Today, farming, ranching, agri-business in general is a complex world. Record keeping has always been a challenge. The banker, the tax man, and the operator all need to be satisfied. Each needs to see the numbers, but from a different perspective.
Cash basis – Income is recorded as a sale when money is received. Expenses are recorded when paid. Generally, cash basis does not provide for any inventory tracking. In agriculture however, inventory (crops in storage, livestock on the hoof) is tracked thru a process known as Market Value Inventory. This inventory is shown on a market value balance sheet. Market value equity is shown separately from regular bookkeeping equity. (Assets – Liabilities = Owner’s equity)
Accrual basis - Income is recorded when invoiced, even though not collected, and expenses are recorded, but not yet paid. Thus, the profit/loss or income/expense statement reflects income not collected or expenses not paid. Inventory accounts track the cost basis of what products are in inventory for sale.
Taxes are based on your profit (Income – expenses = profit or loss). Your income and taxes may be higher in many cases with accrual accounting. With this accounting method... cashflow is even more critical. If you don’t collect what you have billed, it may be a challenge to pay bills and pay your taxes. However, an allowance or offset against income is allowed for uncollected, billed revenue.
The tax man loves reports. In addition to reporting taxes, there are multiple reports which change from time to time, generally related to payroll and employee issues.
In addition, consideration should be given to the enterprises that make up the total farm. For example, what is the income or expenses for an enterprise which may be a crop, field, livestock, etc... so you can determine detailed numbers for breakeven price or yields.
From an operating stand point you need to know how much money is still in the budget at any point in time during the year.
As your growing season progresses based on costs, what will the yields be, and at what price of yields you will break-even. For example, if you do not cover all your inputs and operating costs then you will not break even. In other words, can you at least pay off the banker. Oh, happy day.
In general, we pay hourly, some pay with overtime, piece rate, commissions or a mixture of all of these methods. Workers are paid weekly, semi-monthly, bi-monthly, or monthly. In some cases, employees are paid an advance which creates a need to keep track of their repayments over several checks. Employers have garnishments and child support to track, in addition to the regular deductions for Federal and/or State Income taxes. Also, included are FICA and Medicare withholdings as well as employer matching portions. Not to mention... unemployment coverages, work comp, track I-9 information... the list goes on and on.
It is helpful in your accounting and payroll software to print checks from your computer to save time and be able to record handwritten checks after the fact.
Even more information is required if you are a contract labor firm. The employer has an entire additional level of details. Such as, which farm each employee worked on by day during the pay period which includes hours and/or units for each farm, field, orchard or block he/she worked. Not to mention, if they are paid by the piece rate... (in some states)... they earn at least the minimum wage.
Countryside Data has provided accounting (US and Canada) and payroll (US only) solutions for agriculture since the mid 1980’s. Visit their web site at countrysidedata.com or call to gain information on how the software may help your operation at 1-208-523-2641. Ask for Ken.
The Banker
The banker looks at numerous items, but mainly collateral and cash flow. The operating budget for the year may be the focus as it shows where money is being used and how it will be paid back. In addition, if the plan fails what are the fallback assets that will be used to recover the money they have loaned for operation, equipment, seed, living expense, and land.The Tax Man
The tax man looks at things a little differently. The focus is income, expenses, and the true profit or loss. Current tax laws or code impact the amount of taxes levied on any business, but agriculture has, from time to time unique situations in which the rules apply. In general, most agriculture operations are cash basis. Agri-business like most businesses tend to be accrual.Cash basis – Income is recorded as a sale when money is received. Expenses are recorded when paid. Generally, cash basis does not provide for any inventory tracking. In agriculture however, inventory (crops in storage, livestock on the hoof) is tracked thru a process known as Market Value Inventory. This inventory is shown on a market value balance sheet. Market value equity is shown separately from regular bookkeeping equity. (Assets – Liabilities = Owner’s equity)
Accrual basis - Income is recorded when invoiced, even though not collected, and expenses are recorded, but not yet paid. Thus, the profit/loss or income/expense statement reflects income not collected or expenses not paid. Inventory accounts track the cost basis of what products are in inventory for sale.
Taxes are based on your profit (Income – expenses = profit or loss). Your income and taxes may be higher in many cases with accrual accounting. With this accounting method... cashflow is even more critical. If you don’t collect what you have billed, it may be a challenge to pay bills and pay your taxes. However, an allowance or offset against income is allowed for uncollected, billed revenue.
The tax man loves reports. In addition to reporting taxes, there are multiple reports which change from time to time, generally related to payroll and employee issues.
You, the operator
Your set of books (for management purposes) is a hybrid of both what the banker and the tax man use with one major addition. Namely, the market values are added to the balance sheet, and to the profit /loss or income and expense statement. These market values (some call it current value) reflect how your operation would be as if everything were sold at today’s values not the book value. This reflects market inventory values which include crops in storage, livestock on the hoof, equipment, and land at current market prices.In addition, consideration should be given to the enterprises that make up the total farm. For example, what is the income or expenses for an enterprise which may be a crop, field, livestock, etc... so you can determine detailed numbers for breakeven price or yields.
From an operating stand point you need to know how much money is still in the budget at any point in time during the year.
As your growing season progresses based on costs, what will the yields be, and at what price of yields you will break-even. For example, if you do not cover all your inputs and operating costs then you will not break even. In other words, can you at least pay off the banker. Oh, happy day.
Now a word about payroll in agriculture
Again, the challenge of agriculture is complex. We pay individually in a variety of ways, and for tax purpose some state laws are different.In general, we pay hourly, some pay with overtime, piece rate, commissions or a mixture of all of these methods. Workers are paid weekly, semi-monthly, bi-monthly, or monthly. In some cases, employees are paid an advance which creates a need to keep track of their repayments over several checks. Employers have garnishments and child support to track, in addition to the regular deductions for Federal and/or State Income taxes. Also, included are FICA and Medicare withholdings as well as employer matching portions. Not to mention... unemployment coverages, work comp, track I-9 information... the list goes on and on.
It is helpful in your accounting and payroll software to print checks from your computer to save time and be able to record handwritten checks after the fact.
Even more information is required if you are a contract labor firm. The employer has an entire additional level of details. Such as, which farm each employee worked on by day during the pay period which includes hours and/or units for each farm, field, orchard or block he/she worked. Not to mention, if they are paid by the piece rate... (in some states)... they earn at least the minimum wage.
Countryside Data has provided accounting (US and Canada) and payroll (US only) solutions for agriculture since the mid 1980’s. Visit their web site at countrysidedata.com or call to gain information on how the software may help your operation at 1-208-523-2641. Ask for Ken.