Farm Ranch Business Management Chapter 2 Record Keeping

Farm & Ranch Business Management 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