AEE 301 Farm Mgt, Records & Acc 2021

AEE 301: FARM MANAGEMENT, RECORDS
AND ACCOUNTING
DEPARTMENT OF AGRICULTURAL AND FOOD ECONOMICS

UNIVERSITY FOR DEVELOPMENT STUDIES
TAMALE, GHANA.
Lecturer: Dr. Osman T. Damba
otahidu@uds.edu.gh
• This course is a pre-requisite for Production Economics
and Farm Management in the final year.
• If you intend coming to AEE & AFE then you must do very
well in this course and other AEE & AFE courses.
• In this course we are going to make use of many of the

things you studied in AEE 201 so please go and revise.
• We may also need some of your Introduction to

Agriculture.
Aim of the Course
• If you happen to be employed as a farm manager you

should be able to perform
• You should be able to give advice to farmers and be a

good consultant
• You should be able to teach others
• The most important, think of going into farming after

school and succeed.
COURSE OUTLINE
• MEANING AND SCOPE OF FARM MANAGEMENT

• THE DECISION-MAKING PROCESS
• BASIC PRINCIPLES OF FARM MANAGEMENT
• IMPORTANT CONCEPTS FOR FARM MANAGERS
• Law of diminishing returns
• Principle of substitution
• Farm Costs
• Gross Margin and Farm Profits
• Opportunity costs
• Comparative advantage
• Supplementary enterprise
• GOALS OF FARMERS AND FARM MANAGERS
• DECISIONS TO BE TAKEN IN CARRYING OUT A FARM BUSINESS
• Customs, norms, taboos
• Land acquisition and tenure
• FARM PLANNING
• Definition of farm planning
• Approaches to farm planning
• Appraisal of resources
• Plan for land use
• Plan for animal programme
• Plan for input of labour, power and machinery
• Plan for finance of the programme
• Plan for supplies, procurement and marketing of produce
• RISKS AND UNCERTAINTIES IN FARMING
• Meaning of risks and uncertainty
• Types and sources of uncertainties
• Adjustments to risks and uncertainties
• FARM RECORDS
• The need for farm records
• Types of farm records
• Inventory record
• Production record
• Income and expenditure record – balance sheet, income statement*
• Supplementary/Special record
• Farm inventory: valuation and depreciation
• Analysis and use of farm records*
• FARM BUDGETING
• Definition of farm budgeting
• Types of farm budgets
• Steps in budgeting
• Introduction to Linear Programming (graphical method)
• *FARM ACCOUNTING
• Basic principles
• Single-entry and double-entry accounting
• The trial balance
• The final accounts
• PRACTICAL
• Farm mapping
• Household farm record keeping and accounting
• Analysis of records
• Computer models
REFERENCES/ Relevant Text
• Adegeye, A.J. and Dittoh, J.S. (1985) Essentials of Agricultural Economics.

Impact Publishers, Ibadan, Nigeria
• Anaman, K.A. (1988) African Farm Management: Principles and Application
with Examples. Ghana Universities Press, Accra
• Anderson, J.R. and Dillon, J.L. (1992) ‘Risk Analysis in Dryland Farming
Systems’. FAO, Rome. 1992.
• Cramer, G.L and Jensen, C.W (1994) Agricultural Economics and
Agribusiness John Wiley and Sons Inc. USA
• Ellis, F. (1993) Farm Household and Agrarian Development. Second edition
Cambridge University Press pp 83-89.
• Johnson, D.T. (19--) The Business of Farming: A Guide for Farm Business
Management in the Tropics 2nd edition
• Kay, R.D. and William, M.E. (1994) Farm Management McGraw-Hill Series in
Agricultural Economics. McGraw-Hill Inc.
• Lipton, M. (1968) ‘The Theory of the Optimising Peasant’. Journal of
Development Studies. Vol. 4 No. 3 pp. 327-351
• Robbins, S.P and De Cenze, D.A. (1995) Fundamentals of
Management: Essential Concepts and Applications. Prentice Hall.
NJ
• Royal Society (1992) ‘Risk: Analysis, Perception and Management’.
Royal Society. London
• Runge-Metzger, A. (1993) ‘Farm-Household Systems in Northern
Ghana’ In: Farm Household Systems in Northern Ghana: A Case
Study in Farming Systems Oriented Research for the Development
of Improved Crop Production Systems (eds) Runge-Metzger, A.
and Diehl, L. Verlag Josef Margraf, Germany
• Walker, T. S. and Jodha N. S. (1986) 'How small farm households
adapt to risk' In: Crop Insurance for Agricultural Development:
Issues and Experiences (eds) Hazell, P., Pomarada, C. and Valdes,
A. Johns Hopkins University Press, Baltimore. p17-34
MEANING AND SCOPE OF FARM MANAGEMENT
• Until recently, farming in Africa was considered a way of life
rather than a business.
o As a result, the purposes of production were not geared
towards profit maximisation or increase in farm net income.
• If farming should be considered as a business then it must be
managed properly to achieve the desired objectives of the
business.
o What are these desired objectives?
• With the introduction of farm management, the emphasis was
on the technical and biological aspects of production, hence the
combination of some resources for maximum yield.
• In the course of the development of management, the

economic and accounting aspects were also developed.
o Hence, farm management as it stands today does not
only take into consideration production but also
economics.
• Farm Management comprises two important concepts:
the farm and management. Let us look at these.
Farm
• Many people mistakenly take a farm to be a place where
crops are grown alone. Though this is partially correct it
is not technically right. A farm is also a place where
crops, animal and trees are grown and sometimes
processed.
• A farm is an area of land, and the buildings on it, used

for growing crops and keeping animals, or
• A farm basically includes all the land on which some
agricultural operations are performed by a person,
either by his own labour, with the assistance of
household members or hired labour.
• We can have:
• Crop farm – tree crop farm, food crop farm
• Animal farm – poultry farm, livestock farm
• Fish farm
• Mixed farm which is a combination of the animals
and crops on a farm.
Management
Many people define management depending on the
discipline and the expected area of emphasis.
• Simply, management in general term is the control or
making decisions in a business or similar organization.
Other definitions of management include:
• Management is making decisions about choices facing the
decision-maker, with the decision being based on economic
analysis.
• Management is a concern for the organisation and the
running of daily operations in achieving identifiable goals.
• Management is making decisions affecting the profitability of
a business.
• Management is leadership and control of resources.
Farm Management
There are several definitions of farm management, which
include:
• Farm management is the application of scientific and
technical principles to the solution of the day-to-day
problems facing the farmer (or the farm).
• Farm management is also the practical aspect of the
applied science of agricultural economics, comprising
the application of physical and biological sciences in
keeping with the economics of profitable resource
allocation for maximising the farmers’ net farm
income.
• Farm management is the act of applying business and
scientific principles to the organisation and operation
of a farm.
Farm Management
• Farm management is the act of managing a farm

successfully, as measured by the test of
profitableness (profitability)
• Farm management is a science dealing with the
combination and operation of production factors,
including land, labour and capital, and selection of
the kind and amount of crop and animal enterprises
which will provide maximum and continuous
returns to the farm unit.
• Farm management is the study of the principles
underlying the functioning of the farmer as a
business proprietor.
Farm Management
• These words are prominent in the definitions:

• Resource use – combination of resources
• Technology application/adoption
• Skills
• Organisation
• Operation
• To achieve goals and continuous returns to the farm unit
• Farm management therefore has a wide scope, from the
planning stage of the farm, the beginning of the farming process,
and the day-to-day operations on the farm, the harvesting and
handling, processing and marketing.
• Management principles are applied at every stage of production.
• Management therefore involves taking decisions, implementing
them and accepting the results as the reflection of the effort you
put in the system.
THE DECISION-MAKING PROCESS
THE DECISION-MAKING PROCESS

• How do FM take decision?
• The FM has several options and alternatives or
bundle of alternatives to choose from that demands
the use of his skills.
• He takes his decisions after taking several factors
into consideration and after doing several analyses.
• The process begins with setting up goals:
THE DECISION-MAKING
PROCESS
• The farm manager:
1. Sets objectives for himself. This could be from the owner(s). In subsequent
years it must be reviewed. SMART (Specific, Measurable, Attainable,
Relevant & Time-bound) objective
2. Plans to pursue the objectives
• Action plans/Objectives Activities
3. Takes decisions on implementation of the plan.
• Appraisal
4. Implements in phases as deem fit.
5. Builds in check and balances to control his plan, to check against
deviation.
6. Must be prepared to take responsibility.
To do these ….the farm manager needs to depend on some

economic principles and concepts that will be discussed later.
Set objectives .-
- What do I want to achieve:

• Food to feed the family
• Highest profit/profit maximisation
• Feed an industry
• Prepare the land for use in the future e.t.c
- What resources are available to me?

