Learning Objectives

Notes

Students should realize a farm is a business similar to other businesses. Students should be able to transfer knowledge learned in earlier modules and arrive at a list of reasons farm records specifically are needed. Students may think of the various agencies with whom a farmer communicates and think of reasons why the farmer communicates with those agencies.

The reasons farm records are needed may include:

• to analyze farm records in order to make business decisions to obtain credit
• to summarize income and expenses for the business
• to indicate a person's share of assets, liabilities, and owner's equity
• to evaluate fairness of operating arrangements
• for income tax purposes
• for applying for government programs
• to decide what to grow and when; to settle estates; to determine payroll deductions; to record production, and many more reasons.

If students have had experience with farm life and have been involved in that life, they may find this objective much easier than those students who have not been involved. Terminology and purpose of each of the agencies may have to be clarified for students. Some parties that use farm records may include:

• The farmer and the farmer's family
• Insurance agencies
• Canadian Wheat Board (a federal crown agency established to market grain for export or human consumption in Canada)
• Special Programs
• Canada Customs and Revenue Agency
• Financial and Lending Institutions.

The farmer and the farmer's family keep records:

• To analyze farm records to make management decisions such as credit, government programs, what to grow and when, record production, to diversify production, etc.
• To identify objectives (may need to determine short-term goals, intermediate-term goals, long-term goals, and the priorities in each category)
• To list assets and liabilities, to indicate each person's share of assets or to evaluate the fairness of operating arrangements.
• To analyze alternate courses of action and to choose the best alternatives for the family when considering:
• changes in tax laws and government programs
• inter-generational transfers
• changes in family structure including marriage, birth of a child, retirement, death, divorce, etc.
• fairness to children, spouse, and others involved in estate planning
• marketing and production alternatives
• to use estate planning tools such as pension plans, savings plans, life insurance plans, etc.
• to make decisions for capital asset replacement.

Insurance Agencies

Producers may need several kinds of insurance to protect farm investment and to avoid severe losses.

• Insurance to cover losses on stock, and inventories such as grain, chemicals, etc.
• Crop Insurance: The Government of Saskatchewan through the Saskatchewan Crop Insurance Board operates an all-risk crop insurance program with assistance from the Federal Government, against crop loss caused by any uncontrollable natural hazards such as drought, flood, hail, frost, fire, excessive rain, snow, hurricane, wind, wildlife, insect pests, and plant diseases.
• Yield Insurance: Special yield insurance programs may be available. Special programs are subject to addition, change or deletion. Teachers are encouraged to use the current information.

• Hail Insurance: To cover losses from hail damage including those losses not covered by crop insurance.
• Property insurance: To cover losses from hazards such as fire, hail, wind, water, explosion; livestock insurance.
• Liability insurance: To cover the risk of injury to employees or public.
• Sickness and accident insurance: To pay limited costs resulting from accidental loss of life or impairment of body which may provide benefits for the loss of time.

Canada Customs and Revenue Agency

Taxation and financial management should maximize profit and minimize taxes payable on profit earned by utilizing current tax laws.

Taxation plays an important part in estate planning, to provide adequate income during retirement and to transfer property to chosen successors as efficiently as possible.

CCRA requires that an income statement or statement of income and expenses be filed yearly with the income tax return. Accounting records provide basic records for filing income tax returns, for inspection in an audit by CCRA to indicate the financial position of the farm before year-end, to make income tax planning more effective.

Financial and Lending Institutions

Borrowed funds are often needed for capital expenditures such as land, buildings, breeding stock, and equipment and for operating funds which may be needed to bridge the gap between the time expenditures are made, to the time income is generated. Guidelines for lending may request a financial plan anticipating credit needs and profit expectations, past financial statements, a partial budget, changes in operation, etc.

The institutions available for farm credit include:

• Chartered banks (for all farm needs, the amounts depend on the ability to pay)
• Credit unions (for all farm needs, the amounts depend on the ability to pay)
• Saskatchewan Economic Development Corporation (loans for intensive livestock operations)
• Federal Business Development Bank (for purchase of fixed assets and capital expenditures where funds are not available from other sources at reasonable rates -- for all Canadian businesses not just agricultural)
• Farm Credit Corporation (Federal Government initiative to provide long-term mortgage credit for developing, viable farm units)
• Farm Syndicates Credit Act (loans to syndicates of three or more farmers for capital expenditures)
• Agricultural Credit Corporation of Saskatchewan (for purchase of livestock and livestock related capital expenditures, if the applicants have a net worth of less than $450 000 and earning less than $45 000/year)
• Farm Improvement Loans (government guaranteed loans related to the improvement of capital assets)
• Finance companies, dealers, merchants, etc. (credit for purchase of equipment, supplies, etc. -- high interest rates).

Status and Treaty Indians may qualify for grants and loans from:

• Federation of Saskatchewan Indian Nations (FSIN) affiliates like Saskatchewan Indian Agriculture Program (SIAP), Saskatchewan Indian Equity Foundation (SIEF), and Saskatchewan Indian Loan Company (SILCO).
• Provincial programs through the Saskatchewan Indian and Native Affairs Secretariat: Indian Economic Development Program, Native Business Development Program and Special Agricultural and Rural Development Agreement (ARDA).

