Introduction to agriculture accounting.pdf

1. Introduction to
Agriculture Accounting

2. Agriculture sector, from past to present, had assumed very
important duties on economic and social development of
societies. It became a global necessity and a strategic sector due
to its various attributes such as: (1) direct and indirect
contributions to population nourishment, (2) national income,
(3) employment, (4) capital transfers, (5) raw material supplies
for industry, (5) exportation, (6) biological diversity and
(7) environmental balance.
Agriculture activities that emerged in the period of hunter
gatherer societies have been replaced by today’s specialized and
planned agricultural enterprises utilizing information and
technology

3. 1. Introduction
Accounting is an information system that communicates
information regarding resource formation and usage of an
enterprise; and increase or decrease in those resources resulting
from financial transactions of the enterprise.
Accounting has four basic functions: recording, classifying,
reporting and interpreting. Within this framework, accounting is
defined as the science and art of recording (journal), classifying
(ledgers), summarizing (trial balance), reporting (financial
statements) and interpreting financial and monetary transactions
(budgets and performance evaluation).

4. Field of activity and branch of activity of enterprises may differ.
These differences are liable for the existence of different
accounting types. Within that framework, accounting is comprised
of three main parts. Those are financial, cost and managerial
accounting. However, there exist some other specialty accounting
types apart from the scope of the main parts listed above.
Construction accounting, bank accounting, insurance accounting,
tax accounting, hotel accounting and agriculture accounting.
So agriculture accounting is considered a specialty accounting.
It utilizes the data provided by financial, cost and managerial
accounting.

5. Within this framework, (1) recording the financial transactions
in agriculture production process necessitates the use of financial
accounting, (2) estimation of production costs incurred during the
cultivation of agriculture goods necessitates the use of cost
accounting and (3) provision of new data, either obtained from
financial or cost accounting, for decision making practices of
enterprise managers necessitates the use of managerial
accounting.

6. 2. Definition and objectives of agriculture
accounting
Agriculture accounting can be explained as a specialty accounting
which primarily records financial and monetary transactions
throughout agriculture activities, classifies financial transaction in
respect to types, estimates production costs incurred during the
cultivation of agriculture goods and then reports those financial
according to their purposes.
The objectives of agriculture accounting can be listed as follows:
1) Estimation of actual costs pertaining to agriculture goods
2) Determination of sales prices of goods obtained from agricultural
activities

7. 3) Fair and well balanced allocation of dividends among enterprise
partners following profit or loss calculation.
4) Assistance to farmers and enterprises in estimation of tax base
5) Monitoring financial and physical aspects of agricultural enterprises.
6) Monitoring the movements in quantity and value pertaining to
agriculture goods
7) Performance of cost analysis followed by performance evaluation.
8) Assistance to agriculture enterprises in budget planning for the
future.
9) Provision of information to facilitate transactions for rent (leasing),
sharecropping and other purchase or sale transactions
10) Providing top executives with information regarding revenues and
price polices

8. 11) Assistance to agriculture enterprises in monitoring the
performance of their own employees and managers
12) Determination of support prices for agriculture goods which would
be subject to financial aid supplied by the government (subsidy)
13) Provision of information on agriculture enterprises to agriculture
credit institution example agriculture banks
14) Determination of employees wages
15) Assistance in education, training and research services concerning
agriculture enterprises.

9. 3. Significance of agriculture accounting
Rational decision making practices of enterprise managers in the
presence of developing situations would only be possible by the
existence of true and actual information. Therefore, as in all enterprises,
formation of an accounting information system in agricultural enterprises
would be special in terms of enterprises’ future.
Accounting information system systematically combines the data on
all types of activities pertaining to goods, services and environment of
the enterprise, classifies obtained data, collects them in an order and
then summarizes them. The data is also saved and preserved within this
system. Consequently, documents and reports are prepared with the
instrument of accounting information system.

10. Within this framework, formation of an efficient accounting
information system in agricultural enterprises would help to obtain
beneficial information, attain actual agricultural production costs,
measure productivity and thus prepare the necessary future plans and
budgets .
The consequences beyond an ineffective accounting information
system in the agricultural enterprises would be:
• Managers would have difficulties in acquiring true and actual
information
• Managers might not make strategic and rational decisions related to
future
• Managers will be unable to perform production planning
• Enterprises might encounter great risk

11. 4. Historical development of agriculture
accounting
Agriculture accounting methods are initially utilized in Babylonian
Empire and Ancient Egypt around 3500 B.C. Account drafting and
account statements are found on clay tablets in Babylonian Empire
and on papyrus paper in Ancient Egypt.
It is detected that accounts of temples and banks are recorded in
Ancient Greek civilization. By banks it is meant the stores for seeds
and the agriculture products in that era.
During Ancient Rome era, accounting system became more
functional; so that, asset accounts for money, grain and livestock
were recorded in separate books.

