For years farmers have been reporting financial information on a variety of forms for various reasons. Effective management of a farming operation today requires that records be kept so managers can make informed decisions affecting the profitability of their farms.
Some lending institutions require detailed business and personal information on everything a farmer owns, as well as the status of unpaid loans. They may also require production records and an estimate of expected sales and expenses for the next year. Increasingly, regulations point toward the keeping of chemical application records and soil and water conservation plans for environmental concerns. The Internal Revenue Service (IRS) requires farmers to report cash sales, expenses, depreciation and information on government program participation.
Farm records are often maintained only for IRS filing purposes. While tax records are necessary, additional information may be needed for informed management decisions. Farm business decisions that are not based on accurate farm records may lead to less profit. The efficient management of a farm operation requires sound record-keeping and record analysis.
Records are important for many reasons:
The IRS can ask for proof of income, expense and inventory items reported on tax returns.
Farm managers use records to construct balance sheets, cash flow and income statements, and other financial aids for making more informed decisions in such areas as machinery purchases, adding or deleting enterprises, size expansion, etc.
Some lending agencies and governmental bodies require financial and/or production records be maintained over a number of years. For example, the government farm program requires certain production and acreage records be reported and maintained by the farm owner. Also, “planning” for conservation compliance and other aspects of soil and water management essentially become historical records over time.
Increasingly, farm owners are being asked to keep records about chemical use, livestock waste applications and irrigation water use on their farms.
In this publication, both hand and computerized record-keeping methods are introduced. Not all record-keeping systems allow records to be kept for all the reasons stated above. The farm owner or manager needs to decide on the system which best fits his/her farm situation. Terms in bold print are defined further in the appendix section of this publication.
Record-keeping refers to keeping, filing, categorizing and maintaining farm financial and production information. Record-keeping can be accomplished through a variety of methods, from a basic hand record-keeping method to an elaborate computerized system.
Record analysis refers to evaluating farm records. The evaluation process allows a farm manager to make informed decisions based on actual (or projected) farm performance. Obviously, record analysis cannot take place without first keeping records. Therefore, establishing and using an effective farm record-keeping system for an ongoing farm operation aids in farm planning, informed decision-making and analysis of both production and financial records.
On the farm, there are two distinct types of records—financial and production. Financial records relate primarily to money or the financial interactions of the farm. Financial records justify or prove farm income or expense transactions. Product sales, operating expenses, equipment purchases, accounts payable, accounts receivable, inventories, depreciation records, loan balances and price information are all examples of financial records.
Production records are items that relate to quantities of inputs and levels of production by enterprise and/or by resource type. They consist of crop yields, plant populations, calves born, pounds of milk produced, weaning weights, death loss, etc.
Both production and financial records are important to the efficient management of today’s farm business. When such information is accurately maintained and categorized, it can be used to produce useful decision-making information.
Keeping and analyzing accurate production records are important and essential aspects of farm management; however, this publication will only address financial records. Therefore, all references to records in the remainder of this publication refer specifically to financial records.
Selecting a record-keeping system should depend on the expected use of the records. There is no “best” record keeping system for all situations, but, at minimum, a farm records system should:
The person responsible for keeping the records should develop a habit of regularly and accurately posting transactions. Making all financial transactions through a bank (checking) account can be useful. For an accuracy check, the monthly statement should be reconciled with the checkbook and record-keeping system.
A double-entry accounting system provides the most detailed accounting of farm business transactions. A significant amount of time is usually needed to learn and implement such a system. The simpler cash accounting system, with inventory adjustments, will suffice for most farm operations, and is an accepted method of reporting income and expenses for tax purposes.
The use of computers and computer software has expanded on farms in recent years. However, a hand recording system is still useful for many farmers. When selecting a record-keeping system, both hand and computer systems should be considered. Some characteristics of each are as follows:
|10/1||Sold 10 calves @ 500 lbs/hd||$4,000|
|10/1||Purchased feed (2 tons)||$475|
|10/3||Sold 2 cows @ 1050 lbs/hd||$1,250|
|10/8||Purchases 1500 gals of diesel||$1,400|
|10/11||Sold 2000 bu of corn||$4,600|
|10/1||Sold 10 calves @ 500 lbs/hd||$4,000||$4,000|
|10/1||Purchased feed (2 tons)||$475||$475|
|10/3||Sold 2 cows @ 1050 lbs/hd||$1,250||$1,250|
|10/8||Purchased 1500 gals of diesel||$1,400||$200||$1,200|
|10/11||Sold 2000 bu of corn||$4,600||$4,600|
A large number of hand systems are available. One of the simplest systems involves the recording by hand of all financial transactions in a journal format. Purchase and sales activities are listed by hand as they occur. The entries show 1) the date, 2) the item involved (quantity, size, etc.) and 3) cash involved in sale or purchase. For example, figure 1 portrays a wholefarm recordkeeping system. The date and a short description of each transaction are listed first, followed by the dollar amount of each transaction under the appropriate income or expense category. The number of income and expense categories depends on the amount of specificity desired by the farm manager.
Figure 2 is similar to figure 1, but adds an enterprise accounting section. In addition to the income and expense categories, the transaction is also listed in an enterprise category. For example, the “purchased supplies” expense of $165 is first listed under the “supplies” category. But $125 of the expense is listed under “Cow/calf” expenses, and $40 is listed under “Corn” expenses. Again the number of enterprises used depends on the amount of detail desired by the farm manager.
To learn how the farm business stands on a cash basis, income and expense categories can be totaled weekly, monthly or during any time period desired. The difference in the two totals is the cash balance.
A number of record-keeping manuals or record books can be obtained from private or government lending agencies. Regardless of the system selected, entries should be made regularly.
In addition, disciplining oneself to make every transaction through a bank checking account will ease record-keeping difficulties. Reconciling bank statements with farm records insures accuracy.
Historically, many farm managers have found keeping and analyzing financial records a challenge. However, a number of challenges have been addressed through computerized record-keeping systems. The advantages of using such a system depend on the expectations of the accounting system, the amount of time available to keep records and the attitude toward initial investment costs.
While a computerized recordkeeping system may make entering income and expense items easier, it may also take several days to learn the computer software. There is also a cost to purchase both the computer and the record-keeping software.
In a 1994 report, Pena, et. al., evaluated six computerized farm record-keeping programs. The range of prices among the six programs was $6.95 to $79.95. Each program had unique features, but all six performed the basic recordkeeping functions.
Selecting a computerized record-keeping program should be done on the basis of features needed. Some programs will allow for enterprise accounting. Some programs will calculate payroll reports for employees. Many will have income tax options, but may vary on the completeness of the tax information supplied. Few financial record-keeping programs allow for production records to be kept simultaneously with financial records. For example, in many programs, sales of grain or livestock can be reported in dollars only, with no accounting for bushels or pounds.
A computerized record-keeping system will not necessarily save time. Its real advantage is in record analysis. Once the information is posted in the computer software, reports and analyses can be created, changed and printed. Computerized systems quickly and accurately sort and report a great deal of information. They can also provide monthly or annual summaries for identifying strengths and weaknesses of an operation.
If a hand system can provide the detailed information required by the manager to make quality farm decisions, it may be the best choice. However, if a hand system does not give the desired level of financial information, a computerized system should be considered.
Once a farm record-keeping system has been established, analyzing the records can begin. Decision-making can be greatly enhanced by analyzing both production and financial records and their impact on profitability.
A number of financial analysis tools can be used when accurate and complete farm records are available. These tools include the balance sheet, income statement and projected monthly cash flow statement (including family living expenses). These three financial statements provide information for making short and long term financial decisions.
|Balance Sheet||Farm Assests Cost & Value
Farm & Personal Asset Changes Livestock, Crop & Other Product Inventories
|Cash Flow||Farm Income and Expenses
Non-Farm Income & Expenses
|Enterprise Analysis||Farm Income and Expenses
Livestock & Crop Yields
|Income Statement||Farm Income & Expenses
Livestock & Grain Inventories
Accounts Payable & Receivable
|Income Taxes||Farm Income & Expenses
Non-Farm Income & Expenses
The balance sheet gives the farm manager a “snapshot” of the net worth on a specific date. The net worth is the value of all assets on the farm less the amount of money owed against those assets.
Year-to-year profits are calculated on the income statement, also known as the profit/loss statement. The income statement is used to calculate net cash income, adjusted by changes in inventories and capital items.
The projected monthly cash flow statement is used to look ahead to the next year of operations. By projecting a cash flow for the next year, potential cash shortfalls can be noted and appropriate changes in the farm operation can be analyzed.
Table 1 was constructed to illustrate the kinds of records that go into the making of financial statements and production summaries. The left column contains the financial or production statement desired by the farm manager. The right column contains the records required to complete the statement. Records can be used for more than one statement. For example, “Debt Payments” are used in the Income Statement, Cash Flow Statement and in Income Taxes. Likewise, “Farm Income and Expenses” are used in the Income Statement, Cash Flow Statement, Enterprise Analysis and Income Taxes.
Keeping and analyzing farm financial records are essential to the efficient management of a farm business. Accurate records and resulting analyses help farmers make financial and production decisions, comply with tax laws and other governmental regulations and support loan applications. Traditional hand record-keeping systems continue to work well for many farmers. Computerized record-keeping and analysis programs have been accepted and used by a number of farmers also. Developing and using a farm record-keeping system will allow the farm manager to make more informed decisions affecting the profitability of the farm.
Additional information on keeping and using farm records is available through the MANAGE program of The University of Tennessee Agricultural Extension Service. Contact your local Agricultural Extension office for more information.
Balance Sheet -
Cash Accounting System -
Double-Entry Accounting System -
Enterprise Accounting -
Income Statement -
Net Worth -
Projected Monthly Cash Flow Statement -
Delton C. Gerloff, Associate Professor, Agricultural Economics
Robert W. Holland Jr., Assistant Area Specialist - Farm Management
The University of Tennessee
Agricultural Extension Service
Pena, Jose, “Financial Record-Keeping Software Review,” Texas Agricultural Extension Service Bulletin B-5089, Texas A&M University System, May, 1994.
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Agricultural Extension Service
Billy G. Hicks, Dean