What is Agricultural Accounting?
Agricultural accounting applies to your family farms or corporations runs their business in agriculture. It does not matter what kind of products you produce or sell in the market. This article will discuss how you start bookkeeping in agriculture!
The Differences Between Agricultural Accounting and General Accounting
The agricultural production cycles are so unique that the accounting methods used in other industries can not be applied in some cases. For example, some crops are annual or perennial. Some livestock is raised for sale or raised as breeding livestock.
Generally, the agricultural business operates in the form of a family-based farm, agricultural corporation, agricultural cooperative. There are so many varieties in the agricultural field, so as a variety of accounting methods. Depending on types of crops and livestock, and at which stage of the life cycle crops are in influence the selection of proper accounting methods.
In agriculture, inventory accounting is one of the most critical areas, and it will be the main topic in this article. We will discuss how the expenses are recorded to the related inventory account and how the inventory will be valued.
How to Make Proper Accounting for Farmers: Inventory Valuation Methods
Inventory valuation methods used in agricultural accounting are :
Lower of Cost or Market: LCM based on GAAP standards. It usually means that the inventory is valued at its cost.
Net realizable value: NRV used when the actual cost of the inventory is difficult to determine. This valuation method is allowed under certain circumstances under GAAP.
Lower of Cost or Market (LCM)*:
Under LCM, inventory is recorded at either the historical cost or the market value. Historical cost refers to the cost at which the inventory was purchased or produced.
Net realizable value (NRV)*:
Net realizable value is the value of an inventory that can be realized upon the sale of the inventory less a reasonable estimate of the costs associated with the sale or disposal costs.
Doing Proper Inventory Recording for Farmers the Right Way
When farmers account for inventory items, the inventory falls in one of the categories listed below:
- Inventory held for sale in the ordinary course of business: i.e. raised crops for sale
- Inventory in the process of being produced for sale: i.e. raised livestock intended for sale
- The materials or supplies intended for consumption in the production process: i.e. fertilizer, herbicides, livestock feeds
Let’s discuss how each inventory category records the incurred costs.
Inventory held for sale in the ordinary course of business:
Annual crops: All costs related to the production are accumulated and recorded on LCM. The crops in this category include tomato, cabbage, corn.
Perennial crops: all of the costs incurred up to the point of the productive stage will be accumulated and capitalized as Non-current assets, in other words, "constructed" assets. This asset depreciates over its lifetime. Once the crops have reached the point of commercial production, all costs related to the crops are charged to expense as incurred, the same treatment as annual crop costs recording. The crops in this category include orchards, vineyards, asparagus, grazing grasses.
Inventory in the process of being produced for sale:
All costs incurred are accumulated under the inventory account up to the point of the productive stage. Examples could be raised livestock for sale, the perennial crop before achieving its productive stage.
Materials or supplies intended for consumption:
It can be recorded as inventory, but require inventory tracking at the end of each accounting period. The tracking process could be time-consuming work to some farmers, so a direct recording of the expenses to the crops could be optional if the amount of materials and supply inventory are less and insignificant.
What Experts Would Say About Adjusting Inventory Value With NRV
When you use NRV to adjust inventory value, three required conditions must be met:
- The product/inventory is available for immediate delivery
- The disposal costs are predictable and insignificant
- The product/inventory has a readily determinable and reliable market price
If the market value of the product drops, you can adjust the amount accordingly:
What about the trees and vines or livestock raised for the production?
All costs of raised trees and vines are accumulated and capitalized as Non-current farm assets. Once the trees reach the point of the commercial production stage, depreciation starts to recognize the expense over its lifetime period.
Examples of Non-current farm assets raised for production:
- Trees and vines, i.e. orchard, vineyard
- livestock raised to the point of the production stage will be accumulated. i.e. breeding livestock, poultry
Chart of Accounts for Agricultural Accounting
You can set up a chart of accounts that fits your farm business, but these are some examples that may help you to get started.
Examples of the accounts used in agricultural accounting:
- Inventory - Crops raised for sale or use [asset account]
- Inventory - Feeder livestock purchased for sale [asset account]
- Purchased feed [expense account]: the feed can be recorded as inventory, depending on the accounting principles you use.
- Fertilizer [expense account] / Herbicide and Pesticide [expense account]: it can be recorded as an expense or capitalized depending on the production stage of the crops.
- Change in value of crop raised for sale [revenue account]
Thank you for reading this article. We briefly discussed what is agricultural accounting and how the inventories are categorized, and the incurred costs are allocated to proper accounts. I hope this article will help you to understand the principles of agricultural accounting.
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Hiroshi Furukawa CPA