Farm Accounts – SS2 Agricultural Science Lesson Note (Third Term)

Farm accounts are statements of money paid out or received for goods and services used in a farming business.

Farmers keep farm accounts to:

• Record transactions: sales, purchases, income and expenses are written down.
• Measure results: they show at the end of the year whether the farm made a profit or a loss.

Behavioural objectives

By the end of the lesson, students should be able to:

1. state the meaning of farm accounts;
2. list and describe the types of farm account;
3. state the importance of a profit and loss account;
4. prepare a simple profit and loss account;
5. define common accounting terms such as assets, liabilities, liquidity, solvency, appreciation and depreciation.

What are the types of farm account?

There are seven types of farm account: sales, purchase, farm valuation, cash analysis, farm income statement, balance sheet and profit and loss account.

• Sales account: also called the sales and receipt account. It shows the farm produce sold, the quantity, the date, the buyer and the price.
• Purchase account: it shows the items bought for use on the farm.
• Farm valuation: it is the value of the farm at the start and end of production. The first is the opening valuation and the second is the closing valuation.
• Cash analysis account: it shows the income and expenditure of a farm over a given period.
• Farm income statement: it lists all farm receipts (sales) and expenses over a period of time.
• Balance sheet or net worth statement: it shows the capital or financial position of the farm at the end of the accounting period, usually a year.
• Profit and loss account: it is prepared at the end of the business period, usually a year, to show whether the farm made a profit or a loss.

What does a farm income statement look like?

A farm income statement lists expenses and receipts for a period, and the difference between them is the net income.

• Net income: total receipts minus total expenses.
• Balancing: net income is written on the expenses side so that both totals are equal.

Income statement of Akande Farms for October 1995

What is a profit and loss account?

A profit and loss account is a statement prepared at the end of the business period, usually a year, to show whether the farm business is making a profit or a loss.

What goes on each side of the account?

• Debit side (left): all expenses, all purchases and the opening valuation.
• Credit side (right): all receipts from sales and the closing valuation.
• Result: if the credit side is larger, the difference is a net profit. If the debit side is larger, the difference is a net loss.

What is the importance of a profit and loss account?

• Detects profit or loss: it shows whether the farm is making a profit or a loss.
• Shows performance: it helps to determine the overall performance of the farm at the end of the account period.
• Aids planning: it helps the farmer plan the farm for better results in future.

How do you prepare a profit and loss account?

1. Write the heading with the farm name and the date the year ended.
2. List the opening valuation, purchases and all expenses on the debit side.
3. List receipts from sales and the closing valuation on the credit side.
4. Add up each side.
5. Find the difference between the two totals.
6. Write a net profit on the debit side, or a net loss on the credit side, so that both totals are equal.

Example: preparing a profit and loss account

Prepare a profit and loss account for Segun Farms for the year which ended 31/12/17, using the following data:

• Cost of feed: ₦500
• Cost of drugs: ₦200
• Sales of eggs: ₦2000
• Eggs for domestic use: ₦200
• Loss due to mortality: ₦300
• Value of stock left: ₦600
• Farm wages: ₦400
• Sales of spent layers: ₦1000
• Transportation cost: ₦300
• Depreciation: ₦200
• Electricity bill: ₦300
• Net profit: ₦1600

Solution

Segun Farms profit and loss account as of 31st December 2017

Working in table form:

• Total expenses: ₦2,200.
• Total credit side before profit: ₦3,800.
• Net profit: ₦3,800 minus ₦2,200 = ₦1,600.

What are the common farm accounting terms?

What is a farm asset?

A farm asset is anything of value in the possession of a farm business. There are two types:

• Fixed assets: assets not used up during production, such as land, farm buildings, motor vehicles, tools and implements, incubators and milking machines.
• Current assets: assets used up or turned over during production, such as water, feed, drugs, chemicals, fertilizers, seeds and cash in the bank.

What is cost?

Costs are the expenses made during production, and they are of two types: fixed cost and variable cost.

• Fixed cost: the part of total production cost that does not vary with the level of production, such as buildings, equipment, machinery and farm structures (silo, barn).
• Variable cost: the part of total cost that varies directly with the level of production, such as wages, salaries, seeds, fertilizer and agrochemicals.

What are liabilities?

Liabilities are money owed to outside persons or corporate bodies, such as a bank loan. There are two types:

• Current or short-term liabilities: debts that must be paid back within one accounting year.
• Long-term liabilities: debts that cannot be paid within one accounting year.

What is net capital, net worth or owner’s equity?

Net capital is the total amount of money supplied by the owner of the farm business.

• Formula: assets minus liabilities = owner’s equity (capital).
• Illustration: assets of ₦500,000 and liabilities of ₦200,000 give an owner’s equity of ₦300,000.

What are the other common terms?

• Liquidity: the ability of a farm business to meet its financial obligations as they fall due. It is the ease with which farm assets can be converted to cash.
• Solvency: the ability of the farm business to pay off all its debts. A business is solvent if the sale of its assets would be enough to pay all debts.
• Appreciation: the increase in the value of an asset over time. Growing animals, cash crops and land can appreciate.
• Depreciation: the loss or reduction in the value of an asset as it is used over time.
• Salvage value: the amount at which an asset is sold off when it is no longer economical to keep, or when the cost of maintenance is too high.
• Useful life span: the number of years a piece of farm equipment can effectively serve the farmer.

What are the common farm records?

Farm records are written details of farm activities and property that support the farm accounts.

• Farm diary: records the day-to-day activities carried out on the farm.
• Inventory: lists the assets of the farm, such as tools, equipment and buildings.
• Payroll: records the wages paid to farm workers.

Evaluation

1. What are farm accounts?
2. List any four types of farm account.
3. State three reasons for keeping a profit and loss account.
4. Differentiate between fixed cost and variable cost, giving one example of each.
5. Differentiate between current liabilities and long-term liabilities.

Assignment

Choose the correct option for each question.

1. In a profit and loss account, opening valuation is put on the _____ A. credit side B. debit side C. and side D. all sides
2. The ability of the farm to meet its financial commitments as they fall due is _____ A. solvency B. liquidity C. depreciation D. appreciation
3. The amount at which an asset is sold off when the cost of maintaining it is high is called _____ A. useful life B. lifespan C. salvage value D. asset
4. Day-to-day activities on the farm are recorded in the _____ A. register B. diary C. payroll D. inventory
5. Farm assets are recorded in the _____ A. diary B. register C. inventory D. labour