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Dairy Farming Manual

Volume 6

Husbandry Unit 12

page i

Extension Materials
What should you know about dairy farm accounting?
 1 How can you keep accounts by single-entry book keeping? (5-11)

By entering transactions in one book and filing documents.

2 How can you calculate profits and losses? (12-18)

Keep payments and incomes over a year under:
- capital items
- recurrent items
- loans, instalments, interest payments.


3 How can you keep capital, loan and current accounts?

Consult your extension worker about:
- how to record items
- when and how to analyze accounts.


4 How can you analyze net returns and cash flows? (19-24)

By accounting for:

- labour and other costs and benefits
- the timing of receipts and payments.

page 1



Husbandry Unit 12: 

Technical Notes

Note: Numbers in brackets refer to illustrations in the Extension Materials.

Introduction  (5-7)

Record keeping is an activity that is almost completely neglected by small scale farmers, even in literate communities.  The farmers may not see the benefits from this extra activity, which appears to be quite unconnected with the practical aspects of dairy farming.  The extension officer, therefore, need to make an extra effort to explain the benefits of maintaining accurate records.  Maintaining separate accounts for the dairy farm will be helpful in:

- understanding how money is spent and income is earned;

- finding ways of reducing expenses and increasing incomes i.e. increasing profits;

- making decisions about increasing or decreasing concentrate feeds, growing pastures and fodder crops, buying and selling of animals etc.

To get a correct picture of the income, expenditure and profits (or losses), everything of value in the dairy farm and all transactions involving payments and receipts of money must be recorded.

page 2

What is dairy farm accounting?
5 Measuring and recording:

- everything of value on your farm: animals, buildings, machines, equipment etc.


- any business or movement of money, buying, selling, borrowing etc.

Why keep accounts?


7 Keeping accounts helps to:

- understand how you spend money and earn income
- find ways to reduce expenses and increase profits
- make decisions about feeds, pastures, animals etc.


page 3

Single-entry book keeping

Single-entry book keeping is a simple method of accounting.  A single book is maintained to enter all transactions, whether they are payments made out or income received by the farmer. (8-10)

page 4

How can you keep accounts by single-entry book keeping?
8 Keep a single accounting book. Your extension worker can advise you on this.

Fill in the book every day or at least every week. Enter all transactions including payments and income.

9 Keep receipts, invoices, statements and other business documents together with a clip or in a file.
10 You will learn a simple method of accounting here called single-entry bookkeeping.

- you use only one book.

page 5

It is important to note the purpose for which the payment was made or income was received.  See the example in the Extension Materials opposite.

Note: If an invoice is received from the dairy coop (or any other purchaser of milk), only the quantity of milk and amount of money received need to be entered in the accounts book, together with the invoice number.  The invoice must be filed separately to get the relevant information when necessary.   (11)

page 6


Make a record for each payment or income e.g.

January 1990

 Item          Date          Description                    Payment          Income

 1               3.1.90        Concentrate                   120.00                  -
                                   feeds (40 kg @ 3.00)

 2               5.1.90         Milk sales-received           -                  310.00
                                    from dairy coop. (for
                                    milk supplied 16-31 Dec.
                                    89. 62 litres; av. fat
                                    4.2 %; 5.00 per l)

 3               5.1.90         Payment to labourer       50.00                   -
                                    (grass cutter)

 4               6.1.90         Mineral mixture              60.00                   -
                                    (5 [email protected] 12.00)

 5               10.1.90       Payment of loan              96.00                   -

 6               12.1.90        Sale of 2 bull calves            -               1500.00
                                     (3 months - 700.00)
                                     (5 months - 800.00)

 7               15.1.90        Purchase of heifer          5000.00               -
                                     Tatoo No. (650); 
                                     date of birth (25.12.88)

 8               16.1.90        A.I. service for cow         60.00                  -
                                     no. (5) - receipt no.
                                     (A 2125)

11 If the dairy coop or someone who buys milk from you gives you an invoice, only record:

- amount of money received
- quantity of milk
- invoice numbers
in the accounts book.

File the invoice separately so you can get information if you need it.


page 7

Profit and loss

Even though income and expenditure are recorded daily in this manner as and when actual transactions take place, the profits (and losses) are usually calculated for longer periods e.g. for a year.  For calculating profits (and losses), the items of expenditure and income during the period under consideration are summarised under three main sections: (12)

- capital items
- recurrent items
- loans (and payment of loan instalments including interest).

Capital items

Capital items are those having a longer life and a higher value e.g. land, buildings, equipment such as milk cans and animals.   (13)

Recurrent items

The recurrent (or consumption) items are those that get used up in the production process e.g. cattle feeds (both roughages and concentrates), mineral mixtures, chemicals, disinfectants, medicines, soap, and various miscellaneous items.   (14)

page 8

How can you calculate profits and losses?
12 You usually calculate profit and loss over a long period (e.g. 1 year).

Whereas you record payments and income from day to day.

13 For profit and loss calculations, keep payment and income under 3 headings:

Capital items

Things with long life and high value e.g.

- land
- buildings
- equipment
- animals.

 Recurrent items

14 Payments for things you use:

- feeds (roughages and concentrates)
- mineral mixtures
- chemicals
- disinfectants
- medicines
- soaps etc.

page 9

Payments made for services such as labour, A.I. and veterinary services are also considered under recurrent items.   (15)

On the income side are sale of milk or milk products, cow dung or compost etc. 

Loans, instalments, interest payments

Money received on loans and payments made as loan repayment and interest charges are summarised separately for purposes of profit (and loss) and cash flow calculations.  (17)

Small scale farmers may find it difficult to prepare these summaries and analyze them. Therefore extension officers should:

- encourage farmers to record each and every item of income and expenditure with relevant details;

- assist farmers to summarise them and analyze them once in 3 months, 6 months or a year.   (18)

Examples of dairy farm accounts are given in the Extension Materials opposite.

page 10

15 Payments for services:

- A.I.
- veterinary.

 16 Income from the sale of:
- milk
- milk products
- cow dung
- compost etc.
Loans, instalments, interest payments.

17 Record these under a separate heading to calculate profit and loss and cash flow.

18 Consult your extension worker about:

- how to record items
- when and how to analyze accounts.

page 11

How can you keep a capital account? 

 Item               Value as           Sales           Additions/         Value as
                       on 1.1.89        during          purchase            on 1.1.90
                                                  89              during 89

Land              5000.00                -                   -                   5,000.001
Buildings       4,000.00               -              2,000.00            6,000.002
Equipment     1,000.00               -              500.00              1,500.002


(a)           Value as of 1.1.89
                      30,000.003           -                      -                           -


Culls (2 Nos.)-                      5,000.003             -                          -
Bull calves (3 Nos.)-            1,500.003              -                          -
Heifer calves(1 No.)-           1,500.003              -                          -


Pregnant                -                    -                 10,000.003              -
heifers (2 Nos.)

(b)        Value as of 1.1.90                                                 33,000.003
Total         40,000.004           8,000.004      12,500.004    45,500.004


1     Even though land values may have gone up (appreciated) between 1.1.89 and 1.1.90, it has not been taken into account.

    Depreciation of buildings and equipment has not been accounted for. Depreciation is the amount of money that has to be set aside to replace the buildings (in about 20 years time) or the equipment (in about 3-5 years time, depending on the type of equipment). This is a factor to be considered in an overall profit and loss account.

    The total number of animals in the farm have been valued as of 1.1.89 and also 1.1.90.

