The business farmer wishes to know how much he is making or losing on his business each year, how much he is making or losing on each crop or class of animals, and how he can improve his business so as to make more money. The function of farm-cost accounting is to supply this information. Cost accounting for the farm is the same sort of work large manufacturing companies do to learn whether they are making a profit on their different products. The farmer wants to know whether his wheat pays, whether his cows pay, or his orchard. These are some of the questions a set of farm cost accounts will settle.
Many farmers are desirous of keeping accounts of this sort but do not know how to start. Undoubtedly many are deterred from starting because they believe they do not know enough about book- keeping and because they have in mind no definite method of procedure. To any such men who desire to keep accounts and who have not worked out a system for themselves, it is believed that this system will be helpful. Those who are already keeping accounts but are not satisfied with the results obtained may find here some suggestions of value.
No cost accounting can be absolutely exact. Commercial cost accounting and farm cost accounting are alike in this respect. Both, are based partly on estimates and partly on ascertainable facts, and both approach exactitude in proportion to the accuracy of these estimates. It is therefore important to make the most accurate esti- mates possible rather than be satisfied with rough approximations. As the work is carried on year by year and experience is gained, greater accuracy in estimating is attained, with correspondingly greater accuracy in the results of the cost accounts.
On the other hand it is not wise to spend much time with refinements in methods of bookkeeping that are designed to check to the last cent. In fact, attempts to find insignificant errors often dis- gust inexperienced persons with the whole question of accounting. It is aimed herein to outline the practical working of the system in sufficient detail so that any one who wishes may start it without further aid. It is a method simple enough, when the necessary complexity of any cost accounting is considered, and many farmers should be able to keep the accounts without assistance.
This is a ” direct-entry ” system, in that there are no preliminary books in which the original entries are to be made and from which they are to the ” posted ” or copied to the permanent accounts. This feature, which would be a serious fault in commercial accounting, where a hired bookkeeper is employed, as it would be impossible to check or audit the records, is a valuable one for the farmer who keeps his own books, in that it does away with that great bugbear, “posting,” resulting in the saving of much time. It is, howevei’, often advisable in busy seasons, when time will not permit the entries to be made each day, to keep a pocket memorandum book in which to make notes from day to day so that nothing is forgotten or over- looked.
Time Required to Keep Accounts
The first question the practical farmer asks about a proposed set of accounts is “How much time will it take?” The time required is one of the chief objections made to farm cost accounting, but farmers who have used this particular system during the past eight years answer the question of time by estimates ranging from two to ten minutes per day. The average seems to be about five minutes for the daily entries. To this must be added a number of hours’ work, or perhaps a day or two, at the end of the. year to close the year’s accounts and open the books for the new year. This time will vary with the type of farming, the complexity of the business, and the degree of accuracy and completeness with which the accounts have been kept.
The daily work of keeping this set of accounts ordinarily consists in entering the receipts and expenditures for the day and recording the hours of work done. On many days there are no cash receipts and expenditures, as these are likely to be bunched on the days when trips are made to town.
Bookkeeping Knowledge Unnecessary
No bookkeeping knowledge is necessary for. the successful keeping of this system. In the work done so far, bookkeeping training, as sometimes given in commercial sdiools, has seemed in some instances rather a detriment than a help, although this training aids in grasping accounting principles. Those trained in commercial bookkeep- ing have a tendency to lean toward bookkeeping technique and com- plexity of entry, which are out of place for a working farmer who wishes to do cost accounting. It is not necessary to know a day book from a journal or to know how to prepare a balance sheet in order to keep farm cost accounts.
When to Start Accounts
Accounts may be started any time after the last crop is harvested in the fall and before the first crop operations are started in the spring. They should be started on the first day of some month, but the exact date will depend upon the geographical location of the farm and the nature of the business or type of farming in practice. The time should be as late as possible in order that there may be the smallest quantities of last year’s crops on hand to be inventoried. However, the date should be early enough to allow sufficient time to close the year’s accounts, work out results, plan the next year’s business, and open the new accounts before the spring crop work begins. In a large majority of cases the best date will fall between January I and April 1. For a tenant the date of taking an inventory and opening the accounts will, of course, correspond to the date of his lease.
Requirements for a Complete Set of Farm Accounts
In order to have a complete set of farm-cost accounts four classes of records are necessary.
- An inventory at the beginning and end of the year.
- An account of all money paid out or received, and of all purchases or sales on credit.
- A record of feeds consumed, crop supplies used, and crop yields.
- A record of all work done by men, horses, tractor, or other power during the year.
In this system of accounts these four classes of records are carried in the three spreadsheets which will be provided, known as the Inventory Record, Financial Record, and Work Record. In the second book all entries are made of class 3 as well as the cash items of class 2.
Source: USDA, 1920. Adapted for use by Michael Family Farm. All tools developed and provided by Michael Family Farm.