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farm accounting forum and facts |
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About Tom Murphy, Tom Murphy is a professional accountant with decades of hands-on experience in the research, analysis, design and development of financial management software and systems tools for business and industry. His software research and development experience has varied from systems to track the manufacture of automobiles plus world-wide warehousing and distribution of spare parts for the automobile industry, to real-time transaction-accounting systems serving international bond and currency markets in New York and abroad. Plus financial systems serving airlines, retailing, accounting service bureaus, government bodies, and more. He returned to Nebraska and his farm roots to design and build tools for farms and farmers, when he discovered no one was offering to them, the quality or caliber of management software he was accustomed to building elsewhere. The agMIS system, currently available in its 6th edition since 1983, is the result of that experience and his life-long interest in and exposure to production agriculture.
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There are unhealthy levels
of misunderstanding about 'accounting' in farm country, and we offer this
agMIS resource as a place for understandable explanations. We'll start with topics we've found to be poorly explained or generally misunderstood, but we invite and encourage readers to use the link at left, to forward us questions, concerns and comments on these or any other related topics. We'll try to respond below -- in ways that may be useful to others as well as yourself.
'Management accounting' is a new buzzword in ag. What is it? We won't speculate on how it will ultimately get defined in ag, but elsewhere, it's a concept made possible and practical by 'MIS' technology (another term emerging in ag) by making it possible for managers to manage, without requiring them first to become accountants. Elsewhere (including here at agMIS), 'MIS' refers to any relational database technology designed to help managers do their job. And when that help has financial components (which is most of the time), a good MIS system provides support also for whatever level of accounting the business uses. Users of agMIS, in fact, know the agMIS support for their accounting is so complete (and accounting-approved, too!) that no additional software is needed - all the way up to but not including, a corporation's balance sheet. And while it may not be misleading to label any accounting program as 'management accounting', farmers should be alert to those who would put MIS labels on accounting programs. How to identify an accounting program? It's an accounting program if it's backbone is a chart of accounts and its entries are debits and credits. As best we can determine, It's the only farm software built on an MIS database platform - same as all management software used in modern business elsewhere - to manage the fabrication, manufacture and/or assembly and distribution of products and services. By definition, those software tools support management needs - which includes accounting management, too, of course. All other farm accounting software we've seen is built on a controller's office chart of accounts platform that's been modified to override or cripple the controller's office features which aren't useful in family situations anyway. By definition, those products serve the controller, and their management value or usefulness is limited to add-ons to their basic and purposely limited structure. It's different because our research told us farms and farmers want, need and deserve management software that's equal in quality, caliber, power, versatility and ease of use to that which their counterparts benefit from in all other industries. While others transformed once-standard accounting programs into proprietary ones they alone can support, we used our MIS experience to research, design and build the open-environment agMIS system everyone can use. How is it possible for agMIS to provide free support? Because we're not obliged to provide accounting services to agMIS users. Anyone can use the agMIS system at his or her level of accounting comfort and need. And, when one asks a question, we look for ways to improve our literature and other documentation. That places burdens, of course, on our system design efforts, especially when adding or evaluating potential system add-ons. We have to ensure that prospective new features (1) have a universal use or usefulness, (2) can be used by the average non-accountant farm and farmer without on-going hand-holding, and (3) retain the accounting and fiscal integrity of the overall system. What is the real purpose of double-entry accounting? It's principal purpose is 'control', though not many farmers are aware of that. Its official name elsewhere is 'general ledger accounting', and used as intended, it prevents one person, acting alone, from stealing from the company and falsifying its books. Does that fact help explain why other purposes had to be highlighted, in order to expect farmers to adopt its programs? Does accrual accounting require double-entry accounting? The answer is no. Need proof? Examine the flip-side of the standard IRS Schedule F form. Its front side is a worksheet for cash-basis income determinations; its back side is a similar worksheet for accrued-basis. Neither requires double-entry accounting. The principal difference between the two? 'Accrued income' means gains (or losses) are recorded at time of sale, and 'cash-basis income' means gains (or losses) are recorded and assumed at 'harvest' time. Only the 'accrued' method requires knowledge of true costs of production (i.e., the cost-value of inventories), in order to determine gain or loss at sale time. Cost accounting is the systematic analysis of the information in the work-in-process account, and the ultimate value and usefulness of a cost accounting system is determined almost entirely by the number of ways that information can be sliced and diced. Accountants address this need by adding more
accounts and sub-accounts and split transactions more ways -- always a self-defeating exercise.
What's needed are per acre, bushel, field, farm, landlord, crop, product,
head, pound, cwt, hour, week, mile, and other quantity breakouts -- all
outside the scope of general ledger accounting. It's one of the ways
IS technology out-performs general ledger accounting. In accounting, it's the general ledger
account whose (debit) balance is the sum of all costs currently in some
stage of production. Its debits arrive via a number of sources, mainly
payables, payrolls, and prepaid inventories; its only credits are to
'finished goods' for the accumulated value of each production batch.
Its balance is always reconcilable to information in the cost accounting
system.
Does cost accounting require double-entry accounting? Absolutely not, in today's world. Virtually all business software developed elsewhere to this day, deals with some aspect of productivity and productivity cost, and none of it has ever used double-entry accounting methods. Those who would propose otherwise to farmers, either (a) have read accounting textbooks but lack any real-world experience, or (b) are uninformed or are motivated by something other than farmers' best interests.
It's an old name that can describe any method for producing financial management reports. It's a title not often heard in ag circles, but we've begun to see it in reference to cost accounting programs, which is appropriate. It's not a new term, by any means; even the simplest old checkbook accounting program is 'management accounting', too -- if its purpose is to assist management. And by all means, don't confuse the term with 'management information' or 'MIS' software -- a distinct, and distinctly different, category of business software (see below).
MIS software is a distinct class of software, and it too is anything but new; its origins, in fact, pre-date earliest business computers. Only recently, however, have we seen the term used in agriculture, and -- true to what seems to be ag's desire for unique titles unto its own -- it too, may be used to define 'accounting' programs. There's one sure-fire way to distinguish an accounting program, from a management information system, however. Just research the platform upon which the software system is built. It's an MIS system if its platform is a relational database, with all the benefits its systems designers can build into its relational capabilities. Or it's an accounting program if its platform is an accounting chart of accounts, with all the restrictions defined for it by accountants. To our knowledge, there's no such thing today
as a 'relational chart of accounts database', though it was actually tried
but failed some years back, in large part because differences between
'relational' in restrictive accounting language, and 'relational' in open
and expansive computer usage, proved
irreconcilable. That's the question producers face when looking at software. Expensive and complicated farm programs offer to do accountants' work -- even for non-accountants -- and assuming correct use, can then furnish accounting information for management. That's a tall order, of course, on most farms. The MIS approach (and that includes agMIS, of course) is the opposite. It furnishes, first, management information that's useful to everyone -- plus tools to support any level of 'accounting' the farm wants or needs as well. It's not a solution we invented, but
it's one reason we can furnish free agMIS support. Because we're not
faced with trying to help non-accountants make accounting decisions and
entries. It has continually failed to realize or acknowledge that 'general ledger accounting' (called 'double-entry accounting' in ag) is a company controller's (chief accountant's) tool for managing and monitoring the integrity of the company's internal controls. In other words, it's not built for better management, it's designed for better controls. But since family farms have no reason to hire
controllers, the effort goes on to fabricate other reasons to induce them to
adopt controller's office methods and tools.
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