Farm & Ranch Business Farm & Ranch Business ManagementManagement

Chapter #2

Record Keeping

Why keep records?

• income tax reporting requirements– assist in planning and management

– obtaining credit

What kinds of records need to be kept?

1) Cash Flow Statement: monthly cash inflows and outflows

2) Net Worth Statement: asset minus liabilities– shows financial condition of business

– lists all assets & values, liabilities & values

– also known as a balance sheet

What kinds of records need to be kept?

3) Income Statement: shows profit for a given time (1 year)– also known as a Profit/Loss Statement

4) Detailed Enterprise Analysis: identifies factors that affect the profitability and efficiency of the individual enterprises– Records allow you to compare past performance

with present performance and future goals

What kinds of records need to be kept?

• Cash Flow Projection: estimate monthly cash inflows and outflows

• Whole Farm Budgets: compares alternative courses of action

• Risk Management Plan: statistical calculation of the probabilities of success

What steps need to be taken to set up a record system?

1) select a record keeping system suited to their particular needs

2) select an accounting system suited to your business situation

3) select a method of reporting farm income and expenses

4) develop a procedure to get exactly the information needed from the records

What kinds of records are there?

• Financial– receipts & expenses

– net worth

– income statement

– cash flow

• Physical– production records of crops/livestock

• crop yield

• birth, wean wt.

What are the types of accounting systems?

• Double entry system:– each credit transaction must be balanced

by a debit transaction

• Single entry system:– no balance is maintained

What methods are used to report income and expenses?

1) Cash Method: records of actual cash transactions

• income & expenses recorded in year that actually received or paid

• no inventory kept for unsold products or supplies

• cost of items bought for resale are not deducted until year actually sold

Cash Method• provides flexibility in choosing when to

take income and deduct expenses

• if the farmer shows a profit, cash is available to pay income taxes

• expenses are not deducted until cash is paid

• inventories must be made to compute financial statements

• income may be erratic

Accrual Method

• income and expenses reported when they actually occur

• uses an inventory to match income & expense to the appropriate time period

• levels out peaks and valleys in income

• detailed and complex required

• all items must be inventoried

Accrual Method

• easier to determine net farm income and analyze the strengths and weaknesses of the farm business from year to year

• work with abstract figures (may only show profit on paper)

• actual cash position may be difficult to estimate

Record Keeping Procedures• learn about record keeping system before

you begin

• develop a habit of keeping record up to date

• do most business through a bank account (also identify items on deposit slips: borrowed money, gift, bushels, pounds)

• get the bank statement each month and reconcile the checkbook and record keeping system

Record Keeping Steps• enter the beginning of the year inventories

(owned assets, accounts payable, beginning cash balance)

• set up depreciation schedules

• enter receipts, expenses, and production records

• enter end of year inventories

• complete the farm analysis (income taxes, financial statements, enterprise analysis, cash flow)

What is an Inventory?

• list of all assets and values

Why keep an inventory?

• get a true picture (on net worth statement)

• beginning to ending inventory change

• must use in accrual method

• place a value on assets

What items are inventoried?

• all unsold items at end of tax year– crops in storage

– raised livestock

• all items purchased for resale but not yet sold– livestock

What items are inventoried?

• hedging contracts• crop and livestock supplies• capital assets

– breeding livestock– machinery & equipment– buildings & land

• accounts receivable & payable• liabilities

Guidelines for making inventories

• measure quantities in commonly used units (bushels, tons, cwt., pounds)

• group like items (cows, bulls, replacement heifers, calves)

How do you place a value on inventory items?

• Cost minus depreciation

• Cost minus depletion: value changes as resources are removed (gravel pit)

• Market cost: actual cost (used within a short time, feed, seed)

• Net Market Price: if you sell the product (wheat)

How do you place a value on inventory items?

• Farm Production Costs: actual amount invested in crop

• Actual Amount: value of liability owed

What are Cash Receipts?• cash flowing into a business

• business income– crop sales,Government payments, patronage

dividends (co-ops), resales (only net gain is taxed), cash rent, Crop insurance payments, raised nonbreeding livestock, capital sales, wages, dividends received, stock distributions, oil & gas royalties, interest received from savings, rental income, gifts, inheritance, life insurance

What are Cash Expenditures?• money flowing out of a business• business expenses

– hired labor, repairs & maintenance, interest paid, feed, seeds, fertilizer & chemicals, machine hire, supplies (useful life <1 yr.), breeding fees, veterinary & medicine, fuel & oil, storage, taxes (real estate, personal property), insurance (on farm assets), utilities, cash rent, freight & trucking, items purchased for resale, capital purchases, money paid on accounts payable

Hired Labor Records

• social security and unemployment taxes may need to be paid by employer