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Crop inventories on a farm balance sheet represent the value of crops that are currently growing in the field or are harvested but not yet sold.
These inventories typically include crops such as grains, fruits, vegetables, timber, citrus, vineyard products or other agricultural products that are produced by the farm operation.
What are Crop Inventories?
Crop inventories on a farm balance sheet represent the value of crops that have been produced but not yet sold. Generally, this is any row crop, grain, fruit, vegetable, timber or vineyard product ready for sale. These inventories are generally harvested and in storage and ready for a buyer.
Types & Examples of Crop Inventories
Crop inventory on an agricultural balance sheet may include include:
- Row Crops: This includes corn, wheat and soybeans which may be held in storage, such a grain bin, for future sale.
- Fruits and Vegetables: Harvested fruits and vegetables ready to sale.
- Crop Products: Cotton, hemp, flax or other crop derived products which are ready for sale.
Crop Inventories on the Balance Sheet
Crop inventories are considered a current asset on the balance sheet, since these are usually (but not always) expected to be sold for cash within the coming year.
Purpose of Crop Inventory
For many producers, crop operations drive a high-proportion of their income. As such, it is important to track crop inventory as this represents the total amount of sellable product that the producer current owns which can be sold in the market.
Proper inventory management is a crucial part of any agriculture operation and understanding inventory is also critical in understanding operational efficiency and how quickly inventory turns.
Inventory can be converted into cash through sales, making it an important component of a company’s liquidity management strategy. By tracking inventory levels on the balance sheet, businesses can assess their ability to meet customer demand and manage cash flow effectively. Sold crops may be reinvested in the operation in the form of cultivating new fields and crops, purchasing new equipment, buildings or real estate, or enabling the producer to take a distribution to cover personal expenses.
How to Record Crop Inventory on Balance Sheet
Recording crop inventory on a balance sheet is usually straightforward. Generally speaking, once a crop is harvested the producer should know the total inventory.
- Initial Recognition: Crop inventories are initially recorded at cost or market value when harvested.
- Periodic Updates: The value of crop inventories is updated periodically to reflect changes in market prices, condition of crops, and quantity on hand.
- Physical Counts: Regular physical counts of inventory are conducted to ensure accuracy and reconcile with accounting records.
Valuation of Crop Inventory on the Balance Sheet
Crop inventory on an agricultural balance sheet is typically valued on a balance sheet at its cost or market value. Here’s how it’s generally done:
- Cost basis: Crop inventory is initially recorded at its cost, which includes all costs directly attributable to bringing the crop to its present location and condition. This includes expenses such as seed, fertilizer, pesticides, irrigation, labor, and other direct production costs.
Cost Based Value of Crop Inventory = Total Production Costs OR Total Units x Cost Per Unit
- Market value: If the market value of the crop is lower than its cost, the inventory is written down to its market value. Market value is determined based on factors such as current market prices for similar crops, expected selling prices, and any costs necessary to complete the production process and sell the crop.
Market Value of Crop Inventory = Total Units x Price Per Unit
- Net realizable value: Alternatively, crop inventory may be valued at the net realizable value, which is the estimated selling price less any costs of completion, disposal, and transportation. This method is often used when the net realizable value is lower than the cost but higher than the market value.
It’s important to note that crop inventory valuation methods may vary depending on accounting standards, industry practices, and specific circumstances of the agricultural operation. However, the objective is to ensure that the inventory is reported on the balance sheet at a conservative value that reflects its true economic worth.
Exclusions from Crop Inventory on the Balance Sheet
When preparing a farm balance sheet, it is important to ensure that a proper accounting of the crop inventory takes place to avoid mis-stating the actual value of crop inventory.
The most common exclusions to crop inventories include:
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Growing Crops: Crops which are still in the process of cultivation and maturing should not be considered a part of crop inventory. Rather, these should be classified as growing crops on the balance sheet.
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Perennial Crops Not Ready for Harvest: Perennial crops (such as orchards or vineyards) that are not yet producing harvestable goods are usually excluded from crop inventories. These are often capitalized as long-term assets until they begin producing.
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Future Crops (Unplanted Crops): Crops that have not yet been planted or for which the planting process has just begun are excluded. Only crops that have been planted and are actively growing or have been harvested are included.
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Consumables and Supplies: Items such as seeds, fertilizers, pesticides, and other farming supplies are not included in crop inventories. These are typically classified under supplies or prepaid expenses until they are used.
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Post-Harvest Losses: Any losses due to spoilage, pests, or damage that occur after the harvest but before the crops are sold are excluded from crop inventories. These losses are accounted for as expenses.
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Sold Crops: Crops that have already been sold, even if they are still physically on the farm awaiting delivery, are not included in crop inventories. The revenue from these sales is recorded as accounts receivable or cash, depending on payment status.
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Leased Crops: If the farm is leasing crops to another entity or has sold crops under a consignment agreement, these crops are excluded from the farm’s inventory once control has transferred to the lessee or consignee.
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Processing and By-products: Crops that have been processed into other products (e.g., corn processed into ethanol) and by-products of crop processing (e.g., corn husks) are excluded from crop inventories. These are categorized based on their specific nature, such as finished goods or raw materials.
Frequently Asked Questions
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