Why a Farm Needs Its Own Accounts
Chapter Two
Syllabus topic 2, "Importance and Need for Farm Accounting."
Pages 3 to 4 of 110
Why this chapter separates two words
MU's topic line is "Importance and Need for Farm Accounting." She names two things, and an answer that treats them as one will read as half an answer.
The need is the problem. The importance is the value. The need is what goes wrong on a farm that keeps no accounts. The importance is what the farmer gains once the accounts exist. Answer a question on need with failures; answer a question on importance with uses.
The need for farm accounting
1. Without records, the farmer does not know which crop pays.
A farm growing four crops takes one bag of money to the market and brings one bag home. If nothing is recorded by crop, a crop that loses money every year is invisible, because the profitable crops carry it. Farmers have gone on sowing loss-making crops for a decade for exactly this reason.
2. Without records, no institution will lend.
A bank asked for a crop loan or a term loan for a tractor wants to see income, expenditure and repayment capacity. So does a cooperative society. No records means no credit, or credit only from a moneylender at a rate that eats the margin.
3. Without records, an insurance or compensation claim fails.
Crop insurance, cattle insurance and calamity relief all require proof of what was sown, what was spent and what was lost. Memory does not satisfy an assessor.
4. Without records, tax and subsidy positions cannot be established.
Agricultural income is exempt from income tax in India, but the exemption has to be shown, not asserted, and a farm with non-agricultural income alongside it has to separate the two. Subsidy schemes require documented area, inputs and yield.
5. Without records, family disputes have nothing to settle on.
A partition, a succession or a dispute between brothers who farmed together arrives years later with no evidence of who put in what.
6. Without records, the farmer cannot compare himself with anyone.
Not with last year, not with the neighbouring farm, not with the district average the agricultural university publishes.
The importance of farm accounting
Once the records exist, they are worth something, and this is what a question on importance is asking for.
1. Cost of production per unit. Cost per hectare, per quintal, per litre of milk, per animal. This single figure decides the price at which selling is worth doing.
2. A basis for planning what to sow. Last year's cost and return by crop, set against this year's expected prices, is a cropping plan.
3. Control over expenditure. Recorded expenditure can be compared with a plan and with previous years, and an item that has run away shows up while there is still time.
Why a Farm Needs Its Own Accounts
4. Efficient use of resources. Labour days per hectare, seed per hectare, water per hectare, feed per litre of milk. Physical ratios are what a farm actually manages, and they exist only if quantities are recorded.
5. Evidence for credit, insurance, subsidy and tax. The mirror of the needs above.
6. Valuation of the farm. For sale, for mortgage, for partition, for a partnership, and for the balance sheet the farmer's own bank will ask for.
7. Measurement of the farm's true income. Including the produce consumed at home, the produce paid as wages and the increase in the herd, none of which cash accounting would ever capture.
8. A record for the next generation. A farm passed on with ten years of accounts is a different asset from one passed on with none.
The one-table answer
| The need | The importance | |
|---|---|---|
| Asks | What goes wrong without accounts | What the accounts are worth |
| Is about | Failure, risk and exclusion | Decision, control and value |
| Examples | No credit, no insurance claim, no idea which crop pays | Cost per hectare, a cropping plan, expenditure control, valuation |
Who else uses these accounts
Not only the farmer.
- Banks and cooperative societies, for lending decisions.
- Insurance companies, for underwriting and for claims.
- Government departments, for subsidy, for relief and for statistics.
- Buyers and processors who contract with the farm, for reliability.
- Successors and partners, for their share.
- Researchers and agricultural universities, for the cost-of-cultivation studies that set minimum support prices.
That last one is worth a sentence in an answer. The Commission for Agricultural Costs and Prices recommends minimum support prices from cost-of-cultivation data collected farm by farm. A farm that keeps no records contributes nothing to the figure on which its own price is set.
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.