• Land – type of soil, what crops will do well on that soil
type
• Labour – permanent, casual, household/family labour
• Capital – for purchase of machinery and equipment,
payment of services, other inputs etc
Sets objectives cont.-
- The Environment
• Political – government policies and conditions
• Social – cultural, traditional
• Economic environment - opportunities
- Forecasting and Planning
• Considering the principles
Analysing
- Post harvest situations
- Profitability – profit maximisation
- To choose from alternatives
In taking decisions these must be taken into consideration.
The aim of the decision is to succeed and achieve the set
goal. After the decision is clearly made there is the need for
preparation and implementation.
BASIC PRINCIPLES OF FARM MANAGEMENT

Management in general is based on some basic principles. A
principle is a fundamental truth, the basis of reasoning, the
primary element or general law.
The principles for management represent the fundamental laws on
which management practice is built. The management principles
are:
1. Division of work
2. Authority
3. Discipline
4. Unity of command
5. Unity of direction
6. Subordination of individual interest to the general interest of
the farm
7. Remuneration
8. Centralisation
9. Scalar Chain – a line of authority
10. Order
11. Equity
12. Stability of tenure of personnel
13. Initiative
14. ‘Espirit de corps’ co-operation
• Division of work
There are many people employed by management and into
management. Each person must have a clear responsibility. Many
conflicts happened in businesses because the work schedules are
not well spelt out.
• Authority
Each person in the business should be made to
understand the extent of his/her authority. Authority
must also be properly applied.
• Discipline
Management must be disciplined in order to enforce
discipline. Basic rules and regulations should be put
up and made clear to all members. Sanctions should
be applied to offending members
• Unity of command
Conflicting messages can derail the whole business. All
management staff must know of changes immediately they are
made so that they all carry the same message to subordinates.
• Unity of direction
Subordination of individual interest to the general interest
of the farm
Personal interests exist in all businesses especially where the
business is not jointly owned but only employed. Where there
is dissatisfaction among members it is difficult to put the
personal interests under that of the business. The business
must come first before me.
• Remuneration
If you want people to do a good job for you then you
must be prepared to give them what our president call
‘a living wage’. The staff must be satisfied in a way so
that they can give their best. Good pay and incentives.
• Centralisation
• Scalar Chain – a line of authority
• Order
• Equity
• Stability of tenure of personnel
• Initiative
• Management is concerned with the primary purpose

of an enterprise, which is, to provide goods and
services that are wanted by consumers (farm
produce). It is also concerned about employing the
most economical and convenient methods. It is
again concerned with effective employment under
socially acceptable guidelines for all levels of
operation and to hold fort for the owner.
• Management responsibility is a continuous and
living activity, which must not be replaced by
routines or operational techniques meant for lower
level operatives in the absence of the managers.
• No matter the size of the business (farm) the
management process must be seen as a unified process
in which all the parts are interrelated and working
towards a single purpose or set objectives.
The management process is based on systematic diagnosis of
the problem, finding the facts, assessing and interpreting the
findings, making decisions, giving instructions, ensuring
execution and checking the results.
• Management performance is judged by the
achievement of plans or objectives, effectiveness of
operation and most importantly, the contentment of
members of the business. 14 principles are listed by
Henry Fayol.
PORTANT CONCEPTS FOR FARM MANAGE
IMPORTANT CONCEPTS FOR FARM MANAGERS
Law of diminishing returns

• This law states the relationship between input of
production (eg labour) and the output that is produced
(eg maize). Specifically, the law refers to the
diminishing amounts of extra output that we get when
we successively add equal extra units of a varying input
to a fixed amount of some other input.
• Simply put, if you add more inputs to a fixed factor, the
total product will increase at an increasing rate at first,
then a decreasing rate and eventually decline.
• e.g. If a farmer has 50 acres of land to use for
production. Without the use of labour he gets
nothing.
• As he begins using labour from 10 and increases it to
20, then 30, 40, 50, production will increase at an
increasing rate.
• From 60 to say 70 the production will increase at a
decreasing rate.
• Increasing the labour beyond 70 to 80 the output
begins to decline.
Law of diminishing marginal output/product
• An increase in some input relative to other fixed inputs will,

in a given state of technology, cause total output to increase,
but after a point the extra output resulting from the same
additions of extra inputs is likely to become less and less.
• This falling off of extra returns is a consequence of the fact
that the new ‘doses’ of the varying resources have less and
less of the fixed resources to work with.
• This principle guides the efficient allocation of resources
because it enables the farm manager to employ additional
labour/other inputs as long as the added return obtained by
the employment of additional input is greater than the
additional cost of employing the input.
• The point of maximum use of the input is the point
of inflexion. This point does not mean you cannot
increase output anymore but that after this point
increase in input produces an extra output that is
less than the previous.
• This helps the farm manager to decide on how much
of a product to produce and how much input is
required for maximum profit.
Principle of substitution
• Technology is changing rapidly and many technologies are being
substituted.
• The principle of substitution allows the farm manager to
substitute one technology with another if the new technology
increase his output and/or profit and that he is able to meet the
additional cost of the technology and the technology is available
when needed.
• Eg SARI came out with maize production technology that yields
up to 22 bags per acre. This is a very good thing but farmers are
not substituting their old practices with the new one. Why?
- We can substitute hand land preparation with bullock ploughing.

- The use of tractors instead of hand weeding or bullocks
- The use of manure instead of inorganic fertiliser
- Planting in rolls instead of haphazard planting.
- Use of short duration planting materials instead of long
duration e.g. early and late millet
• Each of these may have one advantage or the other over

the other.
• The farm manager in taking decision may decide to apply
the principle of substitution in order to increase profit.
Farm Costs
In the production process, some expenditures are
made in order to come out with the output. In the
production of maize, the land, the tractor services,
the labour charges, the seeds, the tools used etc must
be paid for. These are costs to the farm. These costs
are divided into two groups namely:
1. Fixed cost(FC) – mainly capital items, physical
assets like buildings, tools, equipment, land, and
permanent labour
2. Variable cost(VC)/Operating Cost – include all cost of
seeds sown, fertiliser applied, and hired/casual labour.
• If the capital items have been acquired already then,
whether you produce or not the cost has been made.
Whether you produce or not you have to pay your
permanent workers, rent etc. These are fixed costs.
• Variable costs come with the performance of
activities/operations. Without any operation there is no
cost. They also vary according to the quantum of
operation e.g. services of hired labour; the more the
labour and the task the more the cost.
• TC = FC + VC
Gross Margin and Farm Profits
• Many farmers make mistake by declaring false
profits. One may say I had GHc1,000,000 at the
beginning of the farming season. After the season
I had GHc2,500,000 so I made a profit of
GHc1,500,000. They forget to take into
consideration many things which were costs to
them e.g. land, household labour, tools, bullock
that was used in ploughing, etc.
• In many cases, they talk about Gross Margin
instead of Profit. It must be made clear here that
Gross Margin is not Profit.
• Gross Margin is the difference between the gross income
earned and the variable costs incurred in production:
• GM = TVO – VC
Where GM = Gross margin
TVO = Total value of output
VC = Variable costs.
• Farm Profit on the other hand is:
FP = TGM – FC
Where FP = Farm Profit
TGM= Total Gross Margin
FC = Fixed Cost
• The element of fixed costs come in before profit is
declared because if that is not done the profit shown
will not be a good representation of the profitability of
the enterprise or project and hence wrong decisions will
be made based on this.
• The fixed costs or common costs are costs that are
common to the various enterprises on the farm. e.g. A
farm may have several enterprises like maize, cassava,
poultry, sheep. It has a tractor, a farmhouse, pick-up,
one general manager, and some permanent workers. In
some cases, all these serve all the enterprises but their
costs are not added to each enterprise’s variable costs.
Example:
• E.g. Farming for the Future: It has a farmhouse, fence, tools,

