Module Two: Bookkeeping and Accounting
Unit 4: System of Farm Accounting
3.1 System of farm Accounting
Accounts are financial records of what the farmer spends and receives.
Potentially, a complete system of farm accounting should give the farmer much information. e.g.
i. The current cash position and estimates of the future cash positions.
ii. The past profitability of different crops.
iii. The amounts owed to the farmer by debtors, and by him to creditors.
iv. The value of the business assets (plant, stock, land and building etc) and.
v. The profitability of the whole farm and estimates of likely future profits.
Four variants of the accounting system are discussed in this unit and these are:
3.1.1 Farm Income Statement or Cash Analysis Account
The Farm Income Account is a statement of all cash transactions that took place with regard to the farm for the year that has just ended. In the farm Account book, Sales and receipts are recorded on the left hand side, while purchases and expenses are recorded on the right hand side. Under each of the two sides of the Account, there are three columns: Date, Details and Total.
Table 5: Farm Income Statement for the Year ended Dec 31, 2007
Sales and Receipts N Purchase and Expenses N
Date Details Total Date Details Total
received paid
Jan 1 Opening balance
being cash in bank 1,000,000 Implements 100,000
Wages 500,000
Feeds 1,200,000
Seeds 80,000
Fertilizer 50,000
July Yams 400,000 Rent 20,000
Sept Maize 250,000
Nov Cassava 180,000
Nov Eggs 500,000
Nov Broiler 600,000
Dec Others 450,000
3,380,000 2,000,000
Closing Balace
being cash in bank 1,380,000
3,380,000 3,380,000
Year 2008: Opening balance being cash in bank = N1,380,000
3.1.2 Farm Trading Account or Profit and loss Account
In order for a farmer to know whether he had made a profit or loss during the year, he needs to present his records in form of trading account in details.
The profit and loss Account provides information about the performance of the business in a given period of time. This is normally in one year. Profit is a return to the management. So, a manager will be interested in making judgments based on the profit earned.
In the farm Trading Account, it is customary to put “purchase and Expenses on the left hand side and “sales and Receipts” on the right. The closing valuation is also on the right and opening valuation on the left
Table 6: Farm Trading Account as at December 31, 2007.
Purchases and Expenses N Sales and Receipts N
Opening valuation Sheep 250,000
Sheep 250,000 Goat 388,000
Goat 410,000 Yams 200,000
Seed 40,000 Cocoa 450,000
Fertilizer 120,000 Maize 198,000
Cocoa Trees 850,000 Melon 104,000
Sprays 35,000 Produce consumed 158,000
Maize 88,000 Miscellaneous
Yam 54,000 Receipts 112,000
Melon 66,000 Total Receipts 1,860,000
Total opening valuation 1,913,000 Closing Valuation
Cocoa Trees 1,000,000
Sheep 300,000
Expenses Goat 480,000
Seed 32,000
Implements 45,000 Maize 140,000
Insecticides 25,000 Yam 33,000
Wages 101,000 Melon 77,000
Feeding Stuffs 44,000 Implements 88,000
Rent 50,000 Total closing
Seeds and fertilizer 210,000 Valuation 2,100,000
Depreciation 500,000
Veterinary Services 72,000
Total Expenses 2,960,000
Farm Profit 1,000,000
3,960,000 3,960,000
3.1.3 Balance Sheet
The balance sheet otherwise known as the networth statement or financial statement which applies to a point in time and represents a stock concept. It is like taking a snapshot of the business at a particular point in time. The networth statement shows the value of the assets that would remain if the business were to be liquidated and all outside claims paid.
By definition, networth statement is equal to total assets minus total liabilities, that is:
The Networth statement sometimes gives information on the solvency of the business and is used as basis for credit because it shows the ability of the business to meet short-run financial demands. If the total assets exceed the total liabilities, the business is solvent.
The greater the networth, the better the solvency position of the business.
Table 7: A Networth Statement for Chivita Farm as at Dec 31st 2006
Assets (N) Liabilities (N)
Current Current
Cash 600,000 Account Payable now 400,000
Crops 400,00
Working Capital Intermediate
Suppliers 250,000 Account Payable 600,000
Tools 50,000 Within three years
Fixed Capital Long Term
Land 900,000 Account Payable in 500,000
Building 300,000 20 years
Fencing 200,000 Total liability 1,500,000
Net Worth 1,200,000
Total Assets 2,700,000 Total Liability
+ Networth 2,7000,000
3.1.4 Farm Assets Valuation
Valuation entails obtaining a realistic measure of the current value of the assets of the farm business. The first thing to do in assets valuation is the listing of all the resources available in physical terms then, place value on the assets. The various methods of valuation include valuation at cost, market price, net selling price, reproductive value etc.
1. Valuation at cost:- This entails entering in the inventory, the actual amount invested on the asset when it was originally acquired. A major disadvantage of this method is that after the buiness has been in operation for sometimes, the original cost is no more of much value since the conditions might have changed.
2. Valuation at Market Price- The market price of an assets at the time under consideration can be taken as its value e.g land
3. Valuation at Net Selling price some costs such as cost of advertisement and transportation might be incurred when selling an asset. Whatever price can be obtained in the market for the assets (i.e market price (Pm) less the cost of selling (Cs) is the net selling price (Pns), Notationally,
Pns = Pm - Cs
4. Valuation by Reproductive Value
An asset can be valued at what it would cost to produce it at present prices and under present methods of production. This method is more useful for long-term assets and has little or no application for short - lived assets
4.0 Conclusion
We have learnt in this unit the various forms of farm accounting.
5.0 Summary
You have leant in this unit that:
• Accounts are financial records of what the farmer spends and receives.
• Farm accounting provides information to control money flow in the business. It provides information on financial worthiness, performance and monetary checking.
• The four variants of farm accounting system are: Farm Income Statement or cash Analysis Account, Farm Trading or profit and Loss Account, Farm Balance sheet or Networth statement and Farm Assets valuation.
• Farm assets could be valued using these methods: valuation at cost, valuation at market price, valuation at net selling price and valuation by reproductive value.
6.0 Tutor Marked Assignment
1. What are the four variants of the farm accounting system?
2. What are the four major ways by which farm assets can be valued.
3. With the aid of an equation, explain the concept of balance sheet.
7.0 References and other sources
Adesimi, A.A (1988): Farm Managements Analysis with Perspectives through the Development process. Pp 43-52.
Olukosi, J.O and P.O Erhabor (1988) Introduction to farm management Economics:
Principles and Application AGITAB Publisher Ltd, Zaria Pp 48 - 61.