Accounting for Farms: Best Practices and FAQs

The farming and agriculture business is the backbone of society. Humans could not exist without the products of the many farms throughout the globe.

Much like any business, a farming business must consider accounting and bookkeeping since it has to abide by all the same rules and regulations as any other business.

Agricultural accounting will help most farm businesses maintain their records and prepare for the future.

Agricultural accounting methods

Businesses throughout the United States have two accounting methods to choose from: cash basis accounting and accrual basis accounting.

1. Cash basis accounting for agriculture

The most common method used among farm businesses is the cash method of accounting because it provides a level of simplicity that the accrual method does not.

For those using the cash method, the following information will get reported as gross income for the tax year:

• Cash income

• Profits from sales of livestock and property

• Cash from breeding fees or rentals

• Incidental farm income

• Taxable farm income

• Taxable subsidies received

• Debt relief

• Gross income

Under this accounting method, farms—like any other businesses—must report their taxable income the instant it reaches their hands or bank accounts. Checks cannot be postponed in order to avoid paying taxes and must be included as taxable farm income during the accounting period. Essentially, when the money is available for the farm to use, it has to go through financial reporting.

On the other hand, if an item is sold under a deferred payment contract and a payment isn’t expected until the following year, there is no constructive receipt in the year the sale went through—the farm didn’t have access to the funds.

Also, under this accounting system, expenses paid in advance cannot be deducted. This applies to any payment made so far in advance that it has, in fact, turned into an asset with a useful life beyond the end of the current accounting period.

See also: Best Apps for Farmers: Top Digital Tools for Modern Agriculture

2. The accrual method of accounting for agriculture business

Unlike the cash basis for accounting, the accrual method calls for recording all income and expenses the instant they take place, regardless of whether funds have changed hands.

Though most farmers will use the first method in their farming strategy, the following are some instances when a farm business has to use this method:

• They are not family-owned and have a gross income of over $1 million for any tax year after the year 1975.

• They are a family corporation but have a gross income of $2.5 million for any tax year after 1985.

• They are in a partnership with a corporation.

With the accrual basis, the uniform capitalization rules apply to all the costs of raising crops and animals.

These IRS rules help farmers make decisions concerning allocating the costs of crops and livestock by using either the farm-price or unit-livestock-price inventory method.

All of the inventory located on the farm must follow the same method, including:

• Livestock and poultry that are for sale

• Eggs that are in incubation and pre-market chickens

• Harvested and purchased farm products held for sales such as grain and supplies

What to know about GAAP for farm accounting

Even in the farm business, the accounting cycle process must follow generally accepted accounting principles (GAAP). These guidelines are set down by the Financial Accounting Standards Board (FASB) as a way to avoid fees, fines, and potential criminal charges.

Per the Securities and Exchange Commission (SEC), publicly traded companies must adhere to GAAP standards. While private companies are not mandated by law to do so, their compliance is strongly favored by potential lenders and creditors.

What to consider for farm accounting

Farm accounting is more complex than accounting for other businesses regarding assets, liabilities, costs, and revenue. Here’s what to know and consider for farm accounting:

1. Land as an asset

Arable land that is managed properly has the ability to increase in value.

On the other hand, mismanaged land will cause that land’s value to decrease. Unsurprisingly, the most important asset for farmers is land, making its maintenance much more important.

Maintenance, however, costs money, and that should be well-tracked.

Keep up-to-date records regarding soil pH management, fertilizer, irrigation, drainage, weed removal, and pest control.

Any funds spent on land use are considered a business expense and should be categorized as such during the accounting process.

2. Governments provide subsidies

Nations depend on agriculture for self-sufficiency, and most governments do not hesitate to provide subsidies to their farmers as a result.

The one constant is change when it comes to subsidies, which means every year the government will subsidize a different product. Farmers who make use of these subsidies must account for every cent, especially if they are made as direct payments.

Understanding subsidy timeframes can help with long-term goals while maximizing revenue from the farm business.

3. Assets and inventory

In farm accounting, crops, and livestock are treated differently from one another, and what’s more, not all livestock is treated the same way.