3 permanent workers, and a team of lecturers as
supervisors/researchers. The amount of each of these used
in a production process is a fixed cost common to all the
enterprises.
• There are 4 enterprises: Techno, Grazing, Orchard, Eco. Each
does its own production but uses the items listed above.
• At the end of each operating year, each of the enterprises
will calculate its gross margin. The sum of all the gross
margins gives the Total Gross Margin of the farm. The total
fixed cost will also be calculated and subtracted from the
TGM to get the farm profit.
• GMa =
• GMb =
Estimated fixed cost =
• To calculate the farm profit we need to subtract the

fixed cost (sum of all overhead costs)
• FP = Gma + GMb + - - - - – FC
Uses of Gross Margin
• For planning – to decide which enterprise to go into
and at what scale/size compared to other
enterprises. ** Gross margin suggests a linear
relationship but this might not be true all the time.
E.g. 1 ha = 40 bags, 2ha = 80 bag, 10ha = 400 bags.
Remember the law of diminishing return.
• Helps in making first step decision
• This is possible if there is record of input and output
• Comparative standards
• Record of personnel use (labour)
Opportunity costs
• The opportunity cost of an enterprise is the value of
the most profitable alternative enterprise that must
be foregone.
• With best resource allocation, the returns to all
resources will be at least as high as their opportunity
cost otherwise profit will not be maximised.
• The farmer may choose the crop that gives lower
gross margin for other reasons than profit
maximisation. The peasant farmer thinks about the
staple food for the family before considering cash
crops.
Comparative advantage
• Simply put a country should specialise in the
production of goods or services in which it has a
comparative advantage and import those in which it
has a comparable disadvantage.
• Whether or not one of two regions is absolutely
more efficient in the production of every good than
the other, if each specialises in the product in which
it has a comparative advantage (greater relative
efficiency), trade will be mutually profitable to both
regions.
Supplementary enterprise
• The manager may decide on a supplementary
enterprise to add to the main enterprise.
• Supplementary Enterprises: Two products are said
to be supplementary when an increase in the level
of one does not adversely affect the production of
the other but adds to the income of the farm i.e.
enterprises which do not compete with each other
but add to the total income.
• It is the enterprise that does not increase the
production of another or other enterprises. It does not
use any limiting resources. It can make productive use
of scare resources.
• Supplementary enterprises differ from complementary
enterprises.
• A complementary enterprise is one that increases its
output while at the same time increases the output of
another enterprise within the same farming system.
Complementary enterprises are extremely rare and
only exist for a very few combinations.
GOALS OF FARMERS AND FARM MANAGERS
• Every farmer has a goal for his business and so is the farm
manager. The farmer’s goals could be passed on to the farm
manager in the case where the manager works for the farmer.
The goal depends on what the farmer has, wants, can get and is
made up of.
• The farmer who sees farming as a business aims at profit
maximisation, optimum profit. But the peasant or subsistence
farmer may have other goals rather than profit maximisation.
• The goals are influenced by the type of farm, the calibre of farm
manager and the economic and social environment in which the
farmer operates and the constraints that the farmer and/or
manager faces.
• The government may have a goal of getting
employment for the people hence establishing a
farm. The goal of such a farm is not necessarily profit
maximisation but employment creation. As long as
the people are employed the goal is achieved. This
type of farming cannot be measured along the lines
of profit. Attempts are made to break-even.
• A retiree may decide to go into farming. He may
have to set his goal for farming, e.g. as a pastime or
hobby.
Often, goals of farming include:
• Profit maximisation
• Increase in sales – sale maximisation
• Satisficing goal – to keep the company/farm in
business
• Maximum utility goal
• Balance sheet homeostasis goal
• Full-cost principle goal
• Managerial goal
• Peasant farm goal
• What are the goals of a commercial farmer in
farming? E.g. Profit maximisation, feed an industry
or factory,
• What could be the goals of the peasant farmer in
farming? Feed the family, cultural purposes
• What could be the goals of government in farming?
Create employment
DECISIONS TO BE TAKEN IN CARRYING OUT A FARM BUSINESS
• How do farmers make decisions and what factors affect
farmers’ production decision-making?
• Farmers have been and will be faced with taking
production decisions. Decisions like: (before production,
production process, after production decisions)
1. What combinations of crops and/or animals to produce
–what should I produce. In doing this you take into
consideration:
• Gross margins
• Comparative advantage
• Complementary/supplementary
• Estimates from research
• Goal
2. What size of farm to operate? How much
should I produce?
Taking into consideration:
• Goal
• Diminishing returns
3. Which method of production to use given the
available resources? How should I produce?
• Bullock/draught animal
• Tractor/mechanized
• Manual
4. What system of cultivation to be followed?
• Mixed cropping – what crops
• Sole cropping
• Eco
• Techno
5. Where or which part of the land to use for what?
6. What kinds of machines to use and at what stage
of the production process should labour be
substituted by machines?
• spray
• harvesting
• post harvest
7. How much of family labour will be
available to me and how much should I use?
How much of hired/paid labour do I need?
• labour available
• control over labour
• cash availability to pay
8. What are the appropriate times for
producing particular crops and/or animals?
• all at the same time
• plant others later
• same crops but at intervals
• poultry/animals to meet specific demands
• stagger production
9. How much of crops and animals to consume
at home?
• how will this affect the goal
10.What are the sources of funds available to
farmer or manager?
How to use the funds properly for results?
• cash flow
• should be before production begins
11.At what price to market the produce? What
time to sell?
Where to sell? What are the problems
involved?
 estimate prices using
• current prices
• previous prices
• cost of production
• Note: Always remember that the farm
manager is responsible for the success or
failure of his plan. He will be held responsible
by the farmer or management.
Social Considerations in Farming
Customs, norms, taboos
• Farmers/farm managers need to obey the rules, customs,
traditions and norms of the area where they farm. They
need to take into consideration the people they are living or
working among.
• Given examples: Non-farming days
Crop festivals
• How do you handle thieves you catch on your farm?
• What will be your contribution to ceremonies in the
community?
Funerals
Festivals
Other celebrations
Land acquisition and tenure
• Land acquisition and tenure systems have become
very important in recent times in agriculture.
 Some farm lands are turned into residential land
 Long litigation over land acquired (even
properly) (many court cases)
 Relocating the farm after you have developed it
like stumping
 Family members of the land rising against the
farmer
• Why so? Land tenure system. – land invested in
the chief, or clan
FARM PLANNING
• Farming is a complex business and requires careful
planning and execution in order to achieve set goal
and succeed.
• It is the basis for which management decision are
taken
• It implies thorough understanding of the goals of
the farm.
• It requires intellectual effort, reflective thinking.
• It requires foresight and imagination.
Definition of farm planning
• Farm planning is simply the process of deciding such things

as what crops to produce, in what quantity and in what
order, how many animals of various classes to keep and
how to manage them, what buildings, labour and power,
equipment etc will be required.
• It is a decision-making process, a conscious determination
of the course of action, the basing of decision on purpose,
facts and considered estimates.
• It is the preparation of an operational programme for a
farm, which will ensure the conservation of land and other
resources and the efficient use of production factors,
thereby increasing the net income and satisfaction of the
farmer/managers.
• There are two categories of farm plans: New entrant plan
and Old farmer plan
Why plan?
• To achieve set goals/include profit maximisation

• Effective/efficient utilisation of resources
• For correct timing/systematic flow of activities
• To reduce risk
• For future/further planning
• For checking assumption
• For monitoring and evaluation
• For appraisal
Approaches to farm planning
• Appraisal of resources
• As discussed earlier, resources for production are
capital, land, labour and entrepreneurship or
management.
• In the preparation of the farm plan the manager may
have to appraise his resources to know how far he
can stretch each one before finalising his plan.
• During appraisal he answers questions like: How
much of each resource is available to me? How
much of each can be committed to production this
year?
• Plan for land use
• On a parcel of land the farmer/manager has to plan the
use of the land.
• He takes into consideration the slope of the land, the
type of soils at various portions of the land, the
presence of a river/stream or water body, rocks, big
trees etc.
• All these help him to decide on where to put what.
• Where to put the permanent structures like:
farm house, roads, animal housing, dam.
• Where to put tree crops, agroforestry; how
to check run-offs and hence erosion; where
to practice mixed cropping, shifting
cultivation, share cropping, rent to others.
• All these must be planned and the
farmer/manager has the responsibility to
plan his land.
• Plan for animal programme
• The animal programme planning include animals like:
• Large ruminant – cattle, donkey
• Small ruminant – sheep, goat
• Poultry – local fowls, guinea fowls, turkey, duck,
pigeon
• Others – crab, grasscutter, rabbit, bee, snail (Non-
Timber Forest Products)
• There is the need to decide on these, which ones to
keep, in what quantities, how to go about it, budget,
resource requirement etc.
• Plan for input of labour, power and machinery
Why?
• To make sure that labour is not wasted
• To prevent labour shortage at critical periods
• To manage labour properly **
How?
1. List the enterprises
2. Plan their labour requirements – Labour profile – by
calculating the labour requirement per enterprise per
month for the year. Peak and troughs of labour should
be noted. The use of past records or standards could be
of help. The periods and quantities are considered.
3. What source of labour to use – family labour,
permanent employees, casuals, contract labour, communal
labour, exchanged labour,
4. Labour efficiency – such that permanent labour does
not stay idle. Define working hours or daily task
• Planning by intuitive but ordered sequence.