12. Although the opinion of by whom and when the double entry
bookkeeping method which formed a basis for accounting was
initially used remains disputable, according to some records that it
started in Italy as of the 13th
century. Double entry bookkeeping
method is elaborated in Luca Pacioli’s work, who was a monk in
Italy.
A fact from Sumerian Era (4000 B.C.- 2000 B.C.), a clay tablet on
which records of good cultivated from agricultural activities was
written is discovered as an evidence for inventory control and
recording.
Development of agriculture accounting practices was also
evidenced in the Ottoman Empire but since then the agricultural
accounting practices remained dull and lack any change.

13. 5. Difficulties encountered during the
implementation of agricultural accounting
Agricultural enterprises possess certain characteristics which
separate them from the rest of the enterprises. Those characteristics
account for differentiations in accounting organization of agriculture
enterprises which, in turn, led to a variety of difficulties throughout
accounting process.
Those difficulties encountered are discussed in the following
points:

14. I. Different sizes of agriculture enterprises: Agriculture enterprises in
different sizes necessitate different accounting procedures to be
followed at each. Income Tax defines separate measurements for
different sizes of agricultural activities
II. Dependence of agricultural enterprises on seasons and climate:
Each agricultural production process requires certain specific conditions
concerning cultivation, maintenance and harvest. During certain periods
of the year farm employees of agriculture enterprises work intensely in
day and night shifts, while during the rest of the year the enterprise
remains idle. Therefore, certain difficulties in cost estimations appear
due to some factors such as excess employment, seasonal uncertainties
and off season. Those factors should be considered in implementation of
agricultural system.

15. III. Strong link among the farmer family members in agricultural
enterprises: A great majority of small and medium size agricultural
enterprises are operated by farmers and their family members by whom
consumption of agricultural goods at a certain level is realized. For that
reason, estimation of gain from agricultural production in such enterprises
becomes more difficult. In Egypt, most of the agricultural enterprises are
either sole proprietorship or family business, without an appropriate
accounting system for monitoring and controlling those enterprises.
IV. Different uses of agricultural activities: Some agricultural enterprises
may involve higher internal consumption and value trade-off in
comparison with other enterprises. Certain agricultural goods through
production process may yield much higher level of by-products relative to
other enterprises, thus, leading to difficulties in estimating actual value of
costs in agricultural production.

16. V. Abundance of investments for future terms in agricultural
enterprises: Certain costs incurred by agricultural enterprises belong to
next months’ or even next years’ budgets. In other words, sales revenue
from production process that incurs certain costs may belong to next
years.
VI. Confusion on the detection of current (liquid) and fixed assets in
agricultural enterprises: For instance; beef cattle as a current asset is
bred to be sold eventually, whereas, dairy cattle or stud cattle as a fixed
asset is bred to be utilized in the enterprise for a long period of time. In
such a case, it becomes necessary to determine which one is to be
considered as fixed asset and which one is current asset, so that
accounting transactions could be interpreted.

17. VII. Excess payment in goods in agricultural enterprises: Agricultural
enterprises may make payments for a service they utilize either in cash or
in goods. In case of borrowing agricultural machineries from other
enterprises or individuals, discharge of debts can be made in exchange of
harvested agricultural goods by the enterprises. As a result, estimation of
both the gain from agricultural production and the amount of payment
made in exchange of services utilized becomes more difficult.
VIII. Insufficient significance given to accounting information system in
agricultural enterprise: Agricultural enterprise managers’ weak
perception of accounting practices is another difficulty. In other words,
managers are unaware of benefits provided by accounting, whereas,
accounting provides crucial information for decision making process. Since
agricultural enterprises are usually of small scale family business, farmers
are reluctant on the implementation of a good accounting system.

18. The agricultural accounting will be the topic of this course. The course
starts with an introduction to agricultural accounting. The second topic
will deal with the different accounting transactions concerning the
agricultural enterprises either financing or investing or operating
activities. The third topic in this course is dealing with the noncurrent
(fixed) assets for the agricultural enterprises. The last topic for this course
is the farm financial analysis going through performance ratios, efficiency
ratios, liquidity ratios, return on investment ratios and livestock analysis
formula.

19. The End