The Hindu Business Line : Accounting for farms

Agricultural farms are rather complicated and so far no standard has been issued by the Institute of Chartered Accountants of India on this type of business. In the absence of any such standards, generally accepted accounting principles should be adhered to.

Is it essential to maintain accounts of agricultural farms?

A big Yes. Though agricultural income is tax free subject to certain stipulations, an assessing officer may call for information on agricultural income. A mere estimation of income is not always acceptable.

In such situations, accounting for farms comes in handy to any farmer. No doubt, an average farmer in our country is illiterate. Illiteracy is not an excuse to avoid accounting.

Which accounts are to be opened?

A basic requirement would be a cash account to record day-to-day cash transactions. The farmer may simultaneously cultivate food grains, Oil seeds, fruits, vegetables, flowers, medicinal herbs, etc. (including the bio-diesel plants)

It would be good idea to maintain accounts separately for each segment of farming.

In all probability, there would be two crops - Rabi and Kharif as they are called in our country. For each segment, accounts can be maintained for each crop separately. This would help to reduce cost of cultivation and help in scientific farming.

In addition to the regular books of account, a farmer would do well to maintain the following additional registers and records:

Fixed asset register to record purchase and usage of fixed assets.

Loans register to records details of crop loans obtained and repaid.

Stock register to record stocks of inputs and out puts.

Crop diary to monitor the crop from tilling to harvesting.

Notional expenses register to record the notional costs to family members of the farmer,

Lease register to record details of securing leases, lease rents paid, balance of lease period, etc

Debtors and creditors register to record advances paid and received, purchase of fertilisers and other inputs on credit, advances received from customers, etc.

Certain terms used in accounting for farms:

Average harvest selling price: Sale proceeds of agricultural produce would normally be a U-shaped curve, with prices reigning high at both the beginning and at the end of the season and low prices during the peak season. An average harvest price is to be considered to determine profits.

Standing crops: As on March 31, harvesting may not take place and the crops are still on trees. For example, mangoes are not ripe for harvesting as on March 31. They are harvested towards end of April. The value of crops remaining on trees as on March 31 would represent standing crops. A good part of expenditure spent on the farm would yield benefit only towards end of April. Therefore, it would be essential to recognise the value of standing crops as on the date of Balance sheet. (This is comparable to work in progress in normal case).

Crop costs: This would represent direct and variable expenditure such as input cost, labour, cost of transplanting and harvesting, etc.

Common costs: This would represent expenditure such as servicing and maintenance of tools and equipment, irrigation costs, and animal power. Common costs can be spread over crops in a reasonable basis, such as maintenance of farm shed can be on the basis of the length of the crop. If two kinds - say vegetables and food grains are cultivated simultaneously, it can further be divided between them on a reasonable estimate.

Deferred costs: Land development costs, partitioning, seasoning, etc are treated as deferred revenue expenditure since thy last over a period of time. Crop rotation costs to restore nitrogen fixation, etc, are also amortised over a period of time.

Notional costs: Along with the farmer, his family members too may work on the farm. Similarly, certain of the output such as fruits and vegetables may be consumed by the household. Workers may be given certain part of the output as part of wages or gratis. Along side the boundaries, grass may be grown for grazing the animals. These milch animals give milk, which is consumed either by the farmer's household or the workers. All these transactions do not directly result in cash transactions but have a significant impact on the cost of output.

There should be a mechanism to record these transactions to exercise a good control over the cost and returns on such farms.

Agricultural costs are classified as Cost A1, A2, Cost B1, B2 and Cost C1, C2.

Cost A1 is total production cost, both cash and in kind.

Cost A2 is Cost A1 plus Rent of land taken on lease.

Cost B1 is cost A2 plus notional interest on owned capital (other than land)

Cost B2 is Cost B1 plus imputed rent of owned land.

Cost C1 is Cost B1 plus imputed wages of family workers

Cost C2 is Cost B2 plus imputed wages of family workers

The above classification is based on the four economic inputs of land, labour, capital and management.

Accounting for income: Main revenue would come from ale of produce. By products such as sale of manures, hay, etc. contribute towards a part of income. Complications would arise due to in house consumption, sharing the produce with work force, payment of wages in terms of foodgrains, payment of lease rentals by way of produce, etc.

The agricultural farm requires a great deal of animal power. Cattle would be reared by the farm. In fact a part of the farm would be left open for the cattle to graze and move around. The head count of cattle is taken as the date of each balance sheet and carried accordingly to the financial statements. Such a farm may yield considerable amount milk and milk products. Such output may be treated as by products. Alternately, a separate record may be maintained for dairy farming activity if the costs and revenues are material.

Records can also be maintained segment wise such as foodgrains, oil seeds, vegetables - leafy vegetables, roots and gourds.

Fruits such as citrus and non-citrus. Such a record would entail better management of farms.

Determining profit or loss on a farm: Total revenue (both realised a well as notional) less Cost C1 or C2 as the case may be gives managerial profits

Total revenue less cost B1 or B2 gives family profits

Costing for crops: Cost A1 or A2 is the basic cost. This, less sale of by products will result in paid out costs.

Total paid out costs/ total out put would give cost of output.

(Cost C1 or C2 less sale of by products)/ output / total output = unit cost of main output.

Look, therefore, at agricultural farms too, because these are the most sought after mode of real estate, next only to residential houses and vacant sites.

The author is a Hyderabad-based Chartered Accountant.