• Determine the available resource
• Develop the opportunities that exist within the
imposed limitations to the business
• Note: Labour cannot be stored for use later. At the end of
the farming period gross margin per man-days will be
calculated according to enterprises.
• Machine use plan
• What will they do?
• When will they do it?
• How will they do it?
• Can labour do it better or cheaper?
• Should machines be purchased or hired?
• What other uses can the machine be put to
outside the farm?
• Operators
Plan for finance of the programme
• It could be long-term, medium-term or short-term
financial planning.
• There is the need for budget and a cash flow to plan
the financial aspect of the farm.
• How much is needed for the whole farm operation for
the year?
• How much is currently available?
• How much can be gotten from credit/loan sources?
• How much can credit buying provide?
• How much produce is available that can be sold
quickly for cash?
• Plan for supplies, procurement and marketing of produce
• Supply planning – this planning of things that should be
brought to you by your suppliers.
• Procurement planning – the planning of the things to buy
from the market.
• Marketing planning involves planning how to dispose off
the produce. How? When? Where?
• Plan a poultry farm based on the objective of producing:

• 50 crates of eggs a week (layers)
• 500 broilers for 6 months
• for a period of 1 year
RISKS AND UNCERTAINTIES IN FARMING
Meaning of risks and uncertainty
• Risk is a probabilistic phenomenon where
outcomes are unknown and can be predicted only
in a probability sense.
• It is the chance, in quantitative terms of a defined
hazard occurring.
• It therefore, combines a probabilistic measure of
the occurrence of the primary event(s) with a
measure of the consequences of that or those
event(s).
• Uncertainty is any decision or outcome, which
cannot be predicted precisely.
• In contrast to risk, the probability of an outcome
cannot be estimated in an empirical or
quantitative sense for a situation of uncertainty.
• It is a situation where it is not possible to attach

probability to the occurrence of the event.
• The likelihood of their occurrence is neither
known to the decision maker nor by anyone else.
• At best uncertainties can only be guessed.

• Farmers operate usually under risk and uncertainty.
• Several factors constitute risk in farming.
• These include
• climatic, economic environment, political and social
environment.
• Other risk that could have economic side-effects
are illness, death of family members or animals, the
cost associated with medication, a funeral, a
wedding ceremony, dowry or loss of labour, may
have long lasting consequences.
• Adverse climatic conditions form the highest risk to
farming because climatic elements’ behaviour
cannot be predicted with precision.
• A look at rainfall data available in the Upper East
Region show wide spread fluctuations without
observable trend and hence precise prediction is
difficult if not impossible.
• Ellis (1993) lists some of the uncertainties as
• natural hazard,
• market fluctuations,
• social uncertainty and state actions and
• war.
• Small-scale (peasant) farmers in general face a lot of
risks but farmers in the semi-arid and arid areas are
exposed to higher levels of risks. More to this, the
future cannot be predicted with precision meanwhile
their economy is agriculture-based. Among the
numerous risks are the frequent and unpredictable
droughts which affect crop production, animals and
hence livelihood, mainly because agricultural
production is rain-fed.
• Anderson and Dillon (1992) say without doubt that,
climate and its variability have been and will continue
to be the major determinants of the practice of dry land
agriculture everywhere, although the economic
environment and the socio-cultural environment are
also sources of risk.
• Farmers in the semi-arid and arid areas have been
grappling with the managerial challenges involved
in risk for generations and have developed quite
sophisticated approaches to managing their risks.
Types and sources of uncertainties
There are several types of uncertainties that the
farmer faces but these are grouped into two broad
classes.
These are:
i. On-farm uncertainties
ii. Off-farm uncertainties
ON-FARM UNCERTAINTIES
Uncertainties related to the

production process on the form.
These include:
Resource uncertainty & production
uncertainty.
On-farm uncertainties -
Resource uncertainty
• A. Resource uncertainty eg. land,
labour, capital, management
Land
• lease right
• Sale by owner to develop
(outright purchase)
• Rent
Resource uncertainty cont’d
Labour –
• scarcity at peak periods
• Sickness
• High demand – unexpected competitor
• Labour unrest
Capital
• loan rite
• Promise not honoured
• Hence input supply problems
Management
• Sudden departure of management staff due to better job offer,
further studies etc
• Taking a wrong decision based on wrong information etc
Production uncertainty
• Production uncertainty (very important)
• Imperfect knowledge is the main source of this
uncertainty.
• Rain-fed and erratic rainfall pattern/seasonal fluctuation
– nature plays a dominant role in this respect and the
uncertainties they bring about are beyond the control of
man.
• Late rains, too early rains, scarcity of rain, short duration
of rain etc. These could result in insect and pest
infestation, diseases in plants and animals. It could also
affect seed viability
• A wrong use of fertiliser, pesticide or herbicide,
Production uncertainty
• Washing away by heavy rains
• Scotching by sun after fertiliser application
• Encourage bush fires
• Rains during harvesting periods
• All these affect yield and hence projections and
goals.
• Theft/Stealing/Pilfering
OFF-FARM UNCERTAINTIES
These are uncertainties in agriculture that do not

occur on the farm but negatively influence agricultural
production.
These include:
Price uncertainties, Technology uncertainties,
Government Policy/Action/Institutional Uncertainties
Price uncertainties
Price uncertainties
• Input price changes – this is very difficult to
contain because output price cannot be fixed by
farmers
• Output price changes – affected by inelastic
demand nature of agricultural produces,
uncontrolled supply because of perishability,
and that there could be other substitutes.
Farmer do not control over price fixing.
Technology uncertainties
• Technology uncertainties
• The new developments need to be incorporated
in farming business to maximise yield and hence
profit.
• Lateness makes others overshadow the small
farmer
Government Policy/Action/Institutional Uncertainties
• Government Policy/Action/Institutional Uncertainties

• Subsidy reduction and removal
• Emphasis on some enterprises as against others
hence support land use degree
• Credit for some enterprises
• Market/Distribution channels e.g. Cocoa by
COCOBOD, Private purchasing
• Co-operatives are supported/assisted not
individuals
• Political decisions – against opponents
• Barn some enterprises
Government Policy/Action/Institutional
Uncertainties
• Other Credit Agents
• Social – taboos, gossips
• Power failure/rationing
• Death
• Superstition
**Others suggest 4 groupings as:
• Natural hazards
• Market fluctuations
• Social uncertainties
• State action and wars
**Three management areas:
• Production and technical risk
• Marketing or price risk
• Financial risk
Another grouping – Natural and non-natural
• Natural – flood, drought, etc
• Non-natural – Pricing, Policy, theft, bushfire etc
Effect/Impact of risks and uncertainties on
farming
Why are we interested in risks and uncertainties?
• They have some important effects on agriculture hence we need
to know them and guard against them.
 These affect the farmer, his family and the nation as a whole.
Ineffective planning
Goals not achieved
Raw materials low, affect industry
Credit affected, not able to pay back loan
Family of farmer get into hunger and starvation, basic needs
cannot be met
Discourages the farmer hence produces less
Importation – balance of trade
Adjustments to risks and uncertainties
Adjustments/safeguards taken depend on several
factors like the size of the farm, wealth of the farmer,
family size, ability to take risks, goals, psychology of
the farmer, education or information he has.
Methods that can be used include:
• Diversification
• Flexibility – farm organisation and production
methods/techniques and costs
• Liquidity and reserves
Adjustments to risks and uncertainties cont’d
• Selecting more reliable enterprises
• Farm/Animal/Crop insurance
• Capital rationing
• Inventory management
• Contract for prices and costs
• Guaranteed minimum prices/study price and
market trends
• Spiritual ie.prayers and spiritual help especially in
Africa
• Forward planning and budgeting
• Seeking more information
Diversification
• It refers to producing more than one crop or allotting
farm resources to more than one enterprise. It tends to
reduce income variability. It enables the farm manager
more and fuller utilisation of resources. Enterprises with
lowest correlation of net incomes can be combined eg
Yam and cassava should not be combined because both
require about the same resource, hence affected by the
same factors. Crops and livestock combination could be
best. When crops are to be diversified they should not
have the same risk factors.
Adjustments to risks and
uncertainties cont’d
Diversification could be achieved by two ways:
• Allocate additional resources to an
enterprise in which he is not already
engaged in.
• From among the existing resources, he may
divert a part of them to produce different
products. This is more important and
realistic.
Flexibility – farm organisation and production
methods/techniques and costs
• The farm plan should be flexible enough not rigid such
that the manager should be able to shift resources from
one enterprise to another for better returns if there is the
possibility of improved yield/market than the previously
planned or change production method. Eg vegetables,
cereals and pulses, dual purpose animals- sheep for wool
or meat.
• The manager must be flexible in the level of fixed costs
incurred due to the possibility of adjusting production to
take advantage of an opportunity. (Sale schedule
revised).
Liquidity and reserves

• Keep enough cash to meet varying costs and calamities
that may befall the business. Bear in mind the present
value of money as against the future. Credit-reserves,
unused credit.
Selecting more reliable enterprises/stable enterprise

