Confusing credits and creditors

Accountants don’t need ‘agricultural literacy’ to be successful, but no farmer ever made
it without being financially literate.

By Peter Hughes
January 23, 2017 2:39 pm

Many years ago, I was responsible for the citrus nursery of the farming operation where I worked.

We’d had a bad year with an extremely poor budwood take. I was included in the meeting with the auditors during the review of the draft annual accounts. As we were lamenting the high nursery costs, and I was explaining the reasons, one of the auditors chipped in.

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“Why don’t you just plant the orange pips and avoid grafting?” he asked.

We were gobsmacked. He was simply unaware of the horticultural necessity for rootstocks and their function, so I was duly asked by the CEO to provide an explanation, and it was the auditors’ turn to be amazed.

Get to know the basics
You and I know that if the subject matter were to move from citrus nurseries to fruit exports, beef grades, broiler feed conversion rates or wool quality, the requisite lingo would roll off the tongue of the farmers concerned.

But while accountants can mostly get along fine without being ‘agriculturally literate’, farmers do not have the same luxury.

They depend on accountants to monitor the financial performance of their business to determine how much tax they should pay and provide a picture of the business to the bank for securing the annual operating overdraft and the term loans for expansion. Farmers simply have to know how accountants do it and the language they use.

We don’t have to be amateur accountants, but we do need to know enough to understand what the words on a set of accounts mean and how they are determined.

This was the realisation that dawned on me as a nursery manager, and eventually set me off on my own journey to seek a measure of financial literacy.

Debtors and creditors
Take something as simple as ‘debit’ and ‘credit’, which I assume you understand perfectly!

These were for me among the most confusing things. Any schedule I saw in my early days as a young manager listing cash transactions had the money coming in under the heading ‘credit’, and the money going out under the heading, ‘debit’.

In my state of total financial illiteracy, I thought that ‘credit’ meant something good and ‘debit’ something bad.

As I became more involved in the financial end of the business, I began to hear more about ‘creditors’ and ‘debtors’. My long-held association between credit being good and debit being bad kicked in, and when I discovered that it was the creditors to whom we owed money (bad) and the debtors who owed us (good), confusion reigned supreme.

It took me years to get over it, and I was not the only one to be confused.

The accounting industry obviously came across quite a few people like me, and, thank goodness, changed these terms. Today, money owed is called ‘payables’, and money to be collected is called ‘receivables’, which is so much clearer for semi-literates like me.

Historic cost
Another source of confusion for many is the convention of recording everything at historic cost. It works fine for things that do not have a long life, but becomes bizarre when it applies to some fixed assets.

Take land bought 50 years ago by the previous generation for R150/ha. Today, it may be worth hundreds of times more, but it is still recorded at R150 in the books. And it stays like that until it is changed by an accredited land valuer, an exercise which in itself is costly.

And even then, what should the new figure be? Have there been actual arms-length sales between parties of similar land in the same area that provide a benchmark?

As my financial mentor and teacher Ronnie always told me – never ever take assets on the balance sheet at face value – especially land and especially in Africa. Find out who did the valuation, what their assumptions were, and on what basis these assumptions were made!