Accounting for crops
/How to Account for Crops
Crops are berries, fibers, fruits, grains, nuts, and vegetables grown by an agricultural producer. All costs of growing crops are to be accumulated until harvesting time. This rule includes crop costs that are incurred before planting, such as the cost of soil preparation. Some costs associated with growing crops are not incurred until after the harvest, perhaps not until the next year. For example, there may be a residue of harvested crops in the fields that is not cleared until the start of the next growing season. These costs should be accrued and allocated to the harvested crop. The cost of growing crops should be reported at the lower of cost or market.
Another way to value raised crops is to do so at their selling price, less any estimated costs of disposal. This net realizable value option is only available if all of the following conditions are present:
The product is available for immediate delivery
The costs of disposal are predictable and insignificant
The product has a readily determinable and reliable market price
When net realizable value is assigned to the inventory, it is also recorded as a change in revenue on the income statement. At the end of the reporting period, the amount of raised crops is determined and valued based on the net realizable value at the end of the period. This ending valuation is then compared to the valuation already in the relevant inventory account from the beginning of the reporting period; the difference is recorded in a revenue account.
Related AccountingTools Courses
Accounting for Vineyards and Wineries
Example of the Accounting for Raised Crops
A farm raises wheat as its principal crop. One field has just been harvested, and the market value of that wheat is $42,000. The farm manager believes that the market price of wheat will increase, so he elects to only sell $10,000 of the crop at once, which is a cash sale. The journal entry for that transaction is:
The remainder of the crop, having a market value of $32,000, is placed in storage. This results in the following journal entry:
The result is an immediate increase in revenue of $42,000, where $10,000 comes from a cash sale and the remainder from the market value of the remaining crops.
One month later, the farm manager finds that he guessed wrong about the direction of wheat prices when he finds that the market value of his stored crop has now declined by $1,000, from $32,000 to $31,000. This results in the following journal entry, which reduces the value of the crop asset and the amount of recognized revenue:
