Accounting for Crops (#363)
/Accounting for Perennial Crops
Let’s start with what are called perennial crops. A perennial is a growing plant that keeps going for several years. For example, the apple trees in an orchard would be considered perennial crops. For these crops, it’s going to be a few years before they can begin commercial production. During that development period, the costs incurred to purchase and maintain the plants are recorded in an asset account.
The costs that you might include in this account are the purchase price of the plants, the compensation expense for hired labor and the related payroll taxes, and farm supplies. So, for example, if you were starting up an apple orchard, you’d buy apple rootstock, and then spend money on fertilization, spraying, weeding, and pruning. All of that expense goes into your asset account for the crops.
Now, let’s say that the perennial crop is now ready for commercial production. From this point on, all costs incurred are charged straight to expense. So for example, if you have people doing weeding or spraying or pruning once production begins, then that labor cost is charged right to expense.
Once the perennial crops are in commercial production, you depreciate the costs that accumulated during the development period, where the depreciation runs through the estimated useful life of the crop. So for example, if you expect an apple orchard to be in production for the next twenty years, then that’s the period over which depreciation occurs. And some perennial crops can run a lot longer than that. You might depreciate the development cost for a vineyard over a fifty year period.
Accounting for Growing Crops
And then we have growing crops. These are crops that are usually planted as seeds, and then harvested within a period of months. Examples are corn, wheat, and tomatoes. In this case, you accumulate all of the costs of these crops until harvesting time, and then charge them to expense when the crops are sold. This includes the costs of soil preparation, even though that occurs before the seeds are planted. Now, keeping track of all this is a pain, and farmers have better things to do with their time than accounting.
So, there’s another way. You can also value these crops at their selling price, minus any costs of disposal. This is called the net realizable value option, and it’s only allowed if the crop is available for immediate delivery, the disposal cost is minor, and it’s easy to figure out the market price. This net realizable value of your crops is recorded as an inventory asset until you actually sell it.
Here's an example. A wheat farmer has just harvested one of his fields, and the market value of that wheat is $50,000. But he thinks the market value of wheat is going to increase, so he puts it in storage and records an entry of $50,000 to the revenue account and $50,000 to the inventory account. And yes, that’s right – you can record revenue without actually selling anything. A month goes by, and the market value of his wheat goes up by $10,000, to a total of $60,000. This results in another entry, this time to increase his revenue by another $10,000 and to increase his inventory by another $10,000. One more month goes by, and the market value drops by $4,000, to $56,000. Now the farmer has to record a revenue decline of $4,000 and a decline in his inventory valuation of $4,000. And then he sells the inventory, resulting in an increase in his cash balance of $56,000, while the offsetting inventory account balance drops to zero.
Accounting for Intermediate-Life Plants
There’s another classification called intermediate-life plants, which fall between growing crops and perennial crops. These plants have a growth and production cycle that lasts for more than one year, but less than the period required by trees and vines. Examples are artichokes and asparagus. In this case, you should accumulate the cost of development until the plants begin commercial production, and then depreciate the accumulated costs over the estimated useful life of the plantings – which may not be all that long.
Accounting for Land Development Costs
That covers the basic accounting for crops. Another relatively farmer-specific accounting issue is the cost to develop land, which is supposed to be capitalized. Farmers can spend a lot of time on this, doing things like clearing and leveling land. These are considered to be alterations to the grade and contour of the land, and as such, they’re considered to have an indefinite life. That means you cannot depreciate this cost.
However, there are some land developments that are considered to have a shorter life, such as ponds, wells, and ditches. The cost of these items can be depreciated over their useful lives.
Accounting for Crop Insurance
What about the accounting for crop insurance? This insurance protects against the loss of crops from natural disasters, such as hail or frost. In this case, you’re paying in advance for the coverage period. This payment is classified as a prepaid expense, so it starts off as an asset. In each successive month of the period covered by the insurance policy, you charge a portion of this asset to expense. By the time the coverage period is over, you should have written off the entire asset.
So, let’s say that you have a crop insurance claim. How do you account for that? It’s revenue. You wouldn’t record it in your normal crop sales account, but it’s still revenue. In this case, you’d record it in a crop insurance proceeds account.
Accounting for Government Subsidies
Here’s another item – government subsidies. The government may pay out subsidies, perhaps because commodity prices are unusually low, or maybe to reimburse a farmer for withholding land from production. In these cases, a subsidy is recorded as revenue. You can record it as soon as you can reasonably determine the amount of the payment and your right to receive it. I would record this in a separate revenue account, just to track it separately from your main crop revenue and any crop insurance payments.
Accounting for Crop Sales to a Co-operative
And we have one more topic, which sales of crops to a co-operative. The co-operative sells the crops on behalf of its members, who are also known as patrons. If the farmer delivers product to a co-operative, then he can record a sale at the point of delivery. However, he can only do this if title passes to the co-operative and a price is available based on current market prices.