Agriculture Form 4 – Agricultural Economics IV : (Farm Accounts)

Introduction

• Financial and physical records, if accurately kept on the farm, serve as very important tools in decision-making.
• The records are kept in several books and statements as follows: Financial Documents.

They include:

• Invoices
• Receipts
• Delivery notes
• Purchase records

An Invoice

• This is a document issued by the seller to the buyer for goods taken on credit, with payment to be made later.
• The original is given to the buyer, and a duplicate is retained by the seller.

The invoice shows the following:

• The buyer and seller
• Date of transaction
• Amount involved
• Invoice number

A Receipt

• This is a document issued by the seller to the buyer when cash payment for goods delivered is made.

It shows the following:

• The buyer and the seller
• Date of transaction
• Amount involved
• Serial number

Delivery Note

• It is a document which shows that the goods have been delivered.
• The receiver verifies the goods and then signs the delivery note.

Features

The delivery note shows the following:

• Goods delivered as per order
• Quality or condition
• People involved in the transaction
• Date of delivery

Journal

• It is a book of first entry showing a record of all business transactions arranged in the order in which they occur.
• Its pages are divided vertically into five sections.
• The information is posted to the ledger.

Inventory

• This is a list of all possessions/assets item by item and their market value.
• Such items include land, livestock, tools and equipment, and crops in the store.
• Valuation is an estimation of the value of each asset or item, based on market price or cost of production.

Local Purchase Order

• Issued by the purchasing officer of the supplier, for example, a school.
• It shows people involved in the transaction, types and amounts of goods ordered, and dates.
• It should be written and signed by the authorised officer.
• It is written in duplicate, and the original is given to the supplier.

Financial Books Ledger

• A book which contains individual accounts.
• It is a principal book of accounts in which entries contained in all the other books are entered.
• It is a storehouse of all the transactions.
• Each page is numbered and vertically divided into two equal parts, namely credit and debit.
• Each part is further subdivided into four sections.

Cash Book

• It is a book where transactions involving cash or cheque payments are recorded.
• It involves cash or cheque payments and receipts.
• It is divided into two parts – debit and credit side.
• All the receipts of cash or cheque are recorded on the debit side, and all payments are recorded on the credit side.

Example

Enter the following entries in the cash book:

• 1.7.05 – Received shs. 2,000 from Ndete by cheque.
• 2.7.05 – Bought D.A.P. fertilizer and paid cheque of shs. 5,000.
• 3.7.05 – Received shs. 5,000 cash from Ngala.
• 4.7.05 – Paid water bill for shs. 400 in cash.
• 9.7.05 – Paid telephone bill of shs. 1,500 by cheque.
• 11.7.05 – Deposited shs. 2,000 in the bank.
• 20.7.05 – Withdrew shs. 2,000 from the bank for home use.

Cash Book record:

Financial Statements

Cash Account Sheet

• It involves the recording of sales and receipts, purchases, and expenses.
• Each sale or purchase is entered twice: once in the total column and once in the analysis column.
• The sum of all the entries in the total column should always equal the sum of the entries in all the other columns.
• The cash analysis account sheet is given above.

The Balance Sheet

• It is a financial statement of assets and liabilities recorded on a given date.
• It shows the financial position of a farm business at a glance (snapshot).

Assets are items owned by the farmer, including:

• Property (money, goods, and buildings)
• Debts receivable from other people
• Goods and services paid for in advance

Assets can be divided into two categories:

• Fixed assets: assets of permanent nature and not easily converted into cash
• Current assets: assets which can be easily converted into cash

• Liabilities are claims to the farmer’s property such as bank overdraft and debts payable.

They are divided into:

• Current liabilities – debts which must be paid within a short time
• Long-term liabilities – debts which are payable over many years or over a long period

Profit and Loss Account

• Prepared at the end of a calendar year.
• It is a final account which summarises the sales and receipts (income flowing into the business) and the purchases and expenses (flowing out of the business).
• Note:
• If assets are more than liabilities, then the balancing factor is net capital (on the liability side); hence the farm business is said to be solvent.
• If the liabilities are more than the assets, then the balancing factor is a loss (on the asset side); hence the farm business is insolvent.
• To calculate profit or loss account, valuation is done by having an inventory of all the assets.
• Valuation of the assets is determined by market price and cost of production for machinery and buildings, as depreciation factor is attached.

Format of a Balance Sheet

Balance sheet of Katilo School as of 31-12-2009

Format

Profit and Loss Account of Kitheko Farm as of 31-12-2009