For Métis and Non-Status Indians, loans and grants may be available from:

• SaskNative Economic Development Trust
• SaskNative Economic Development Corporation (SNEDCO).

For all Aboriginal peoples, loans and grants may be available through the Canadian Aboriginal Economic Development Program or Strategy (CAED) which is a federal program through Industry Science and Technology Canada, Indian and Northern Affairs Canada, and Employment and Immigration Canada.

Students should refer to resource materials for a review of generic advantages and disadvantages of each form of business. Each form may have a particular farm application. Students should be able to give examples of each form of ownership within their own community. Some specific agricultural advantages and disadvantages of each may be as follows:

Sole Proprietorships (SP): SPs are easy to organize, but the biggest advantage is that the owner has complete control of the business and receives direct rewards for good management. Disadvantages may be that the owner has sole responsibility for debts (unlimited liability) and for raising capital. Most farming operations are sole proprietorships. Perhaps this area can be discussed at length.

Partnerships: Principles of a general business partnership relate to the farming operation. The Partnership agreement becomes a necessity in the farm application for distribution of profit, etc. The most common partnerships may be father/wife/son/daughter, brother/brother, sister/brother operations. There is nothing different in an agricultural partnership than in any other partnership operation other than tax deferrals between parent, spouse, or child. The Income Tax Act considers each partner as a separate person, and the partnership itself is not subject to income tax.

Farm Corporations: As with all corporations, the company is formed by either provincial or federal governments. Advantages: income tax advantage, persons may combine funds, special skills, abilities, and labour to manage farms which are becoming "big business" in light of current capital expenditures. The rollover of farms from father/mother to son/daughter may be completed by the selling or transferring of shares. The disadvantages are the same as for other business organizations, the main one being the cost and complexity of organization.

Cooperatives: Farming cooperatives have been created for a number of reasons across Saskatchewan. Students may think of examples in their community. (Fuel cooperatives, machinery cooperatives, dairy cooperatives, etc.).

Learning Objectives

Notes

How does a farmer or any other small business person keep records, in particular, cash records? A farming operation depends upon cash transactions for most of its source documents. A synoptic/

combination journal seems to best suit the cash flow needs in an agricultural setting. Two synoptic/combination journal formats may be prepared. One for cash inflow (cash receipts) and the other for cash outflow (cash disbursements/payments).

Good cash control procedures may be reviewed from Module 4 or through resource materials. Items to be stressed may be:

• record all cash and deposit all farm business income in the bank
• make all payments by cheque, develop a habit of regularly updating cash records
• follow complete and proper procedures to write cheques and deposits -- entering from source documents the complete information which may be date, quantity, weight, description, and the name of the person with whom you deal
• prepare bank reconciliations, and reconcile bank statements
• cash records and synoptic/combination journals are essential each month.

Although the synoptic/combination journal is most popular in the agricultural setting, it is not the only means of record keeping. A regular journal/ledger accounting system may be employed or a computerized system may be used. Remind students that they must understand the manual system to use an automated system.

The students should realize that the synoptic/combination journal may be used in exactly the same way as it is in a general accounting system noting the following similarities:

• it is a double-entry accounting system
• the source document number, description, quantity, and date are entered for each item
• columns are designed to fit the specific needs of the business/farm
• at the bottom of each journal page and at the end of the accounting period, cross balancing/footing of each journal page is completed
• the balances are forwarded to a new cash inflow or cash outflow page after balancing
• at the end of the period, journal totals will be posted to appropriate ledger accounts and/or used for financial statement preparation
• the farm journal may or may not have a post reference column depending on the number of general ledger accounts open.

Cash System of Accounting: When using a cash system, the income is recorded in which cash is received. This may or may not correspond to the time when this income is earned. Expenses are recorded in the year in which they are paid e.g., payments for fertilizer, seed, or repairs.

Most producers use this system, as it is flexible, and they are able to use income tax management schemes. Farm businesses are one of the few in Canada who are able to report income on a cash basis. Producers are allowed to use the cash basis of accounting because inventories may be held for several years, and it would be unfair to tax producers on production that has not sold. This method is popular because the Income Tax Act allows its use for producers and also because it is a major purpose for record keeping for most businesses.

Advantages: Flexibility in the timing of the recognition of income and expenses; requires simpler records than the accrual system; farmer may have cash available to pay expenses instead of having to use credit; promotes cash control; and avoids the necessity of adjusting entries other than depreciation.

Disadvantages: Expenses are not deducted until cash is paid, thus not allowing a clear picture of profitability; does not represent a true result of operations; inventory adjustments may have to be made to portray true income statement and balance sheet information; and income may be erratic.

Accrual System of Accounting: Most businesses in Canada use the accrual system. It matches expenses with the income it helped to earn, regardless of when payment is received or expenses are paid. (GAAP: Matching Principle) It matches expenses to the year in which they are incurred, whether paid or not.