When the difference between additions/purchases of animals (10,000.00) and sales of animals (8,000) amounting to 2,000.00 (10,000.00 - 8,000.00) is added to 30,000.00, value as of 1.1.90 should be only 32,000.00. The additional 1,000.00 could be due to a heifer on 1.1.89, calving down and starting its lactation in 1989, thus appreciating in value.

page 12

4     Total value of capital items (assets) has gone up only by 4,500.00 (44,500.00 - 40,000.00) in spite of additions and purchases amounting to 12,500.00. This may be explained as follows:

Value of assets as of 1.1.90              45,500.00

Additions/purchases during 1989 + 12,500.00

Total value of assets held during 1989      =      58,000.00


Sales of assets during 1989               8,000.00           +
Increase in value of herd growth      1,000.00
Value of assets as of 1.1.89              40,000.00
                                                      = 49,000.00
Investments from savings and/or loans   9,000.00

i.e. The increase in the value of capital items by 5,500.00* (45,500.00 - 40,000.00), including additions/purchases amounting to 12,500.00* has been made possible:

- partly by sale of assets (animals)                                 - (8,000.00)

- partly by using cash from a loan and farmer's savings - (9,000.00)

- partly due to an increase in the value (appreciation) 
  of a heifer                                                                     - (1,000.00)

                                   Total                  =                      18,000.00

*(5,500 + 12,500 = 18,000)
page 13


How can you keep a loan account?
Item        Outstanding      Receipts      Payment        Outstanding
                  as of 1.1.89        in 89              in 89              as of 1.1.90

Loan          10,800.001              -               3,600.00        7,200.00
in 1987

Interest              -                       -               600.00                 -
on above loan

New loan           -                 2,400.002      1,200.00         1,200.00
in 1989
Interest on new  -                       -               360.00                  -
                      10,800.00      2,400.00         5,760.00         8,400.003

1 Loan may have been obtained to purchase cattle/equipment and/or construct/improve buildings.

2 Part of the investment of 9,000.00 may have come from this loan.

3 Interest is also payable in addition to the outstanding loan amount.

page 14


How can you keep a current account?
Current Account (with and without depreciation and excluding capital items and loans)

Income Expenditure        Income                   Items

- milk sales                                        26,500.00
- milk product sales                                 -
- cow dung sales                                      -
- compost sales                                        -
- animal sales                                    8,000.00

Expenditure Items

- concentrates                                                                14,200.00
- minerals                                                                            250.00
- roughages                                                                               -
- seeds and planting material                                              300.00
- fertilizer                                                                            800.00
- labour payments                                                               600.00
- hire of machinery                                                                  -
- transport costs                                                               1,200.00
- vet. fees, pharmaceuticals etc.                                         300.00
- A.I. and stud services                                                       500.00
- chemicals, disinfectants etc.                                            250.00
- miscellaneous purchases
(e.g. ropes, chains, soap etc.)                                             200.00
- rent on land, buildings etc.
(if not owned)                                                                          -
- maintenance of buildings                                                 400.00
- maintenance of equipment                                                    -
- other recurrent items                                                             -
Total                          34,500.00                                    19,000.00

- Profit on the operation   (34,500.00 - 19,000.00)         15,500.00

Less depreciation (buildings, 5 %; equipment 20 %)             600.00
- Profit after allowing for depreciation                               14,900.00

Note: Revenue from sale of animals is included as an income whereas payments for the purchase of new animals are not included as an expenditure. The sales result from a previous investment; the payments for new animals is a new investment and the farmer's capital assets have increased because of this investment.

page 15

Profit from the dairy enterprise

Net return on investment

 This shows that by making an investment of 45,500.00 (19), the farmer has received an income of 14,900.00 in 1989 (after setting apart 600.00 to meet the replacement of buildings in 20 years and equipment in 5 years) i.e. a return of 32.7 % on investment. (23)

However, the time spent by the farmer and his family have not been taken into account in this computation.  If the farmer and his family together spend about four hours a day (for 365 days of the year) on the dairy enterprise (milking, feeding, cutting grass, washing animals and sheds, transporting milk and cattle feed etc.) (21), the total number of hours spent in a year is 1,460. If the normal wage rate is 5.00 per hour, the total earning from working for 1,460 hours is 7,300.00. (22)

The net return from the investment of
 45,500.00 after allowing for labour              = 14,900.00 - 7,300.00
                                                                       = 7,600.00 mu 

 and the net return on investment 
 (after allowing for labour)                             = 7,600    x 100

                                                                       =  16.7 %

page 16

 How can you analyze net return?
Net return on investment

From the above accounts:

19  The farmer made an investment of 45,000 mu

20   and received an income of 14,900 mu in 1989 (after allowing for depreciation).

