Farm accounting involves maintaining and using records and other information needed to measure the financial performance of the business. A farmer cannot possibly make intelligent decisions regarding the current use of capital unless adequate information regarding the current financial condition and past progress of the operation is at hand.
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Farm Accounts for Financial Management
Farm accounts for financial management are concerned with production costs: accounting that provides detailed information on the cost of production of farm produce or carrying out an operation in farm business. The following are what should be considered in farm accounts management.
1. Serviceability
Financial accounts are meant to serve the business and legal needs of the management of a business enterprise. Since the introduction of a new record or account involves additional expenses, a new record should be added only if it has a prospective benefit that is greater than the opportunity cost of introducing it.
2. Objectivity
Financial reports should show facts that can be supported by concrete evidence of complete transactions, such as invoices, cheques, and contracts. Additionally, such reports should be unbiased and verifiable by independent investigators, such as auditors.
3. Materiality Principle
The materiality principle states that only assets of some significance should be included in accounts, i.e., assets with a purchase price over a specified amount.
For instance, while depreciation values on assets such as vehicles and equipment are included in the accounts, depreciation values on assets such as pencils and erasers are not, because the amounts involved are very small compared to the opportunity cost of depreciating them. However, determining what is and what is not material to the accounts of a business is a matter of judgment.
4. Conservatism
This principle cautions against being over-optimistic when values of assets, depreciation rates, etc., are being determined. When valuing assets for accounting purposes, the lowest of the three values, i.e., historical cost, replacement cost, or net realizable value of an asset, should be used.
5. Disclosure
This principle requires that full supplementation of numerical recordings and tabulations with explanatory footnotes and comments be made.
6.The Going Concern
It is assumed that the business entity will continue its activity indefinitely. Thus, only the cost of assets paid by the entity is considered. The business will have continuous use of the assets for the purpose for which they were acquired. Any deviations from this should be completely identified and clearly explained.
7. Consistency
This principle states that the basis for valuing assets and measuring profits should remain consistent from one period to the next. This is necessary to make comparisons between the accounts of one year and another more meaningful.
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Cost as Basis of Valuation
This principle states that assets should be valued in a balance sheet at what they cost, not at their market value if sold. Cost includes incidentals such as transportation and installation. Where there are two alternatives for value, such as in a trade fair or a gift, the more reliable estimate of the “fair” market price should be selected.
Duality Principle
This principle considers every business transaction as having a dual aspect, i.e., “giving” and “receiving,” which must be reflected in the accounts. For example, when a business purchases an asset, it will be “giving” cash and “receiving” the asset.
This principle is fundamental to the double-entry system of credits and debits, which is the basis of most modern bookkeeping.
Stable Monetary Units
This principle assumes that the general price level remains reasonably constant. Since the primary purpose of accounting is the measurement of income and business worth, there must be some stable measuring unit.
Realization of Revenues
This principle states that revenues are realized when marketplace transactions increase the owner’s equity and should not be recorded until that time.
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