• Records will show that some enterprises are more stable
or reliable than others though they all face some degree
of risk. The farm manager may decide on going in for the
more reliable enterprises to escape risk and uncertainty.
Farm/Animal/Crop insurance
• A more reliable method of adjusting for risks and
uncertainties in business is insurance. Unfortunately, most
attempts at agricultural insurances have not been
successful in Africa but done in some developed countries.
Other businesses are easy to insure and there are several
insurance packages and facilities.
• Animals could be insured or the whole farm – covering all
the enterprises where the insurance facility exists. Farm
equipment and machinery, buildings of commercial farms
are easily insured. This is mainly in the form of insurance
against damage and theft. Traditionally, we have the
extended family system as a form of insurance – sharing of
fortunes and misfortunes. (The Group Farm Concept)
Capital rationing
• The farmer should ration his investment among
different crops and equipment. He often faces the
problem of indivisibility of capital. He cannot
purchase half a tractor or he may have to purchase
bullocks with bullock cart or may have to invest in
bullock shed. If the farmer puts all his capital in the
purchase of a tractor and he is unable to perform
some operations on the farm he is bond to fail,
hence the need to ration the capital at his disposal
pending the inflow of more.
Inventory management
• Inventory deals with stock, goods in store. Its management
could be used to adjust against risk and uncertainties.
Times of stocking and times of sales of stock are essential.
It is similar to wholesale management.
Contract for prices and costs

• This involves going into contact (agreement) with buyers
of produce or supplies of input requirements in advance.
Purchase or sale prices are agreed upon before production
or supply. This kind of arrangement forestalls against risks
to both the farmer and the buyer. It could encourage or
discourage production depending on the end of
negotiations. Eg Cotton, Cocoa.
Guaranteed minimum prices/study price and market trends
• Though this method is not in use in recent times it is worth
knowing. It is the situation where government sets
produce prices before the harvesting period. This price is
most of the time above the minimum market price. This
makes sure that the farmer does not loss so much at the
peak supply period when prices normally go low.
• Studying the price movement of the produce on the
market provides the manager information on which to
base the time of sales of his produce. He knows periods in
the year when we have peaks or troughs, the highest and
lowest, high demand and low demand.
Spiritual
• In Africa, and among farmers, some risk situations

are attributed to spiritual forces. As a result spiritual
solutions to some of the problems are important to
them. For those who believe in this their first
preventive or curative method against risks and
uncertainties is to seek spiritual interpretation and
action.
Forward planning and budgeting
• Proper planning and budgeting could be used to adjust
against risks and uncertainties since time, supply and
demand are important. If the manager plans properly, he
could prevent or reduce the effects of risks and
uncertainties if they should occur.
Seeking more information

• Information on the types of risks and uncertainties in the
past, how they happened, the times they occurred, how
they were reacted against etc. Information is power.
** some people talk about ‘Group or communal
action’ such as forming co-operatives for input supply,
production sales, farming operations etc could be
important in adjusting for risks and uncertainties.
The purposes of the adjustments are that they seek to:

1. reduce income variability over time
2. prevent output from falling below a minimum
value
3. raise farm’s ability to withstand unfavourable
outcomes, enhance survival of the business.
• Risks could be reacted to in one of three ways described
as: Risk Neutral, Risk Averse and Risk Taking (Ellis 1993).
• The risk taker prefers to take the chance at the largest
possible profit even though he knows the harsh
consequences of a failure (high risk).
• The risk averse prefers the safety of acting as if the worst
possible outcome will happen knowing well the other
better possible outcomes. He does not deliberately take
any risk at all.
• The risk neutral actor is in-between. He prefers the
average where he does not get the best during ‘good’
years and does not loose too much during ‘bad’ years (he
is indifferent).
• This disaster avoidance is what Lipton (1968) refers
to as ‘Survival Algorithm’ of peasant farmers. He
argues that poor small farmers are of necessity risk-
averse. They cannot afford not to cover their
household needs from one season to the next since,
should they fail to do so they will starve to death.
• Ellis (1993) describes this as a ‘safety first principle’.
• Anderson and Dillon think that as wealth or income
of a household increases risk aversion declines.
• It is realistic for small farmers who do not know of how
to feed their families in case of the odds to gamble with
their source of livelihood. Small farmers will continue in
this direction until they have diversified enough to
gamble with one livelihood source.
• The case of risk aversion assumed here might be a thing
of the past. Farmers have developed various non-farm
activities (de-agrarianisation), and have gained
confidence in their extension officers hence, they turn to
move away from risk aversion to risk taking at least with
part of their land used for food production.
•
• Risk neutrality is encountered very rarely among
individual decision-makers (Anderson and Dillon,
1992) but rather risk aversion. The non-neutral case
of risk aversion is of more importance, interest and
generality (Binswanger et al, 1982). But the few risk-
neutral need not be overlooked since the major
goals of most governments in developing countries
is rural development and poverty reduction.
FARM RECORDS
Farm records can serve as a powerful tool in farm

organisation. They serve as a management tool that helps in
decision-making especially:
To identify the strengths and weaknesses of the farm. The
human mind with all its tremendous powers, cannot
remember or recall everything all the time. Keeping records
makes information available for not only for the farm to
plan and improve performance but also other farmers.
Peasant farmers keep records in crude ways; trees and
rivers as boundaries, markings on the wall for IOUs, etc.
The record kept can be analysed to identify possible
problems and take corrective measures hence ensuring
greater chances of success for the farm in subsequent
years.
FARM RECORDS
To ensure effective management of the

farm, the farm manager needs extensive
information concerning past costs, revenues,
inputs and quantities used, production,
present physical and financial conditions and
the future costs, returns and production.
These can be acquired from farm records
and also some off-farm sources.
FARM RECORDS
In each case there is
the physical aspect of the records and
the financial aspect of the record which shows the
financial implication of each transaction.
Record are kept daily, weekly, monthly, quarterly or
annually depending on the enterprise and the type
of record kept and the management system.
However one important principle of record
keeping, to ensure accuracy, is filing of records as
soon as possible after the transaction.
USES OF FARM RECORDS
The farm manager may use the information from farm records
for:
1. Making production decisions
• What to produce?
• How much to produce?
• Gross margins to compare
• Price movements and quantity to produce
• Yields per hectare and over years
• Fertiliser input per hectare
• Number of eggs per hen?
• Number of pigs weaned per litter?
• Number of pigs weaned per sow per year?
• Amount of cow milk produced per cow per month
Uses of farm records cont’d
2. Evaluating the performance of the farm or farm enterprises

within a given period of time.
• What are the goals?
• Did we achieve them?
• Why/why not? What went wrong?
• Periods – the production process
3. For credit purposes

• Banks
• Creditors
• Past record and future plan
4. Taxation and insurance purposes

• Important in filing tax returns
• Important for insurance purposes
5. Farm planning and budgeting

• Estimates – numbers
• Estimates of prices
• Outputs/yields
• Value of dairy sales per cow per month
• Income from the various enterprises
6. National agricultural and economic planning
• Animal budget
• Input supply
• Estimate demand and supply
• Deficits
• Policy future
7. Resolution of disputes over assets especially land.

• Double ownership
• Family members’ dissatisfaction
The farm manager employs clerks to keep records. Some
managers keep the records themselves. In cases of the
farmer not been literate his children or friends assist him.
(Discuss traditional record keeping, its advantages and
disadvantages.)
• Who need records?

• Government for - - - -
• Researchers for - - - - - -
• Farmer himself for - - - - -
• Extension agent for - - - -
• Other farmers for - - - - -
TYPES OF FARM RECORDS
Four (4) major classes/types of records
1. Production Records (includes labour records

separated by some text)
2. Inventory Records
3. Farm Accounting Records/Expenditure and
Income Records
4. Supplementary/Special Records
major classes/types of records
1. Production Records (includes labour records

separated by some text)
• Crops
• Livestock
• Poultry
• Fish Separate records for each of these
enterprises.
Production Records cont’d
• Type of crop – variety, seed source, date planted, seed
quality – germination rate
• Land size under cultivation
• Number of stands per land size
• Weeding dates, how, labour involved,
• Inputs – Fertiliser, chemicals, seeds?
• Tools and equipment used and for how long
• Harvesting
• Yield, post harvest handling – processing, preservation,
storage
Production Records cont’d
• Livestock:
• Poultry:
• Labour records like personal information on permanent labour

• Number of labour use per day or per operation
• Wages (wage book) payments made – cash and kind
• Expenditures made on food, drinks, clothing,
• Record of man-hours of non-hired labour – family/communal
• Analyse average labour per operation
• Labour chart to be filled eg. Adegeye and Dittoh pg. 146-7
Major classes/types of records cont’d
2.Inventory Records
3.Farm Accounting Records/Expenditure and Income Records
4.Supplementary or Special Records

Supplementary records are kept because of their important role in
farming. Such records include soil maps, legal documents, farm
layout/map, specific crop field maps, land records, receipts and
any other record that does not fit into the other records. Tape
records, pictures, written history of the farm/land, site plan,
registration certificate, receipt of purchase of equipment and
machinery.
Question
You have identified that a farmer is not performing
well and could be better if had kept records. How
would you convince the farmer to start keeping
records?
Farm inventory: valuation and
depreciation in inventory
Inventory record is the complete count and
evaluation of all assets and liabilities on the farm at a
specific date.
• It is a list of all physical properties of a business
along with their values at a specified date. It is a
complete list of farmers’ assets and the first step in
farm accounting.
• It is done at the beginning or end of each farm year.
It must be at the same time each year. The closing
inventory of one year is the beginning of the other.
Why lnventory Records?
• Gives a list of all assets and their values hence shows what amount of
capital accumulation goes back into the business.
• It reveals the changes in net worth through comparison of farm

inventories over years hence a basis for computing growth.
• It enables the farm to measure management efficiency and other
measurements.
• It help to determine depreciation costs
• Basis for income statement.
How is this done? Two ingredients:

1. Physical count and 2. Valuation (depreciation). This is where
Valuation comes in.
VALUATION
There are many valuation methods. Each one has its merits
and demerits. The farmer has the right to use any but he has to
choose the right one for the right asset.
Types of Valuation
1. Valuation at Cost.
The actual cost of purchasing the equipment or asset
2. Valuation at Market Price

Valuation at the market price of the asset at the time it is
valued
Types of valuation cont’d
3.Valuation at net selling price

For assets that are meant for sale.
Selling price – marketing cost = Net Selling price
4.Valuation at cost less depreciation

Cost minus depreciation. This is mainly used for
machines
5.Valuation by reproductive value/replacement cost
DEPRECIATION
• It is the slowly using up or loss of value of an asset due to
age and usage.
• There is use depreciation due to function of time and usage
and
• Time depreciation due to obsolesce occurring regardless of
usage
• Economically, it is the decline in an item’s value due to
decline in its ability to produce income now and in the
future.
• We need to depreciate some of the assets to get the value –

so sometimes valuation is done through depreciation.
THERE ARE THREE (3)MAIN TYPES OF
DEPRECIATION
1.Straight line depreciation
Annual Depreciation
= Purchase price(Original cost) – Scrape value
Expected Useful life
• Salvage value is the remaining value of the asset after its
expected useful life has been covered.
• This type of depreciation is the most use because it is

convenient and easy to use but some assets depreciate
unevenly hence may not be the best for such assets.
Advantages of Straight line depreciation:

 Cost of asset is written off within a definite period
 The charge is uniform all the time
 Easy to calculate
2. Diminishing Balance Method
In this method a fixed rate is use each year and
applied to the value of the asset at the beginning of
the year i.e. the remaining balance.
Each year the remaining balance is used (not original
value) hence it changes every year.
Annual depreciation=(fixed percentage ) x (remaining book
value at the beginning of the year)
E.g. if as asset is bought for 100 dollars and the depreciation rate chosen is 10%
the depreciation schedule will be as follows.
Year Value Annual Depreciation
1 100 10
2 (100 – 10) = 90 10% of 90 = 9
3 (90 – 9) = 81 10% of 81 = 8.1
4 (81 – 8.1) = 72.9 10% of 72.9 = 7.29
5
• The last value at the end of the useful life is the
scrape value. This method is mainly used for
machines.
Advantages of Diminishing Balance Method

 Same rate is used
 Gives room for maintenance cost which becomes
high over time
 It is more realistic for machines.
3. Sum of the Years – Digits Method
It is used to distribute depreciation heavily in the early years
of the asset. It is given by:
Depreciation= (Remaining number of useful years at the start
of the year x total depreciation)/sum of digit of useful life
Or
or
Depreciation = 2D (n – a + 1)
n(n + 1)
where: D = Value (cost price – scrape value)

a = year number (the year)
n = Useful life
The sum of all the depreciation gives the value.

Selection of Method of Depreciation
Selection of Method of Depreciation to use depends on
the purpose and the farmer decides on which method to
use. Sometimes the 3 depreciation methods are used and
a choice it made from the observations. It is also done
based on :
1. the type of property/asset
2. what the resulting book balance is going to be used
for
3. the method which best approximates the loss in the
value of the asset
4. Ease of computation
• Straight line method is the easiest to compute and
understand hence the most commonly used. Sum of
the years-digit and declining balance methods give
similar outputs.
• Note these: Item, date of purchase, cost price,

salvage value, useful life, book value.
• There are other types of depreciation methods
which are not often used. They are:
1. Annual Revaluation Method. In this case
depreciation is the difference between the last
year’s valuation and this year’s valuation. It is
used for working animals, breeding stock, assets
that are likely to appreciate in value. They
appreciate instead of depreciating. This occurs
also during high inflation periods.
2. Annuity Method
3. Used Adjusted Method
4. Compound Interest Method
Problems in Computing Depreciation
• Determining life usefulness / useful life of an asset
• Reconditioned machines
• Second hand machines
• Appreciation of assets instead of depreciating.
Q. What are the advantages and disadvantages of

each of the valuation methods? Give examples of
properties that might be valued by each of the
methods. What type of property could not be valued
by each of the methods?
Q. The purchase cost of a farm machine is
¢6,000,000. The deduction percent is 20% of the
remaining book value of the machine. The estimated
useful life of the machine is 10 years, with a salvage
value of ¢500,000 where appropriate. Use as many
depreciation methods as you know to calculate the
depreciation schedules and compare them.
ANALYSIS OF FARM
RECORDS
• Raw data collected or recorded on the farm will have
little value unless they are properly managed, including:
summarising, tabulations, editing and analysing.
• This will show the proper measures of income and the
computation of management and efficiency factors for
the farm.
• This will also show the factors which affect the farm’s
success or failure so that an individual farmer by
comparing his performance with these measures or
standards may be able to recognise his weak points and
take necessary steps for improvement.
Analysis of farm records cont.
He must perform:
• Yield analysis
• Profitability analysis
• Trends
• Land-use effects
• Timing analysis/dates of events
• Rainfall pattern and effect
• Input/output analysis
• Efficiency analysis – capital efficiency,
• Cost ratios/operating cost ratio
• Overhead charges (fixed ratio)
Analysis of farm records cont.
• Gross ratios i.e. capital per unit of Gross income etc
• Net returns per land cultivated
• Net returns per output of crops
• Net returns per number of people employed
• Crop yield index (CYI) = Actual crop yield x 100
Normal or average crop yields
• They indicate financial positions and strength of the
business. It also provides a standard for comparison
between different sizes of farms and for a particular
farm over a period of time.
FARM ACCOUNTING
INCOME AND EXPENDITURE
RECORD
 Daily Record
Daily records of activities on the farm are kept in what is
called the Journal or Daily Diary. It records all transactions
chronologically or on a day-to-day basis.
Eg. Journal of AEE Farm (January 2003).
No. Date Item Qty Amount Remark
1 02/01/03 Seed maize bought 19 bags 2,000,000

2
3
4
Two main financial records are needed by the farmer.
They are
• The Balance Sheet/Net-worth Statement, and
• The Profit and Loss Account/ Income Statement.
The Profit and Loss Account /Income Statement

• It shows the summary of all revenue and expenditure of
the farm over a particular period, normally one cropping
season or one calendar year. It is also known as Profit
and Loss Statement. It is so called because it shows
finally the profit or loss of the farm during the period.
Income Statement
Eg.
Income Expenditure
BALANCE SHEET
• Balance Sheet also known as Net-worth Statement is
a summary of assets and liabilities of a business,
together with a statement of the owner’s equity. It
gives the summary of the financial position of the
business at a point in time.
• It is a snap-shot of the business at one point in time
when it was taken. The end of one balance sheet is
the beginning of the next. It is a picture of the
business at the time it is taken.
The balance sheet has two characteristics:
1. It always refers to a specific date or a point in time.
2. It always has three divisions/parts
• Assets
• Liabilities
• Equity – positive or negative
For every balance sheet:
Equity = assets – liabilities

i.e. Assets = liabilities + owner’s equity
• Assets are all things that the business owns
• Liabilities are all things that the business owes to
others to be paid for.
• Equity is the share of the business that belongs to
the owner(s) of the business i.e. what becomes
theirs if the business should be liquidated.
Balance Sheet of Kwesi Wayo Farms as at 31st December 2002
Assets Liabilities
Item Value Item Value
Current Assets Current liabilities
Intermediate Assets/Working assets Intermediate/medium-term liabilities
Long-term Assets Long-term liabilities
Equity
Total Assets Total liabilities

ANALYSIS PERFORMED FROM THE
BALANCE SHEET
Some common analysis performed from the balance
sheet data are as follows:
1.Net Capital Ratio (NCR) is the ratio of the total assets
to total liabilities
NCR = Total assets
Total liabilities
It has no unit. This measures the farm’s degree of
financial safety or solvency. If the ratio is greater than
one, the farm is very safe. If it is one, the farm is on the
edge while less than one, the farm’s financial situation
is bad i.e. it is in debt in the immediate/short-run.
2. Working Capital Ratio (WCR) is the ratio of the
sum of working and current assets and the sum of the
medium-term and current liabilities
WCR = Sum of working and current asset

Sum of medium and current liabilities
This measures the degree of financial safety over an
intermediate period of time. (Interpretation is as
before) If the ratio is greater than one, the farm is
very safe. If it is one, the farm is on the edge while
less than one, the farm’s financial situation is bad
3.Current Capital Ratio (CCR) is a measure of the
liquidity of the farm or the ease with which the farm
assets can be exchanged for money and is defined
as:
CCR = Current assets

