Adjusting Farm Accounts As An Aid To Planning

Press, Volume CV, Issue 30961, 18 January 1966, Page 8

Adjusting Farm Accounts As An Aid To Planning

Annual accounts prepared for taxation often give a misleading picture of the profitability and efficiency of farm enterprises. They take no account of the effects of inflation on the replacement cost of farm improvements, stock, and plant, and only partial account of the distinction between capital costs and expenses.

Much adjustment, particularly for these factors, is required if the accounts are to be used as an aid in planning future farm management.

These points are made by Mr J. W. B. Guise, a lecturer in economics at the University of Canterbury, in a new publication issued by the Agricultural Economics Research Unit at Lincoln College. The publication, entitled “Standardisation of Farm Accounts for Managerial Analysis,” begins with a detailed discussion of the deficiencies of ordinary financial accounting statements for managerial decision-making on farms. These deficiencies arise from the legal requirements which determine procedures adopted in financial accounting. For example, the money unit, £l, is treated as a fixedunit measure of value. No notice is taken changes in its relative purchasing power over time. For managerial accounting purposes, it is necessary to take account

of the variation in the unit of measurement.

An interesting conclusion reached after considering the effect of changes in the value of money over time was that net growth in farm real-estate values in New Zealand since 1951 had been little more than sufficent to keep pace with inflation. The difference between p-oss and net growth in farm values represented the additiona’ investment required to raise stock-carrying capacity by more than 40 per cent since 1951. The rest of the article is devoted to a discussion of suitable adjustment procedures to eliminate as far as possible, the inappropriate features of financial accounts, and substitute relevant data for management planning. This involves revaluing the property at an up-to-date value, clarifying the nature of the various expense items and eliminating capital outlays, separating clearly the farm household entity from the farm business entity, and then examining the performance of the farm business in terms of the capital investment involved.

An example of the application of these adjustment procedures to a set of farm accounts is included an as appendix to the publication.