This is the method of accounting used in Modules 1 and 2 where adjustments were performed at the end of the year. An income statement prepared by the cash basis may be adjusted to an accrual system by including changes in the values of farm inventories and credit accounts for the beginning and the end of the year. Depreciation would also be adjusted. If students have covered a number of adjustments in Module 2, they may be reviewed at this time. If not, the example of depreciation is sufficient.

Advantages: Gives a realistic picture of profitability of a business in each accounting period.

Disadvantages: Records are more complex and adjustments are more difficult to understand. There may be other considerations.

Learning Objectives

Notes

A list of many types of transactions should be made available to students. These transactions should include both farm business and personal exchanges. Although actual farm records may sometimes include both personal and business transactions, it is not recommended practice.

This objective will emphasize the segregation of business and personal activities. This objective should make students aware of this segregation. The transactions should be classified as to whether they should or should not be recorded in farm accounting records and whether they may or may not be added or deducted from net income or net loss for the period of time.

Some items of farm business income to consider:

Transactions to be included: sales from crops, government payments, subsidies, custom work income, refunds, goods sold (examples: livestock, grain), cash rent received, crop and hail insurance proceeds, livestock products (examples: eggs, milk), capital sales (examples: machinery, equipment), etc.

Transactions to be excluded: wages, salaries, investments, oil and gas royalties, mineral leases, etc., sale of machinery (assets), interest received, rental income from houses, sale of crop shares, non-taxable income such as gifts, inheritances, etc.

The general requirement for an expense in farming:

• is used for the purpose of gaining or producing income from farming
• the amount is reasonable
• the timing of the expense must be appropriate for the farming year
• the expense must be for the purpose of farming.

Some examples of potential farm business expenses are given. Discussion of whether they should be considered as farm expenses should take place.

• receipts for the purchase of seed used in farming
• an amount paid for hiring machinery to carry on the farming operation
• premiums paid for insurance on assets used in the farm business
• a percentage of utility bills that is attributable to farm business use
• hired labour costs
• repairs and maintenance to assets used in the farm business
• interest paid on debt used to carry on farm business
• feed for livestock, fertilizer and chemicals
• machine rent
• supplies
• breeding feeds
• veterinary costs
• fuel and oil, storage
• feeds
• taxes paid for farm business
• property taxes
• groceries
• utilities for the home
• income taxes
• life insurance premiums
• personal auto expenses
• household expenses
• travel to a non-farm job
• investment costs
• gifts
• fines
• hobbies
• principal paid on debt
• Goods and Services Tax (GST). Students should look closely at the items on which farms pay GST and those that are exempt.

Some zero-rated items include:

• large farm tractors
• bulk fertilizer
• livestock raised as food or to produce food for human consumption
• educational tax
• insurance premiums for amounts used in farm business
• cash rent
• freight and trucking costs
• conservation and land clearing
• miscellaneous costs
• items purchased for resale, etc.

While discussing GST, students should be aware that First Nations farming practices are the same as any other. However, Bands are exempt from GST for on Reserve purchases of goods and for off Reserve purchases of goods only if the vendor delivers the goods to the Reserve. Services purchased off reserve are exempt from GST if the purchase is in respect of Band management or in connection with real property located on Reserve. Students will need to use current GST information and decide whether a GST would or would not be an expense for farming or personal use.

The type of guidelines students arrive at may include those which deal with:

• reporting all income
• developing a habit of keeping the record system up-to-date
• entering complete information for each transaction including names, dates, descriptions, etc.
• identifying deposits and withdrawals from accounts so that they may be readily identifiable as being farm or personal transactions
• keeping adequate records so as to evaluate the fairness of operating arrangements (partnerships, crop sharing, etc.)
• keeping good records to enable owners to make planning and management decisions for credit, government programs, crops to grow, etc.
• setting goals (short, intermediate, and long-term) to save in the "good" times to cover the "bad" times.

Special issues may be relevant in a community and may be discussed.

Learning Objectives

Notes

Using a set of farm-related transactions, students should be given opportunity to categorize the transactions into types and assign cash inflow and cash outflow column headings.

A review of double-entry bookkeeping, posting procedures, and balancing (balance forward) procedures should take place.

Students should be encouraged to realize the efficiency in recording if accounts may be combined and yet are still distinguishable for expense or income analysis purposes.

Many subsidiary ledgers may be established. Some of the ledgers established in previous modules included accounts receivable, accounts payable, and payroll (employees earnings records). The inventory subsidiary ledger may be used frequently in a farm business application. These inventories may include: livestock, grains, feed grains, etc.

Subsidiary ledgers may be maintained for land owned, buildings and improvements, machinery and equipment, farm supplies, long-term loans, intermediate-term loans, operating loans, charge accounts, Canadian Wheat Board advance payments, etc.

When students used the Records Planning Charts, these types of decisions may have been made.

Review the format of the balance sheet, and income statement. If time permits, students may prepare a specialty format of the worksheet that changes the cash income statement to the accrued income statement.