Explain the following terms: (a) salvage value (b) farm inventory (c) farm assets (d) point of diminishing return (e) depreciation.
Explanation
Explanation of agricultural terms such as: (a) Salvage Value: (i) this applies to farm assets such as machinery which depreciates in value. (ii) The asset depreciates in value to a point where it may attract little value. (iii) at this point, it is termed obsolete and sold off as scrap. (iv) The receipt of such sales is called salvage value.
(b) Farm inventory: (i) refers to the records of all the assets and liabilities of a farm, (ii) Examples of assets are cash at hand, land and landed properties, machinery, crops and livestock. (iii) Examples of liabilities include loan payments and interest. (iv) A good inventory records can assist the farmer to obtain bank loans, i.e they make him more credit worthy.
(c) Farm assets: (i) refers to all property and cash owned by a farmer. (ii) Examples are landed property, buildings, machinery, crop and livestock owned by the farmer. (iii) An evaluation of the assets gives the net worth of the farmer. (iv) can assist in obtaining bank loans for developement.
(d) Point of diminishing return: (i) In production practices, there are usually fixed and variable resources or inputs. (ii) When variable resources are being increased against fixed resources, there is usually increase in the yields, e.g. fertilizer application rates being increased against the plot of land. (iii) There is a point at which additional application of this variable resources against the fixed assets, leads to while maximum returns, after which further increases in the variable factor will lead to a decline in the returns. (iv) The point at which this net return begins to decline is usually referred to as the point of diminishing returns. (v) This law is very important in agricultural production because there is a maximum level of application of resources which may lead to net loss. This should be avoided.
(e) Depreciation: (i) refers to the reduction in the value or performance of an asset, e.g. a farm machinery. (ii) Depreciation is the value at purchase over the value after a number of years of use (iii) Rate of depreciation usually varies with the type of fixed asset. The more durable asset depreciates at a i slower rate than the less durable ones. (iv) Depreciation is taken into account in the annual valuation of the farm.