Agricultural Economics IV: (Farm Accounts) - Agriculture Form 4 Notes

• Introduction
• Financial Documents
  • An Invoice
  • A Receipt
  • Delivery Note
  • Journal
  • Inventory
  • Local Purchase Order
• Financial Books
  • Ledger
  • Cash Book
• Financial Statements
  • Cash Account Sheet
  • The Balance Sheet
  • Profit and Loss Account

Introduction

• Financial and physical records if accurately kept in the farm serve as very important tools in decision-maki
• The records are kept in several books and statements as follows:

Financial Documents

• They include:
  • Invoices.
  • Receipts.
  • Delivery notes
  • Purchase records.

An Invoice

• This is a document issued by the seller to the buyer for goods taken on credit, and payment to be done later.
• The original is given to the buyer and duplicate retained by seller.
• The invoice shows the following:
  • The buyer and seller.
  • Date of transaction.
  • Amount involved.
  • Invoice number.

A Receipt

• This is a document issued by the seller to the buyer when cash payment for goods delivered is made.
• It shows the following:
  • The buyer and the seller.
  • Date of transaction.
  • Amount involved.
  • Serial number

Delivery Note

• It is a document which shows that the goods have been delivered.
• The receiver verifies the goods and then signs on the delivery note.
• The delivery note shows the following:
  • Goods delivered as per order.
  • Quality or condition.
  • People involved in the transaction.
  • Date of delivery.

Journal

• It is a book of first entry showing a record of all business transactions arranged in the order in which they occur.
• Its pages are divided vertically into five sectio
• The information is posted to the ledger

Inventory

• This is a list of all the possession/assets item by item and their market value.
• Such items are land, livestock, tools and equipment and crops in the store.
• Valuation is an estimation of the value of each asset or item, based on market price or cost of production.

Local Purchase Order:

• Issued by the purchasing officer of the supplier for example school.
• It shows people involved in the transaction, types and amounts of goods ordered and dates.
• It should be written and signed by the authorised officer.
• It is written in duplicate and the original is given to the supplier.

Financial Books

Ledger:

• Is a book which contains individual accounts.
• It is a principle book of accounts in which entries contained in all the other books are enter
• It is a storehouse of all the transactions.
• Each page is numbered and vertically divided into two equal parts namely credit and debit.
• Each part is further sub-divided into four sections.

Cash Book:

• It is a book where transactions involving cash or cheque payments are record
• It involves cash or cheque payments and receipt
• It is divided into two parts - debit and credit side.
• All the receipts of cash or cheque are recorded on the debit and all payments are recorded on the credit side

Example: Enter the following entries in the cash book.

• 1.05 -Received shs.2,000 from Ndete by cheque.
• 7.05-Bought D.A.P. fertilizer and paid cheque of shs. 5,000.
• 7.05-Received shs.5,000 cash from Ngala.
• 4.7.05 -Paid water bill for shs 400 in cas
• 7.05-Paid telephone bill of 1,500 by cheque.
• 11.05 -Deposited shs.2,000 in the bank.
• 20.7.05 -Withdrew shs.2,000 from the bank for home use.

Financial Statements

Cash Account Sheet

• It involves the recording of sales and receipts, purchases and ex
• Each sale or purchase is entered twice, once in the total column and once in the analysis column.
• The sum of all the entries in the total column should always equal the sum of the entries in all the other columns.
• The cash analysis account sheet is given above.

The Balance Sheet

• It is a financial statement of assets and liabilities recorded on a given date.
• It shows the financial position of a farm business at a glance (snapshot).
• Assets are items owned by the farmer, these include:
  • Property (money, goods and buildings).
  • Debts receivable from other people.
  • Goods and services paid for in advance.
• Assets can be divided into two:
  • Fixed assets: assets of permanent nature and not easily converted into cash.
  • Current assets: assets which can be easily converted into cash.
• Liabilities are claims to the farmer's property such as bank overdraft and debts payable. They are divided into:
  • Current liabilities - debts which must be paid within a short time.
  • Long term liabilities - debts which are payable over many years or over a long period.

Format of a balance sheet

Profit and Loss Account

• Prepared at the end of a calendar year.
• It is a final account which summarises the sale and receipts (income flowing in the business) and the purchases and expenses (flowing out of the business).
• Note: If assets are more than liabilities then the balancing factor is net capital (in the liability side) hence the farm business is said to be solvent.
• If the liabilities are more than the assets, then the balancing factor is a loss (in the asset side) hence the farm business is insolvent.
• To calculate profit or loss, account, valuation is done by having an inventory of all the assets.
• Valuation of the assets is determined by market price and cost of production for machinery and buildings as depreciation factor, is attached.

Format