agMIS Important MA topics explained

agMIS ...important MA topics explained

Accrual accounting simplified

‘Accrued’ or ‘accrual’ accounting in agriculture - a history

Agriculture was correct, some years back, when it stated that farms and farmers need more financial information than that which can be extracted from traditional checkbook accounting methods. In the main, that needed information centers around reports and results expressed in ‘accrued’ or ‘accrual’ accounting mode. Specifically, it refers to income statements that reflect gross margins or profits determined by matching revenues with the true costs of producing it, and balance sheets that reflect, as assets, the true values for in-process and unfinished production.

It erred, however, in its suggesting that information can only be obtained by double-posting of all records as debits and credits in ‘double-entry’ or general ledger accounting mode. That’s not the way it’s achieved in business elsewhere, for reasons equally adaptable to agriculture.

Visit any well-managed business elsewhere, in fact, and you’ll not find anyone engaged in double-entry accounting. Why? Because double-entry records, in today’s world, are maintained solely inside the corporate office, and ‘closed’ yearly – in a record known as the ‘general ledger’. And the source of its year-end closing information? It’s all the ‘management accounting’ and MIS systems the business uses day-to-day all year long.

‘Accrual’ or ‘accrued’ accounting simplified -- to just 3 year-end accounting entries

Our purpose here isn't to explore or explain every year-end closing entry, from all possible ‘MIS’ or ‘management accounting’ systems, but instead to explain only the three accounting entries that achieve 'accrual' or 'accrued' accounting results in any product-oriented business with good production ‘management accounting’ systems in place. Those three entries are:

Entry #1 – A debit to the ‘work-in-process’ asset account, for the value of all expenditures, withdrawals from supply inventories, etc., placed in production during the year. Those values are determined from information provided by ‘management accounting’ systems which reveal the source asset and expense accounts to be credited; the debit is their sum.

Example:
Year-end MA/MIS systems report $123,456.78 spent for production plus withdrawals from prepaid inventories for production of $87,654.32

1 debit:
Work-in-process $211,111.10

2 credits:
Cash or checking $123,456.78
Prepaid inventories $87,654.32

Entry #2 – A debit to the ‘finished goods’ asset account for the value of the costs of completed or harvested production in the year. Once again, it’s total or basis is supplied by production ‘management accounting’ systems. The equal offsetting credit is to the ‘work-in-process’ account; the basis is the same as above.

The farm harvested all its products prior to end of year. (If otherwise, MA/MIS systems would provide a basis for this year-end entry.)

1 debit:
Finished goods $211,111.10

1 credit:
Work-in-process $211,111.10

Entry #3 – A debit to ‘cost of goods sold’ for the cost of completed products sold during the year. The equal offsetting credit is to ‘finished goods’.

At year-end, the farm had sold half its production. (Basis is the same as above, probably expressed in 'per unit' terms.)

1 debit:
Cost of goods sold $105,555.55

1 credit:
Finished goods $105,555.55

Some will argue, of course, those entries offer nothing that’s useful, and we remind them it's the MA and MIS tools that provided these totals, that were also the source all year for useful management information the farm wants or needs. These year-end general ledger entries are merely their totals -- with further advantages in regard to auditing, authenticity, credibility, and valuable managers’ time!

Just further justifications for good MA and MIS systems!