Farm Record Keeping

Balance Sheet, Income Statement,

Cash flow Statement
FARM RECORDS
• Farm record is an account of various activities carried
out in the farm on the regular and systematic basis.
• It includes land size, number of livestock and equip
ments in the farm, procurement and utilization of farm i
nputs, sales of the farm outputs, etc.
• Farm record keeping is both the art and science of recor
ding business transactions regularly and systematically in a
book, so that their nature, extent and financial effects ca
n be readily ascertained at any time of the year (Johl and
Kapur, 2001).
Advantages of farm record keeping
• Basis for proper farm planning and diagnosis
• Means to improve managerial ability of the farmer
• Information regarding the existing resource use
Pattern
• Means to increase income
• Basis for farm credit and financing
• Basis for government policies
• Basis for conducting research in farm management
Problems in farm record keeping in Nepal
•Farming at the subsistence level
•Laborious nature of farming
•Illiteracy and lack of business orientation
•Complex nature of agribusiness
•Insufficient extension service
•Unavailability of handy/suitable farm record
book
•Taxation fear
Types of record keeping system

•a) Single and double entry system

•b) Cash or accrual system
•c) Hand or computer summarization
Single and double entry system:
• Single entry system is the method of recording every
transaction of the business in single fold, without
separate allocation of income and expenses.
• In double entry system, every transaction is recorded in
twofold aspect, i.e., both the debit and credit entry.
• Double entry record keeping system permits the entry
of both receipts and expenses to each transaction of
the business. However, this system requires more
skills and detailed information. Thus, this system is
considered more complex than single entry record
keeping system.
b) Cash or accrual system:
• In the cash system of record keeping, income is
recorded in the year it is actually received, eithe
r in the form of cash or kind.
• Likewise, expenses are also deducted in the year it
is actually paid. In contrary to this, in accrual system
,irrespective of the time of payment receipt, incom
eis included for the year in which it is earned.
• Expenses are deducted during the year when they
are incurred, irrespective of their payment.
c) Hand or computer summarization:
•Simple records can be summarized by
hand while the complex ones
involving various details require
computers. The second one is the most
preferred these days as it saves time,
labor, encourages precision and facilitate
s analysis as and when necessary.
Types of farm records
• Farm record can be broadly classified into followi
ng three types:
i) Farm inventory
ii) Farm physical records, and
iii) Farm financial records.
2) Farm physical records
• Farm physical records give an idea regarding the
physical aspects of the farm business
operation. It simply records the physical efficiency
of the farm, but does not indicate the financial
position. Physical record consists of following records:
• 1) Farm maps
• 2) Farm production records
• 3) labor records
• 4) Livestock feed records
3) Farm financial records
• Farm financial records are related to the financial aspect of the
farm business. There are various types of financial records like,
i) Farm cash analysis account,
ii)Classified farm cash account and annual farm business analysis,
iii)Supplementary financial records:
a) capital assets sale register,
b) cash sale register,
c) credit sale/purchase register,
d) wage register,
e) fund borrow/repayment register,
f) farm expense (Paid in kind) register.
 Balance sheet
• Balance sheet is also known as net worth statement. It
lists the assets and liabilities of a business together with
the statement of equity or net worth.
• Here, the term balance is used as the sum total of the
assets column is equal to the liabilities and net worth
column.
• It shoes the financial condition and stability of the farm
business at a particular point of time.
• In other words, it shows the value of assets that would
remain if the farm business were liquidated and all the
liabilities in the business are paid off. Balance sheet
reflects three essential components, viz., assets, liabilities
and net worth or owner's equity.
•Mathematically,
•Net worth = Assets – Liabilities
•Assets refer to anything of value in the
possessed by the farm business or a
claim of the farm for anything of value in
other's possession. Assets constitutes of
farm inventory, farm cash and accounts
receivable.
Farm assets are broadly classified as:
• Fixed assets: Such assets are difficult to
convert into cash to meet any current
obligations. For example: land, building.
• Working assets: Such assets are more liquid
than the fixed assets. For example: Farm
machineries and equipments, producing livestock.
• Current assets: Such assets are most liquid
assets and are consumable within a year. For
example: cash on hand or in the bank, seed,
fertilizers, etc.
• Liabilities can be defined as other's claim against the
farm business, like mortgages, loans and accounts payable.
• It can be classified into three groups:
• Long‐term liabilities: Those liabilities which can be deferred
from 5 years to 20 years are classified as long- term
liabilities.
• Intermediate liabilities: Such liabilities can be deferred
for the present.
They have to be paid between 1 to 5 years period. For
example: promissory notes and medium-term loans.
• Current liabilities: Those liabilities which have to be paid
immediately, generally within one year.
They can’t be deferred.
• Net Worth

•Net worth is estimated by subtracting total

liabilities from total assets. It reflects the
owner’s equity in the business and in other
personal property. The net worth statement is
one of the primary documents used by lending
agencies in evaluating requests for new loans
or extension of existing loans. It is also useful
for calculating financial ratios of the farm
business.
 Income statement
• Income statement is also called 'Profit and Loss Statement’
which shows the measure of revenue and expenses
during a given accounting period.
• It can be prepared either for a single enterprise or for all en
terprise of a farm business as a single unit.
• Income statement shows the performance of the farm b
usiness during the given agricultural period and thus provi
des guidelines for improving the farm efficiency in future.
• Measure of income provided by this statement is useful in
tax payment determination, analysis of the business
expansion potentiality, evaluation of the outcome of the
business activity and justification of loan repayment
ability. However, it fails to guide for family spending.
 Cash flow statement
• Cash flow statement summarizes the cash inflows and
outflow over a given accounting period.
• It provides an information regarding the timing and mag
nitude of cash flows.
• Thus, it guides in estimating following items:

i)surplus and deficit cash period during an agricultural year, so

that farmer could plan investment of income and loan,
ii) timing and magnitude of borrowing and repayment of loan,
iii)the potential affects that the marketing patterns have on
the need for borrowed funds.