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Accounting Method B: "Farmer's Shortcut"
In prior installments in this series, we covered the two key questions in the Growth Path Accounting Decision Tree. This month we continue tracing the accounting results from these decisions.
So far we've identified two widely-different outcomes: Method C (cash only reports) and Method A (stand-alone accrual accounting).
This month we're branching off from those two methods in response to more intensive information goals. You're a candidate for accounting Method B if:
You're strictly cash accounting, but want to incorporate real time inventories of crops, livestock, or inputs.
Or...
You're primarily accrual and want to add some form of cost analysis by enterprise that exceeds the scope of your accounting system. You also may not have a formally-trained accountant on staff.
What Does Method B look like?
1. Integration with production information. If you're tracking field or livestock performance records, the direct and indirect costs will come through your accounting records.
2. Cash and/or accrual accounting. You can continue using your current accounting method. Financial statements will not be affected.
3. Real-time inventory tracking. Both accounting and production events will drive inventories. Inputs like seed, chemicals, fertilizer and feed will be valued at cost from accounting while growing/harvested crops and growing animals can be assigned either standard costs or market values.
4. "Hybrid" approach that maintains "pure" cash and/or accrual accounting books but does enterprise analysis and inventory "on the side" through specialized reports that merge accounting and production data.
What are the benefits of Method B?
1. Can produce unit-based cost analysis and inventory control with much more detail and automation than Methods A or C.
2. No additional accounting training required as analysis reports do not tie to financial statements.
3. Handles all data integration functions "behind the scenes."
4. Doesn't require that production employees allocate costs or accounting employees track production details.
What are the downsides of Method B?
1. Manual accounting adjustments to reverse prepaid expenses in cash accounting and cost of goods sold for accrual accounting systems.
2. Cost allocations and inventories do not "drive" financial statements through raw materials, work in process and finished goods inventories. Overhead allocations are also limited to a "single hop" (rather than service centers allocated to support centers that are allocated to production centers).
3. Limited accounting control because physical inventories don't tie to financial statements.
4. Doesn't follow Generally Accepted Accounting Principles(GAAP).
Many FBS users have chosen Method B's hybrid approach as a shortcut to track inventories and generate cost analysis reports and closeouts.
However, there's one more branch to the growth path that doesn't compromise accounting practices or business analysis We'll cover Method ABC in the next installment of Growth Path Accounting.
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