This chapter discusses choosing and setting up an effective farm accounting system. It explains that an accounting system should provide key financial reports, track revenue and expenses from production, investment, and financing, and consider using either cash or accrual accounting. The system output will include financial statements like a balance sheet and income statement to assess financial performance and inform management decisions.

1. CHAPTER 15
FARM RECORD SYSTEM

2. Outline
 Purpose and Use of Records
 Farm Business Activities
 Basic Accounting Terms
 Options in Choosing an Accounting System
 Basics of Cash Accounting
 Basics of Accrual Accounting
 A Cash Versus Accrual Example
 Farm Financial Standards Council
Recommendations
 Output from an Accounting System

3. Objectives
1. To appreciate the value of establishing a
good accounting system
2. To discuss some choices for the accounting
system
3. To outline the concepts of cash accounting
4. To present concepts of accrual accounting
5. To review some recommendations of the
Farm Financial Standards Council
6. To introduce some financial records

4. Purpose and Use of Records
1. Measure profit and assess financial
condition
2. Provide data for business analysis
3. Assist in obtaining loans
4. Measure the profitability of individual
enterprises
5. Assist in the analysis of new investments
6. Prepare income tax returns

5. Measure Profit and Assess Financial Condition
These are among the most important reasons
for keeping records.
Profit is estimated by developing an income
statement.
The financial condition is shown on the
balance sheet.

6. Provide Data for Business Analysis
Use the information from the balance
sheet and income statement to perform
an in-depth analysis.
Analysis of past decisions is useful for
making current and future decisions.

7. Assist in Obtaining Loans
Lenders require financial information about
the farm business to assist them in their
lending decisions. Many agricultural lenders
are requiring more and better records.
Good records increase the odds of getting
a loan.

8. Prepare Income Tax Returns
Internal Revenue Service (IRS) / LHDN
regulations require keeping records for tax
purposes.
Tax records are often inadequate for
management purposes.
Sound record-keeping can also help reduce
income tax obligations.

9. Farm Business Activities
 Production Activities
 Investment Activities
 Financing Activities

10. Farm business activities included
in an accounting system

11. Production Activities
These accounting transactions involve
activities related to the production of
crops and livestock. Revenue from
product sales or other farm revenue is
included here, as are production
expenses.

12. Investment Activities
These activities relate to the purchase,
depreciation, and sale of long-lived assets,
such as land, equipment, or breeding livestock.
Records should include purchase date and
price, annual depreciation, book value, current
market value, sale date and price, and gain or
loss when sold.

13. Financing Activities
These transactions relate to borrowing money,
and paying the interest and principal on loans.
Financing activities include money borrowed
to finance new investments and money
borrowed to finance production activities.

14. Basic Accounting Terms
 Account payable
 Account receivable
 Accrued expense
 Asset
 Credit
 Debt
 Expense
 Inventory
 Liability
 Net Farm Income
 Owner Equity
 Prepaid Expense
 Profit
 Revenue

15. Account Payable
An expense that has been incurred but
not yet paid. Typical accounts payable
are for items charged at farm supply
stores where the purchaser is given 30
to 90 days to pay the amount due.

16. Account Receivable
Revenue for a product that has been sold
or a service provided but for which no
payment has yet been received. An
example would be custom work for a
neighbor who has agreed to
make payment at a future time.

17. Accrued Expense
An expense that accrues or accumulates
daily but which has not yet been paid.
Examples are interest on loans and
property taxes.

18. Asset
An tangible item, financial item, or item
of value.
Examples would include machinery,
land, bank accounts, buildings, grain,
and livestock.

19. Credit
An accounting entry in the right-hand
side of a double-entry ledger. A credit
entry records a decrease in the value
of an asset. It records an increase in
liability, owner equity, or an income
account.

20. Debit
An accounting entry in the left-hand
side of a double-entry ledger. A debit
entry records an increase in an asset
or expense account. It records a
decrease in liability or owner equity.

21. Expense
A cost or expenditure incurred in the
production of revenue.

22. Inventory
The physical quantity and financial
value of products produced for sale that
have not yet been sold.

23. Liability
A debt or other financial obligation that
must be paid at some point in the future.

24. Net Farm Income
Revenue minus expenses or same
as profit.

25. Owner Equity
The difference between business assets
and business liabilities. It represents the
net value of the business belongs to the
owner or owners of the business.

26. Prepaid Expense
A payment made for a product / service
or input in an accounting period before it
is received or will be used to produce
revenue, respectively.

27. Profit
Profit or net farm income is revenue
minus expenses.

28. Revenue
The value of products and services
produced by a business during an
accounting period. Revenue may
be either cash or non-cash.

29. Options in Choosing
an Accounting System
 What accounting period should be
used?
 Should it be cash or accrual?
 Should it be single or double entry?
 Should it be basic or complete?

30. Accounting Period
A period of time used to summarize
revenue and expenses and estimate
profit. It can be either a calendar year or
a fiscal year.
It is generally recommended that a firm’s
accounting period follow the production
cycle of the major enterprises.

31. Basics of Cash Accounting
 Revenue: recorded when and only when cash
is received from the sale of product or
service
 Expenses: When the item is bought or used
to produce a product. It will be recorded
when paid.
 Advantages: simple and easy-to-use
 Disadvantages: recorded revenues and
expenses may not be accurate reflections of
activities during the accounting period

32. Basics of Accrual Accounting
 Revenue: recorded when the item is
produced regardless of when sold
 Expenses: “matched” revenue -
recorded when used to produce
 Advantage: accurate
 Disadvantage: requires more time and
knowledge than cash system

33. Output from an Accounting System
 Balance Sheet: report that shows the
financial condition of the farm at a
point in time
 Income Statement: report of revenue
and expenses over the accounting
period
 Other reports, depending on
complexity of system

34. Possible reports

35. Summary
This chapter discussed the importance,
purpose, and use of records as a management
tool. Records provide the information
needed to measure how well a business is
performing. They also provide information
needed to make sound decisions in the
future. Any accounting system must be able
to handle production, investment, and
financing activities. The output desired from
the accounting system must be considered
when choosing one.