What Farm Accounting Is
Chapter One
Syllabus topic 1, "Unit I: Introduction to Farm Accounting"
Pages 1 to 2 of 110
In one line
Farm accounting is the recording, classifying and reporting of the transactions of a farm, treated as a business, so that the farmer can say what each crop and each animal cost, what it earned, and what the farm is worth.
The farm as an accounting entity
A farm is a business. It buys, it sells, it employs, it owns assets and it owes money. Everything in a first-year accounting course applies to it: the business entity concept, the money measurement concept, the going concern concept, double entry, the trial balance and the final accounts.
So why does it need a subject of its own?
Because four things about a farm behave in a way a trader's shop does not, and each of them breaks a rule the ordinary books rely on.
The four things that make it a subject
1. The produce grows. Nobody buys it.
A cloth merchant's stock arrives with an invoice. There is a price on a piece of paper and that price is the cost. A farmer's wheat arrives out of the ground. There is no invoice, no supplier and no purchase entry. Between sowing and harvest, the value of the crop in the field rises every week without a single transaction being recorded.
Ordinary accounting has no entry for that. This is exactly the hole Ind AS 41 fills, and Unit II of this paper is that standard.
2. Much of the income never becomes cash.
Grain eaten by the farmer's own household is income. Grain paid to labour instead of wages is income and an expense at once. A calf born this year is an increase in the herd, and it is income, though no rupee changed hands. A farm whose books recorded only cash would understate both its income and its costs, sometimes badly.
3. One expense serves many crops, and one field serves many years.
Manure spread in June helps the crop harvested in November and the crop after that. A pair of bullocks ploughs for every crop on the farm. A well dug once serves for twenty years. The cost has to be split, and splitting it is what makes a per-hectare or per-crop figure possible.
4. The production cycle is long and the risk is outside the farmer's control.
A shopkeeper turns over stock in weeks. A sugarcane crop takes twelve to eighteen months, and an orchard takes years before its first commercial fruit. Drought, flood, disease and price collapse can wipe out a year's work after every rupee of the cost has been spent. Accounts that report only at the end of the year tell a farmer nothing he can act on while the crop is still standing.
What Farm Accounting Is
What farm accounting therefore has to do
| It must record | Which ordinary trading accounts do not |
|---|---|
| Physical quantities as well as money | Bags harvested, litres of milk, hectares sown, animals on hand |
| Produce that never leaves the farm | Home consumption, seed retained, produce given as wages, feed grown and fed |
| Growth that no transaction caused | Standing crops, the increase in a herd, an orchard coming into bearing |
| Cost by field, by crop and by animal | Not one figure for the whole business |
| Labour in days, not only in rupees | Because most farm labour is casual and paid by the day |
The two halves of this paper
MU sets the subject in two modules, and they answer two different questions.
Module I asks what the rules are. Unit I is why the farm needs accounting at all and what technology now does for it. Unit II is Ind AS 41, the accounting standard that governs biological assets and agricultural produce.
Module II asks how the books are actually kept. Unit III is the thirteen farm records a working farm maintains, with a specimen of each. Unit IV is the final accounts: trial balance, farm trading account, profit and loss account, and balance sheet.
The two halves join at one point, and it is worth fixing now. The records of Module II are the source documents. The accounts of Module II are built from them. Ind AS 41 in Module I is the rule that decides what figure the standing crop and the livestock go in at. A student who keeps those three roles apart will not confuse a register with a ledger account in the examination hall.
Farm accounting and farm management are not the same thing
Farm accounting produces the figures. Farm management uses them to decide. Whether to sow cotton or soyabean next season is a management decision; what last season's cotton cost per hectare is an accounting answer. The two are studied together because the second is useless without the first, but a question asking for the scope of farm accounting is not asking for a course in agricultural economics.
What comes next
The next chapter separates the two words MU uses in her own topic line, importance and need, because they are not the same and she names both.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.