Current liabilities
If it is less than one it cannot pay its liabilities when
they fall due in the short-run.
4. Leverage Ratio = Total liabilities = 1
Total assets NCR
Net Capital Ratio =NCR
It measures the fraction of the total assets that is taken by

the total liabilities. It gives the proportion of the total farm
assets that can be used to pay all farm debts and
obligations.
L.R. under 0.5 is normally considered healthy for a farm. If

L.R. is one (1) or more, the farm is theoretically bankrupt
of ‘broke’ since the total liabilities exceed the total assets.
Computers in Agriculture
Computers are used in performing many operations.
Store data and information
Analyze data
Retrieve information/data
Word processing
Interaction – communication - e-mail, e-conference, e-
commerce etc.
Human beings operate the computers. The kind of data you put
into the computer is the kind that it will store and analyse for you.
Most computers are under utilised considering the many

functions they can perform
• Basic programmes or soft wares that the computer runs on
are:
• Microsoft Office which includes: Word, Excel, Power
Point, Access, etc.
• Others are SPSS, M-Stats etc
• The aspect of use for analysis is not very much, minimal.
Mostly it is for writing letters, reports – word processing.
• Also information dissemination with the use of power point
• Payroll management using spreadsheets
• Physical and financial record keeping
• Farm accounting
• Budgeting
• Linear Programming (alternative planning)
FARM BUDGETING
• What is budgeting?
Definition of farm budgeting
Budgeting is the monetary expression of a plan in
terms of receipts, expenses and net income.
• Hence, budgeting is the process of estimating costs,
returns and profit of an enterprise.
• Budgeting refers to a well-knit programme of farm
activities and methods to be adopted by a farmer to
achieve his objective. Changes in techniques, prices
and inputs lead to major adjustments in agricultural
operations.
Budgeting is a mechanical vehicle for calculating profit and
for looking at probable results of plans and action. It is the
detailed quantitative statement of a farm plan or a change
in farm plan and the forecast of its financial results.
It is made up of two aspects:
• the physical aspect of the plan i.e. what to produce, how
to produce and the resources needed - description of
activities to be carried out.
• the financial aspect of the plan i.e. the expected costs
and returns and hence profit.
Hence budgeting is part of the planning process. It is based
on several assumptions.
Importance of budgeting:
• It helps in projecting future costs and predicts expected
returns from production.
• It also helps to guide farmers in choosing between farm
enterprises most likely to fulfil the objective(s) of the farm.
• Managers and /or consultants often need a quick way to
assess the financial effect of a proposed change in farm
policy or prices in a farm business where the overall farm
organisation is unchanged eg the decision to hire a sprayer
instead of buying one, substituting a beef herd with cash
crop etc. This is answered by the budget.
• A plan without a budget doe not mean anything.
Types of farm budgets
There are three types of budgeting. These are:
Complete budgeting
Partial budgeting
Break-even budgeting
Most books consider complete and partial budgets

hence the most common.
Complete Budgeting
• It involves the whole farm system so all expenses and
receipts likely to be incurred are included.
• It is a sum of series of partial budgets.
• It is a statement of objectives, strategies and expenses
involved in the completion of a complete plan pertaining
to a single farm.
• Complete re-organisation of the farm is called for and an
elaborate plan drawn up regarding the crops, livestock,
methods of cultivation, costs and benefits/profit.
• The farmer needs then to prepare both a long-term and
a short-term plan.
Complete budgeting is required for:
• A new entrant (new farmer)
• When there is a major change in technology and methods
of production
• When the size of the farm changes drastically. A large
basic change that affects all the farm costs and returns
• Q. Kofi upon the advice of a consultant is contemplating

re-organising his 50 ha mixed farm of maize and citrus to
accommodate dairy cattle, beef cattle, goat, maize and
cotton. He needs to do a complete budget and compare
with the existing one before taking a decision. How will
the budget look like?
Partial Budgeting
• It is a marginal analysis technique as it only looks at the
changes in cost and receipts (returns) and also net farm
income likely to result from marginal change in farming
system. It may be used to choose a plan out of series of
plans or modified plans. It makes use of the stage II of
the production function.
4 basic questions arise:
1. What new costs will be incurred?
2. What former cost will be saved?
3. What former income will be lost?
4. What new income will arise?
These questions could be grouped as:
These questions could be grouped as:
Losses Gains
New costs Former costs
Former incomes New incomes

Total losses Total gains
Net gain or Net loss
Incomes Expenditures
Increase in costs Decrease in costs
Decrease in returns Increase in returns

Reduced income Increased income
• Additional costs: costs that do not exist at the
current time with the current plan. This could be
from the purchase of an additional/new input or
increase in quantities used or substituting more of
one input for another.
• Reduced revenue: An existing revenue that will be

lost if the new plan is adopted, either by elimination
of an enterprise, reduction of the output of that
enterprise, reduction in selling price. This must be
carefully done.
• Additional revenues: Revenues that were not in
existence but will emerge as a result of the new
adoption eg the addition of a new enterprise,
increase in size of current enterprise, increase in
selling price.
• Reduced costs: Current costs that will no longer
occur due to the adaptation of the new plan eg
eliminating an enterprise, reduction in the input use,
reduction of an enterprise size, substituting more of
one input for another, purchases at lower cost,
elimination of some fixed cost items.
Break-even Budgeting
• It is used when there is considerable doubt about
the level of an important variable such as yield or
prices or both.
• Breaking-even budgeting can be employed to
estimate the yield required to provide an exact
balance of changes in expenditure and
returns/income so that the farmer is neither better
off nor worse off.
• E.g. Doubts about the benefits of purchasing a new
machine calls for a break-even budgeting.
Steps in budgeting
1. Determine farming goals and farmers’ preferences
2. List the farm resources available to the farmer
3. Determine which of the resources are currently being used
4. List the gross production
5. Prepare a statement of expenditure and income for the farm
on the basis of current utilisation of the farm resources
6. Analyse the input-output relationships such as labour and/or
machine performance or efficiency attained on the farm
7. Compare the above with the standards available on other
farms in the area
8. Diagnose weaknesses – structural and operational
Steps in budgeting cont.
9. Determine priorities in correcting the structural and operational

weaknesses
10. Prepare a number of alternative farm plans and choose one as
the final plan to be adopted
11. Supervise the implementation of the programme under the
plan
12. Evaluate the results.
It is important to compare your budget with the actual at the end

of the process. This will help you sharpen your budgeting skills and
also help in the evaluation process. It is always better to have
budgets very close to the actual.
Disadvantages of budgeting
1. it assumes linear relationship and ignores
diminishing returns and complementary
relationships between enterprises.
2. Estimating yields and prices particularly for new
farmers becomes a problem
3. Many budgets may be needed before a high-profit
plan is obtained and even then, there is no way of
knowing the existence of other profitable plans.
Cash Flow Budget
• It is important in
1. Planning farm development projects
2. Arranging loans
3. Preparing to cope with cash crisis
4. Choosing between alternative farm plan
5. Comparing actual against budgeted results, so enable
corrective action to be taken.
Cash flow budget is designed for the farm adviser to assist the
farmer in planning his future activities, either on a short-term i.e.
monthly, quarterly or year-long, or medium-term 2-5 years. It
gives continuous feedback or monitoring during the period of the
programme. It includes: operating receipts, capital sales, operating
expenses, capital expenditures, family expenditures, monies
borrowed, payments of monies borrowed.
• A cash flow chart is simply a month by month or
quarter by quarter comparison of the expected cash
income and expect cash expenses along with the
expected cash position at the end of each month or
quarter.
• It may not be exactly the same as actual but it
should be close enough to be a useful planning tool.
Introduction to Linear Programming (graphical method)
• Management has the problem of limited set of resources

which it has to use to achieve certain end, mostly optimum
solution.
• Operations Research helps to solve some of these problems
(mainly the allocation model of operations research).
• Operations Research is the application of mathematics and
other sciences to management problems.
• LP may be defined as the maximisation or minimisation of a
linear function of a number of variables which are subject to
restrictions expressed in the form of linear inequality.
• It is a mathematical technique that is based on matrix
algebra, similar to Programming Planning. It has a wide
scope and can be done by the use of the computer. It
offers an elegant theoretical solution to certain farm
problems given certain assumptions. The stated
objective is either to maximise or to minimise while
satisfying various linear constraints.
The elements of a linear programme are:

• Production possibilities of a farm
• Their resource needs
• Gross margins (net returns/revenue)
• Resource constraints
• These are put into a matrix to give the optimum
plan. The linear programming technique depends on
obtaining:
• A set of non-negative constraint equations
describing the resource(s) to be studied – any
problem that can be formulated as the maximisation
or minimisation of a linear objective with several
linear constraints can be solved by linear
programming.
Ainput + Binput ≤ constraint
Cinput + Dinput ≤ another constraint
Eoutput + Foutput – Ginput ≤ constraint
(Formulate an objective function – a set of linear

constraints and a set of non-negative conditions
Max A = Σ PjXj
Subject to
Σ aijXj ≤ bi,Xj ≥0
I = 1,2,3, …m j = 1,2, …. n
b. Find optimum mix of resources to maximise profit

