an expense it is subtracted from income.

33. Total Farm Profit • Lenders are interested in farm in farm operating profit and trends in operating profit over time. • Total farm profit includes not only operating profit but also changes in the value of durable assets (usually land) due to inflation or deflation. • Total Farm Profit = Farm Operating Profit + Increase in Value of Durable assets due to inflation (or – decrease in value of durable assets due to deflation).

34. Total Farm Profit • Total farm profit tells managers how much their time and equity money has been earning. • This is the best figure to compare to income from an off-farm job and earnings from investment of equity in other alternatives. Total farm profit is the bottom line. • It is what the business is making before taxes.

35. Record Keeping Systems and Guidelines • Systems and guidelines for keeping farm records include: • Use of Available Record Systems • Use Comparative Analysis • Keep a Separate Checking Account • Having a Specific Procedure • Keep a separate hired labour record for each individual

36. Farm Accounts • Farm management accounting aims to provide the farmer and manager with realistic information on the current status of both the farm business as a whole, and of individual activities. • In farm accounting, the transactions like purchases of inputs, sales of produce and the investment of owner’s money in the farm business are recorded chronologically in the journal.

37. Farm Accounts • Each type of transaction is classified according to what effect it has on the farm business and recorded in a separate ledger. • At the end of a period, for example, one-year, summaries of the classified records are made so as to prepare a profit and loss account and a balance sheet.

38. Farm Accounts • The profit and loss statement comes from the deduction of cost of sales from total sales to give gross profit. • Operating expenses are then deducted from gross profits to arrive at net profit. • Taxes are based on the net profit. • The balance sheet statement represents a balance of all assets against the claims on the assets.

39. Farm Accounts • Assets are the productive resources like cash, machinery, buildings, cattle, growing crops etc • Liabilities are money owed such as mortgage, purchases made on credit and borrowed (hired) equipment or unpaid wages • Owner’s equity is the remainder, after all liabilities have been deducted from the assets.

40. Farm Accounts • The owner of a farm business will usually provide some money (personal savings), some land, buildings (barns) or other useful items for the farm operations. • The values of these items represent the owner’s equity in the farm business.

41. Farm Accounts • When the farm has been operated for some time and it makes profits, such profits accrue to the owner as part of the future equity in business. • Such profit may be withdrawn for personal use or kept in business to increase the contributed equity.

42. Features of Farm Accounts • Approximate market value, and not the historical cost, is the basis of valuation of most resources analyzed; inputs are related to outputs. • The production year rather than the fiscal year, established by tax authorities, is the basic accounting period. • Thus the initial month of the accounting year will vary with the main activities pursued on the farm and the locality i.e. it may start in March, April or July.

43. Features of Farm Accounts • Physical records play a very important part in the preparation of accounts. • Deferred payments for sales are related to the year of production, not the year of receipt. • Regular up-to-date reports of the actual progress against budgeted projections are important.

44. Enterprise Accounts • The returns to a particular crop or livestock can be determined in the same way that returns to the total farm are figured. For enterprise accounts each enterprise would have records that make it a separate component of the total business. • Enterprise Operating Profit = Enterprise receipts – Enterprise expenses + or – enterprise inventory change.

45. Enterprise Accounts • The concept of enterprise accounts is more complex than keeping farm records for three main reasons: • Receipts and expenses must be kept separately for each enterprise. • Transfers from one enterprise to the other must be recorded. • Certain resources are used by more than one enterprise e.g. buildings, machinery and equipment so decisions must be made regarding how costs for these resources should be allocated.