agMIS    ...important MA topics explained

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Can you ace this accounting quiz?

If you can, you'll be well on your way to understanding how 'management' and 'accounting' is handled in the world of business outside of agriculture.

Many in agriculture are not aware of how poorly informed -- and badly misinformed -- they are, on the subject of 'double-entry' accounting.  Most are not aware, for example, that double-entry accounting is not an appropriate tool, in family accounting situations.  Nor are they aware the very principles of double-entry accounting have to be ignored, overridden, crippled or otherwise violated, in order to keep a family's records using them.  Additionally, most are not aware that acceptable professional alternatives exist that can spare farm families from those drawbacks, while at the same time providing all its benefits and more.

Our concern here is just how much that misinformation is keeping you, as farm producers, from the computerized management software benefits you and your farm need.  And deserve.  Take time to ponder and study these questions about accounting.  Chances are -- as a farmer -- you're not an accountant.  And chances are too, you're also misinformed -- and perhaps confused -- about accounting matters important to you and your business.  Sound farm financial management is critical to farm and family success, and it is our hope these questions, their answers, and their message can help you find ways to benefit.

Question #1 -- True or false? -- "Every farm should have (needs) a double-entry accounting program."

The answer is false, despite what so many work so hard to induce you to believe.

Called the 'general ledger', or 'book of final entry' in accounting, it's purpose is to satisfy the principles of 'dual control' where that's required, as in a corporation.  The notion a family gains by imposing dual controls on itself, is nonsense. 

In today's automated world, accounting is done from high-level recaps obtained from 'books of original entry', i.e., management information systems) that serve day-to-day management needs, as the name implies. 

Question #2 -- True or false? -- "The purpose of double-entry accounting is to help improve operating results."  

Double-entry accounting methods, used properly, simply make it impossible for one person, acting alone, to steal from, defraud, or otherwise 'cook' a company's books.  The answer, therefore, is false in all cases.

Dual control is achieved by ensuring the same employee is not responsible, in the normal course of his or her job, for creating both the debit and the credit to any account.  The often-used example is the separation of duties such that the employee who deposits company funds, is never the same employee who pays its bills.  Because that enables one employee to make both the debit and credit entries to the checking account.

If you can understand why those rules don't apply to most family farm situations, you'll also understand why vendors had to create other arguments to induce farm families to adopt double-entry methods. 

Question #3 -- True or false? -- "The cost of 'accounting' goes down, for every 'management information' or 'MIS' system installed."

It is true -- to the extent, of course, the MIS system includes financial data.  As a 'book of original entry', financial records entered in an MIS system for management purposes, always avoids multiple entries later, in the general ledger.  The workload savings -- as well as avoided accounting complexities -- can be significant. 

It's a fact of life not generally understood in ag circles, where the more common belief is that 'more outputs' always requires 'more inputs'.  A good MIS system, in fact, can slice and dice financial data in a multitude of ways -- for management purposes -- yet recap it all at year-end into one or two general ledger entries.

Question #4 -- True or false? -- "MIS software systems are not accounting programs".

It's true; they are not -- in the accounting sense of account numbers, debits and credits, and so forth. 

As their name suggests, they are 'information systems for managers'.  Accountants are managers, too, of course, and to the extent an MIS system contains financial information, it also supports their 'accounting' needs.  But not in double-entry mode.  And always in high-level recaps.  And preferably, also, in ways the information can be audited and proved. 

Question #5 -- 'A', 'B', or both? -- Which of the equation(s) below, measure a farm's true 'accrued' income?
 

Congratulations if you recognize that both equations measure the same thing -- a farm's true accrued income.

Ag banks and lenders typically use Equation 'A', because they can calculate it from 2 documents they ask you to provide.  It serves their purposes, but provides no clues to where, why, or how things turned out the way the did, or how or where changes might be beneficial.  And since it can only be calculated after the fact, it's never in time to make decisions that might improve it.

In Equation 'B', notice first, that neither factor requires any double-entry accounting.  And second, that their focus is the two constants in the mind of every producer -- optimizing its production including costs, and its marketing.

Whether or not farm producers realize it, each already has -- in one form or another -- his or her own way to track those factors.  In today's world, it's the perfect argument for computer-based management information systems (MIS) tools that help.

Question #6 -- True or false? -- "Accrual accounting is a double-entry accounting function."

It's a notion used to promote accounting programs, but it is absolutely false.

Look again at the factors in Equation 'B' above.  Every business in the world relies on management software tools to help them manage those two critical elements and farmers need, deserve, and should seek the same benefits for themselves.   

Good MIS tools pay for themselves, and are therefore not an expense.  And payback increases to the extent they also support the level of 'accounting' a farm wants or needs, if any.  And keep in mind, too, that good MIS tools can reduce 'accrued accounting' to just three double-entry transactions!