Accounting standards provide three separate distinctions: crops, livestock, and production animals.

Crops are further defined as grains, vegetables, fruits, nuts, and fibers. Livestock is cattle, sheep, horses, poultry, and other small animals.

Production animals, unlike livestock, are animals that provide a service or product (other than offspring), such as cows for their milk or poultry for eggs and meat.

Boiling this down further for farm accounting purposes, crops are considered inventory. All direct and indirect costs associated with crop production get allocated to the harvested crop. The same goes for any post-harvested costs, such as fertilizer or pesticides.

Production animals with short lifespans are in the inventory category. All other livestock, including breeding animals, are labeled as assets. All of the direct and indirect costs associated with these animals are accumulated to maturity and then capitalized on the asset.

4. Land-use changes

Economic trends have a heavy impact on land-use changes.

As an example, cultural shifts toward vegetarianism lead to less production of animals and more toward crops. Of course, the government will also subsidize certain crops in rotation. Recording all of these land-use changes is key.

5. Government schedules

The government has strict schedules surrounding classifying animals into maturity groups. Livestock born too late, too early, or just out of calving season can run the risk of being non-compliant with government regulations surrounding age standards. Breeding should be well-planned, keeping in mind the timetables set down by the government.

6. Know your stock

Stock prices and other stock numbers are the key for most businesses, but especially farmers. Record stock levels to understand market value and maintain a healthy farm business.

7. Assets depreciate

The cost of new equipment for the farm can be used to offset your tax bill. With regular wear and tear, equipment will depreciate, which will affect various tax situations as the value has an effect on the way your taxes are calculated.

8. Losses

Recording any losses in your accounts is important because it will reduce the overall tax bill for the year.

Logically, a business cannot get taxed on something that’s been destroyed or on a small business profit that hasn’t been made.

Losses are a part of life when it comes to running a farm. There are years when crops are likely to fail, and accidents will cause other losses, which means farmers must prepare for those eventualities.

Draughts and storms are a part of farming and will continue to be so.

9. Profitability

Use either the Economic Farm Surplus, month-to-month profit, or KPI to understand how profitable your farm is throughout the year. Learn more about these various methods as part of your financial management process.

10. Use technology

Farming might have a rustic reputation but that doesn’t mean modern agriculture doesn’t use technology. Farmers have various cutting-edge technology options at their fingertips, from upgraded tractors to software built for planning planting strategies.

The same can be said of accounting software. A farm business should use an accounting system that streamlines the accounting process from maintaining records to tracking current farm performance.

A well-thought-out accounting system will help disclose fundamental business information on how much revenue the farm has.

Frequently asked questions

Should a farm outsource its accounting?

Farming and accounting are both full-time professions that require quite a bit of work. Keeping track of expenses and income while going through tax preparation all on your own might sound like a daunting task, which is understandable. Having a handle on financial management could mean outsourcing the job, even part-time, to someone who could help set up and maintain an accounting system. Most farmers would find this beneficial, especially for those who are moving beyond small family-owned farms.

What is considered farm income?

Keeping accurate records and completing the tax prep process means understanding income.

Here are a few examples:

• Running a stock, dairy, poultry, fish, or fruit farm

• Running a plantation, ranch, range, orchard, or grove

• Sale of crops

• Running a nursery for growing crops

• Government payments or subsidies

• Crop insurance payouts

• Feed assistance and other assistance from the Secretary of Agriculture

How does the weather affect me?

Severe weather, such as draughts, floods, or tornados, is outside of your control but has a profound impact on the outcome of the business. Record all weather events which caused unexpected changes to your farm. The IRS allows postponing reporting grain from additional animal sales if you can prove the sale was related to the weather. The key is ensuring you have the information surrounding normal behavior on the farm through sales and what was affected by the severe weather.

Agata Kaczmarek has held a passion for writing since early childhood. A professional writer for many years, Agata specializes in writing articles and blogs focused on finance as someone who holds a Masters Degree in Accounting and Finance.

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