Farm Business Accounting: An Introduction

Introduction to Farm Business Accounting

• Record-keeping is not a common practice among farmers in the Philippines because their enterprises are often small.
• As a farm grows and becomes more market-focused, establishing a record-keeping system becomes essential.
• This helps to track costs and resources.
• It also assists in planning and budgeting.
• A primary goal of keeping records is to offer useful financial and physical data for making informed decisions.
• Past performance records help determine:
• Which crops are profitable.
• Which crops should be expanded or dropped.

Farm Accounting and Agriculture

• Accounting serves as a way to communicate the outcomes of economic activities to those involved.
• Farm accounting encompasses:
• Farm bookkeeping.
• Cost studies.
• Farm cost accounting.
• It uses analytical accounting techniques (Stoen, J. A., 1968).
• Farm management needs clear and accurate accounting data.
• Special needs and limitations exist here that make standard accounting practices unsuitable for farming businesses.
• Most farms are small.
• Economic transactions are influenced by personal objectives.
• Crops or livestock are often sold only to meet immediate financial needs.
• Selling outputs in commercial ventures is usually a planned activity.
• Agricultural resources face risks related to climate, pests, and diseases.
• Production adjustments are hard to make once production has begun, despite changes in market demand.
• Investment is largely in fixed assets.
• Adjusting production levels after resource commitment is difficult.
• Capital often comes from the operator's own resources.
• Operators may not feel pressured to keep strict accounts.
• Farmers in less developed countries lack control over the physical and economic environment.
• This is because they are typically not united enough to influence policy.
• Control can be exercised over production costs and resource use.
• Farmers may not know that accounting can help assess production methods.
• This can help determine the best alternative technology for profit.

Phases of Accounting

Measuring and Arraying Economic Data

• Involves assessing property values, both owned and owed, and creating a record-keeping system.

Communicating Results to Interested Parties

• Involves summarizing, analyzing, and sharing record-keeping data with relevant parties.

Accounting Conventions

Accounting Entity

• Treats the business owner as separate from the business.

Historical Record Convention

• Records transactions as historical events.

Accounting Period

• Divides business operations into arbitrary time periods.

Continuity

• Assumes the business will continue indefinitely and records depreciation to reflect asset usage over time.

Monetary Convention

• Expresses values in monetary terms for standardization.

Rule of Law

• Requires adherence to all relevant laws.

Accounting Equation

• Assets = Liabilities + Equity

Accounting Doctrines

Consistency

• Requires consistent application of accounting conventions across all periods, avoiding changes to the system.

Disclosure

• Demands full, honest, and objective reporting of significant information, with nothing concealed.

Conservatism

• Mandates making adequate provisions and reserves for potential losses.

Materiality

• States that all key information should be quantified and included in the accounts as much as possible.

Operations Involved in Accounting

• Transactions are recorded chronologically
• Transactions are systematically classified and sorted
• A summary brings accounting data together, which reveals the business's worth and answers relevant questions

Debits and Credits for Balance Sheet Accounts

• Debit signifies:
• An increase in assets.
• A decrease in liabilities.
• A decrease in proprietorship.
• Credit signifies:
• A decrease in assets.
• An increase in liabilities.
• An increase in proprietorship.

Debits and Credits for Income Statement Accounts

• Income Accounts:
• Debit decreases income.
• Credit increases income.
• Expense Accounts:
• Debit increases expenses.
• Credit decreases expenses.

Debits and Credits for Real and Nominal Accounts

• Assets + Expenses = Liabilities + Proprietorship + Revenues
• Debit increases Assets and expenses and decreases liabilities, proprietorship and revenues.
• Credit decreases Assets and expenses and increases liabilities, proprietorship and revenues.

Account Types and Normal Balances

• Assets typically have a Debit balance.
• Liabilities typically have a Credit balance.
• Proprietorship typically has a Credit balance.
• Income typically has a Credit balance.
• Expenses typically have a Debit balance.

Transaction Examples

• Mr. Cruz starts a poultry farm with:
• P10,000 Cash,
• P3,000 Equipment,
• P2,000 Supplies.
• Land rent of P500 is paid.
• Chicks are bought on credit for P2,500.
• The chicks are paid for.
• Poultry feed for P1,000 is purchased.
• Poultry is sold for P3,000.