(or minimise cost) from the known cost constraints.
Advantages
• Solves complete complex problems simply
• Computer can be used
•
Disadvantage
• It needs the presentation of planning data in a way
that needs special skill
• Its advantages are removed by the inadequacy of data
available
• Its assumption of linearity, ie that however many units
of an activity are included in the plan, unit costs and
returns are constant is often wrong.
Uses
• Planning production functions to maximise profit
• Finding least cost feed mixes to meet stated nutritional
standards
• Planning the best mix of finance – equity, loan, preference etc
• Indicate plan for models or representative farms – where
there is much homogeneity between farms and the solution
can guide the planning of individual farms.
• Government to find optimum settlement holding, size for a
family
• To indicate the changes in farming systems that should follow
changes in prices, costs, labour supply or technical
improvements.
Linear Programming is based on the following assumptions:
1. Proportionality assumption: implies that the objective
function to be maximised is proportional to the activity.
2. Additivity assumption: indicates that cross-product terms
are not admissible. Hence there are no interactions
between any of the activities e.g. Sorghum and maize
mono crops and sorghum and maize intercrop.
3. Divisibility assumption: implies that the units of activities
or enterprises can be divided into fractional levels so
that non-integer values for the decision variables can be
used.
4. Certainty assumption: indicates that inputs and output
prices, production coefficients are known with certainty.
There are several methods of solving L.P problems. Some
are:
1. Graphical method
2. Vector method
3. Simplex method
At this level we will be interested in the graphical method.
E.g. We attempt to solve the problem by graphing the

resources and the constraints under different assumptions.
It is a very useful method of solving two-dimensional L.P
problems
Maximise π = 10.00A + 15.00B
Subject to the constraints:
10.7A + 5.0B ≤ 2,705 ---- cutting capacity
5.4A + 10.0B ≤ 2,210 - - - folding capacity
0.7A + 1.0B ≤ 445 - - - packaging capacity
Solution: set A = 0 then B = 2705/5 = 541
Set B = 0 then A = 2210/5.4 = 409.25

FARM ACCOUNTING
FARM ACCOUNTING
Basic principles
Journal or Daily Diary
• Records all receipts and expenses of the farm during a
period on daily basis. It records all transactions
chronologically or on a day to day basis.
No. Item Date Amount Remarks
1. x xx xxx Revenue
2. x xx xxx Expenses
3. x xx xxx Paid
4. x xx xxx Credit
Record all transactions including farmer’s home
consumption from the business output, farmer’s
home inputs used etc. In addition we have:
• Debit records
• Credit records
• Labour records
• Output records
Then to a ledger: a principal book for farm accounts

into which transactions from the journal may be
transferred.
Single-entry and double-entry accounting
Advantages of Double-entry
• Improved accuracy as the accounts can be kept in
balance more easily.
• The ability to produce complete financial statement
including a balance sheet at any time, directly from data
already recorded in the system.
The trial balance

A trial balance is a bookkeeping worksheet in which the
balance of all ledgers are compiled into debit and credit
account column totals that are equal. A company prepares
a trial balance periodically, usually at the end of every
reporting period.
• Trial Balance is a list of closing balances of ledger accounts
on a certain date and is the first step towards the
preparation of financial statements. It is usually prepared at
the end of an accounting period to assist in the drafting of
financial statements.
• The purpose of a trial balance is to ensure that all entries
made into an organization's general ledger are properly
balanced.
• A trial balance lists the ending balance in each general
ledger account. The total dollar amount of the debits and
credits in each accounting entry are supposed to match.
• Therefore, if the debit total and credit total on a trial
balance do not match, this indicates that one or more
transactions were recorded in the general ledger that were
unbalanced.
• From a practical perspective, accounting software packages
do not allow users to enter unbalanced entries into the
general ledger. This means the trial balance is not needed by
entities that have computerized systems. If a business is still
using manual record keeping, then the trial balance has more
value, since it is possible to create unbalanced entries in such
a system.
• When a manual record keeping system is used, the trial
balance is also used to create the financial statements. This
means that the account balances in the trial balance are
manually aggregated into the line items found in the financial
statements.
• Auditors also use the trial balance. They request it early in an
audit, and transfer the ending account balances from this
report into their auditing software. They then use
audit procedures to test these balances.
The final accounts
• Final accounts gives an idea about the profitability and
financial position of a business to its management,
owners, and other interested parties. All business
transactions are first recorded in a journal. They are then
transferred to a ledger and balanced. These final tallies
are prepared for a specific period.
• The preparation of a final accounting is the last stage of
the accounting cycle. It determines the financial position
of the business. Under this it is compulsory to make
trading account, the profit and loss account and balance
sheet.
• The term "final accounts" includes the trading account,

the profit and loss account, and the balance sheet.
Trading Account
• A trading account sheet shows the results of the
buying and selling of goods. This sheet is prepared to
demonstrate the difference between selling price
and cost price. The trading account tally is prepared
to show the trading results of the business, e.g.
gross profit earned or gross loss sustained by the
business. It records the direct expenses of a business
firm.
• According to J.R.Batlibboi- "The Trading Account
shows the result of buying and selling goods. In
preparing this account, the general establishment
charges are ignored and only the transactions in
goods are included."
Profit and Loss Account
• This account is prepared to ascertain the net
profit/loss of a business during an accounting year
and expenses of an accounting year. It records the
indirect expenses of a business firm e.g.: rent,
salaries, advertising expenditure, etc.
• Profit and loss A/C includes expenses and losses and
income and gains which has occurred in business
other than the production of goods and services
Balance Sheet
• The balance statement demonstrates the financial
position of a business on a specific date. The
financial position of a business is found by tabulating
its assets and liabilities on a particular date. The
excess of assets over liabilities represents the capital
sunk into the business, and reflects the financial
soundness of a company. Now it's known as the
statement of financial position of the company.

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AEE 301: FARM MANAGEMENT, RECORDS

DEPARTMENT OF AGRICULTURAL AND FOOD ECONOMICS

• In this course we are going to make use of many of the

• We may also need some of your Introduction to

• If you happen to be employed as a farm manager you

• You should be able to give advice to farmers and be a

• You should be able to teach others

• The most important, think of going into farming after

• MEANING AND SCOPE OF FARM MANAGEMENT

• Adegeye, A.J. and Dittoh, J.S. (1985) Essentials of Agricultural Economics.

• In the course of the development of management, the

• A farm is an area of land, and the buildings on it, used

• Farm management is the act of managing a farm

• These words are prominent in the definitions:

THE DECISION-MAKING PROCESS

To do these ….the farm manager needs to depend on some

- What do I want to achieve:

- What resources are available to me?

BASIC PRINCIPLES OF FARM MANAGEMENT

• Management is concerned with the primary purpose

IMPORTANT CONCEPTS FOR FARM MANAGERS

Law of diminishing returns

• An increase in some input relative to other fixed inputs will,

- We can substitute hand land preparation with bullock ploughing.

• Each of these may have one advantage or the other over

• E.g. Farming for the Future: It has a farmhouse, fence, tools,

• To calculate the farm profit we need to subtract the

• Farm planning is simply the process of deciding such things

• To achieve set goals/include profit maximisation

• Planning by intuitive but ordered sequence.

• Plan a poultry farm based on the objective of producing:

• It is a situation where it is not possible to attach

• At best uncertainties can only be guessed.

Uncertainties related to the

These are uncertainties in agriculture that do not

• Government Policy/Action/Institutional Uncertainties

Liquidity and reserves

Selecting more reliable enterprises/stable enterprise

Contract for prices and costs

• In Africa, and among farmers, some risk situations

Seeking more information

The purposes of the adjustments are that they seek to:

Farm records can serve as a powerful tool in farm

To ensure effective management of the

2. Evaluating the performance of the farm or farm enterprises

3. For credit purposes

4. Taxation and insurance purposes

5. Farm planning and budgeting

7. Resolution of disputes over assets especially land.

• Who need records?

Four (4) major classes/types of records

1. Production Records (includes labour records

1. Production Records (includes labour records

• Labour records like personal information on permanent labour

3.Farm Accounting Records/Expenditure and Income Records

4.Supplementary or Special Records

• It reveals the changes in net worth through comparison of farm

How is this done? Two ingredients:

2. Valuation at Market Price

3.Valuation at net selling price

4.Valuation at cost less depreciation

• We need to depreciate some of the assets to get the value –

1.Straight line depreciation

• This type of depreciation is the most use because it is

AEE 301 Farm Mgt, Records & Acc 2021

AEE 301 Farm Mgt, Records & Acc 2021