His return is 

14,900  x 100 = 32.7% 


21  But the farmer and his family use their time, they work on the farm:

- cutting grass and feeding
- washing animals and sheds
- milking
- transporting milk and cattle feed.

22 If the farmer and his family spend 4 hours/day for 365 days/year   = 1,460 hours/year.

If the normal wage is 5 mu/hour, they should earn 7,300 mu.

The net return (after allowing for labour) is 14,900 - 7,300 m = 7,600 mu

The net return on investment is 7,600 x 100       = 16.7%

page 17

Net return on labour 

 Another method of analyzing the benefits is to compute the net return on labour.  In this method the capital investment is valued on the basis of the normal interest rate.  If the interest rate is 12 %, the value of the investment of 45,500.00 is 5,460.00 i.e. 

45,500   x  12 

 The net return from 1,460 hours of work (labour) is 

(14,900.00 - 5,460.00 =) 9,440.00

Therefore, the net return on labour is  6.47 mu per hour i.e. 


page 18


You can also calculate the net return on labour. 

If the interest rate is 12 %, the value of the investment of 45,000 is:

                       45,500 x 12   = 5,460 mu
The net return from 1,460 hours of work (labour) is:

                     14,900 - 5,460 = 9,440 mu

The net return on labour is:

                         9,440 mu = 6.47 mu/hour
                            1,460 hours

Thus this example shows that the farmer benefits because:
- he gets a higher return on the investment than the normal interest 
  rate and
- he gets a higher payment for labour than he could have obtained 
  by renting his labour i.e. by working for somebody else.

Other benefits that have not been taken into account are:
- the increase in value (appreciation) of land
- the increase in value (appreciation) of the herd
- the value of cow dung, compost etc. that may have been used for
  improving soil fertility
- the value of milk that may have been consumed in the household.

page 19

Cash flows

It is also important to know about the timing of receipts and expenditure of money.  If money is not available from the enterprise to meet the expenditure at the correct time, e.g. planting grass or buying concentrates, the farmer may be forced to borrow from expensive sources (because the borrowing has to be done at short notice).  The cash flow from the above example is shown opposite.

page 20

 How can you analyze cash flow?
23 It is important to know about:
- timing of receipts
- timing of payments.
If you do not have money to pay at the right time for planting grass, concentrates etc.
24 you have to borrow.
If you hurry to borrow, this can be very expensive.

Here is the cash flow from the above accounts:
Item                        Inflow                               Outflow
                                      (receipts)                           (expenses)
       Capital Account            8,000.00                              12,500.00
       Loan Account               2,400.00                                5,760.00
       Current Account          34,500.00                           19,000.00
                                             44,900.00                            37,260.00

In this example, there is a surplus inflow over outflow of (44,900.00 - 37,260.00 =) 7,640.00. Therefore, it would be possible to arrange the expenses in such a way as to avoid borrowing at short notice. (Of course, there is an outstanding loan of 10,800.00 and a new loan of 2,400.00 which are considered as planned borrowing at normal interest rates.

page 21

 What do you know about dairy farm accounting?
     What dairy farm accounting is 
    Reasons for keeping accounts 
    Single-entry book keeping
    1 Entries 
    2 Filing 
    3 Example 
     Calculating profits and losses
    1 Capital items 
    2 Recurrent items 
    3 Loans instalments, interest payments 
    Capital accounts 
    Loan accounts 
    Current accounts 
    Analysing net returns
    1 Net return on investment 
    2 Net return on labour 
    Analyzing cash flows 

page 22

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