Farm Business Accounting Basics

Farm Business Accounting

• Keeping records is not a widespread practice for farmers in the Philippines
• Reluctance stems from the perceived insignificance due to the small scale of their operations
• As enterprises expand and become more market-driven, records become essential for:
  • Tracking costs and resource utilization
  • Planning and budgeting
• Maintaining records provides financial and physical data useful for decision-making
• Reviewing past performance records helps determine profitability of crops and informs decisions about which crops to maintain, expand, or discontinue

Farm Accounting and the Nature of Agriculture

• Accounting communicates the results of economic activities to participants
• Farm accounting encompasses bookkeeping, cost studies, and farm cost accounting, employing analytical techniques
• Accounting is general analysis of accounts
• It aims to provide valuable information for farm management, and careful analysis is necessary for its utility
• Accounting for farmers involves organizing receipts and contracts for tax preparation and banking
• Farm management requires clear accounting information but faces unique challenges compared to accounting practices in other business ventures:
  • Small farm sizes influence transaction frequency and align with personal family goals
  • Crops or livestock are sold when families need money, unlike the programmed outputs in commercial ventures
  • Agricultural resources are vulnerable to weather and pests
  • Production adjustments after processes begin are difficult
  • Significant investment in fixed assets
  • Adjusting production is challenging

Capital and Farmer Control

• Capital often comes from the operator's own resources and is not subject to external pressure for careful accounting
• Farmers lack control over physical and economic environments, especially in less developed countries with limited farmer unity in policymaking
• Control is limited to production costs and resource allocation
• Most farmers are unaware of accounting's ability to evaluate production methods, assess technology merits, and optimize profitability

Phases of Accounting

• Measuring and Arraying Economic Data: Valuation of owned and owed properties, and set up a record system
• Communicating Results: Summarization, analysis, and communication of record-keeping results to interested parties

Accounting Conventions

• Accounting Entity: Business owners should be separate and distinct from their business
• Historical Record Convention: Transactions should be considered as historical events
• Accounting Period: Divides the life of a business into arbitrary time periods
• Continuity: Assumes the enterprise will exist indefinitely, recording depreciation charges to reflect asset usage

Accounting Doctrines

• Consistency: Uniformly observe every accounting convention
• Disclosure: Honesty and objectiveness when reporting accounts
• Conservatism: Make reserves for potential losses
• Materiality: Information should be quantified and included in accounts

Operations Involved in Accounting

• Recording transactions chronologically
• Classifying transactions systematically
• Summarizing data appropriately

Debit and Credit - Balance Sheet Accounts

• Debit: Increases assets, decreases liabilities and proprietorship
• Credit: Decreases assets, increases liabilities and proprietorship

Debit and Credit - Income Statement Accounts

• Debit: Decreases Income, Increases expenses
• Credit: Increases income, Decreases expenses

Debit and Credit - Real and Nominal Accounts

• Assets + Expenses = Liabilities + Proprietorship + Revenues
• Debit increases assets and expenses, and credit increases liabilities, proprietorship, and revenues

Impact of Technology on Family

• This studied the income and employment of small rice farmers
• Ernesto P. Abarientos, from the Department of Agricultural Economics at UP Los Baños wrote this
• It was presented at a workshop on Manpower and Human Resources, October 13-15, 1972
• Background includes agriculture, income inequality, labor surplus, and new technology use
• Farm Record Keeping Project objective; create a practical farm record book for planning
• Weekly visits provided data for this paper
• Analysis intended to show the impact of resource use and yield changes from new technology on family income
• Crop years studied were pre-HYV crops from 1962-1966 and post-HYV crops from 1966-1970
• Cases were discussed and results shown for each farm
• Statistical bias was cleared by all of the cooperator farmers
• All assumptions of all farmer cooperators can skew the data

Limitations and Scope

• Sixteen Laguna co-operators
• Fifteen co-operators during 1962 - 1970
• One co-operator during 1962 - 1969
• All 16 co-operators operated lowland irrigated rice farms

Hypotheses

• Higher yields come from using more fertilizer and farm chemicals
• Specialized tasks lead to more need for hired labor instead of family workers
• Using more fertilizer and supplies raises cash operation costs
• Using HYV crops raises the earnings of the farmer
• If farms need more workers, family members can work to increase other types of profits

Conclusions

• High correlation (75% of farms) between yield, fertilizer, and farm chemicals
• Limited effect (25% of farms) on yield from fertilizer and farm chemicals
• Hired labor (75% of farms) need increased faster than family labor need
• Family labor use (25% of farms) was greater than hired labor use
• Cash costs of operations (all farms) all rose during post-HYV, particularly in fertilizer, herbicides, insecticides
• Additional income streams (all farms) from various odd jobs
• Improved income from other work sources (81% of farms) from contracted family labor

Marketing Activities, Management Decisions

• Producers controlled their destiny in the beginning
• With specialization into hunters, farmers, merchants, society grew complex
• Bartering expanded exchange across geographies and time
• Industry separates the agricultural producer and urban consumer
• Commercial agriculture relies heavily on markets to be efficient and profitable

Marketing Systems

• Price signals help producers understand needs and conditions
• Price serves as the signal in a market economy
• Evaluating how markets direct resource use is "pricing efficiency"
• Pricing efficiency measures how fast and correctly prices transmit from consumers through marketing

Efficiency of Physical Activities

• The ratio of valuable output to valuable input represents technical efficiency
• Technical efficiency is important as a large component of marketing
• A large bill relative to the marketing margin may indicate parasites exist
• Specialization created agribusiness management as a subsector of the agricultural industry

Agribusiness Management: Academic Field

• ABM 103 (Introduction to Agribusiness Management): Focuses on managing agribusiness ventures
• ABM 171 (Organization of Small Business): Strategy of creating all businesses
• ABM 180 (Agribusiness Research Methodologies): Format of business and research
• ABM 190 (Special Problems in Agribusiness): Studies enterprise cases

Perspective of Customer or Consumer

• Examine individual firm decisions and compare to society
• Firms see the person buying their products as a customer to obtain or satisfy
• Signal originators or decision makers consider allocations as consumers
• What Is Marketing? Action done after passing farm gate

Six Stages of Marketing Activities:

1. Production: Raw farm product
2. Assembly: Combine items for distribution
3. Processing: Change product form
4. Wholesaling: Connecting production and consumers
5. Retailing: Breaking products down for consumers
6. Consumption: The product’s final form is used

Consumption and Utilities

• Consumption drives production, marketers must satisfy consumer wants
• Marketing adds value to commodities, creating time, form, and possession utilities
• Marketing is customer-oriented
• Utility signifies a product's usefulness
• Time, place, form, and possession constitute the four utilities
• Activities have costs summed known as marketing margin

Time, Place Form and Possession Utility

• Time: Providing access when desired by storage
• Place: Accessible at desired locations
• Form: Providing raw products into the style, appearance, or quality desired by the consumer
• Possession: Transfer ownership to buyers
• Marketing transforms the raw product into a final product
• Consumer-producer separation creates the margin which represents those associated cost