Establishing and Using a Farm ... - agecon.okstate.edu

1 1 Why keep records?Records are important for many reasons:Proof: The IRS can ask forproof ofincome, expense andinventory items re-ported on tax : Farmmanagers use records toconstruct balance sheets, cash flow andincome statements, and other financial aidsfor making more informed decisions in suchareas as machinery purchases, adding ordeleting enterprises, size expansion, UNIVERSITY OF TENNESSEEAGRICULTURAL EXTENSION SERVICEPB 1540or years farmers have been reporting financial information on a variety of forms for variousreasons. Effective management of a farming operation today requires that records be kept somanagers can make informed decisions affecting the profitability of their lending institutions require detailed business and personal information on everything afarmer owns, as well as the status of unpaid loans. They may also require production records and anestimate of expected sales and expenses for the next year.

2 Increasingly, regulations point toward thekeeping of chemical application records and soil and water conservation plans for environmental con-cerns. The Internal Revenue Service (IRS) requires farmers to report cash sales, expenses, depreciationand information on government program 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 thatare not based on accurate farm records may lead to less profit. The efficient management of a farmoperation requires sound record-keeping and record Delton C. Gerloff, Associate Professor, Agricultural EconomicsRobert W. Holland Jr., Assistant Area Specialist - farm ManagementEstablishing and Using aFarm FinancialRecord-Keeping SystemInstitutional Requirements: Some lendingagencies and governmental bodies requirefinancial and/or production records be main-tained over a number of years.

3 For example,the government farm program requirescertain production and acreage records bereported and maintained by the farm , planning for conservation compli-ance and other aspects of soil and watermanagement essentially become historicalrecords over Regulations: Increasingly, farm owners are being asked to keep recordsabout chemical use, livestock waste applica-2tions and irrigation water use on their this publication, both hand and comput-erized record-keeping methods are all record-keeping systems allow records tobe kept for all the reasons stated above. The farmowner or manager needs to decide on the systemwhich best fits his/her farm situation. Terms inbold print are defined further in the appendixsection of this or recordanalysis?Record-keeping refers to keeping, filing,categorizing and maintaining farm financial andproduction information. Record-keeping can beaccomplished through a variety of methods, froma basic hand record-keeping method to an elabo-rate computerized analysis refers to evaluating farmrecords.

4 The evaluation process allows a farmmanager to make informed decisions based onactual (or projected) farm performance. Obvi-ously, record analysis cannot take place withoutfirst keeping records. Therefore, Establishing andusing an effective farm record-keeping system foran ongoing farm operation aids in farm planning,informed decision-making and analysis of bothproduction and financial or financialrecords?On the farm , there are two distinct types ofrecords financial and production. Financialrecords relate primarily to money or the financialinteractions of the farm . Financial records justifyor prove farm income or expense sales, operating expenses, equipmentpurchases, accounts payable, accounts receivable,inventories, depreciation records, loan balancesand price information are all examples of records are items that relate toquantities of inputs and levels of production byenterprise and/or by resource type.

5 They consist ofcrop yields, plant populations, calves born,pounds of milk produced, weaning weights,death loss, production and financial records areimportant to the efficient management of today sfarm business. When such information is accu-rately maintained and categorized, it can be usedto produce useful decision-making and analyzing accurate produc-tion records are important and essential aspectsof farm management; however, this publicationwill only address financial records. Therefore, allreferences to records in the remainder of thispublication refer specifically to financial a record-keeping systemSelecting a record-keeping system shoulddepend on the expected use of the records. Thereis no best record keeping system for all situa-tions, but, at minimum, a farm records systemshould:- provide accurate and necessary information- fit into the farm organization or framework,- be available in a form to aid decision- makingThe person responsible for keeping therecords should develop a habit of regularly andaccurately posting transactions.

6 Making allfinancial transactions through a bank (checking)account can be useful. For an accuracy check,THE UNIVERSITY OF TENNESSEEAGRICULTURAL EXTENSION SERVICE3the monthly statement should be reconciled withthe checkbook and record-keeping double-entry accounting systemprovides the most detailed accounting of farmbusiness transactions. A significant amount oftime is usually needed to learn and implementsuch a system. The simpler cash accountingsystem, with inventory adjustments, will sufficefor most farm operations, and is an acceptedmethod of reporting income and expenses for the handand computer systemThe use of computers and computersoftware has expanded on farms in recent , a hand recording system is still usefulfor many farmers. When selecting a record-keeping system, both hand and computer sys-tems should be considered. Some characteristicsof each are as follows: Hand low initial out-of-pocket expense easy to implement time-consuming more opportunities to make mistakes limited in extent of analysis without extraordinary investment of time and effort Computer higher initial out-of-pocket expense may require significant amount of study fast accurate can be a powerful analysis toolIncomeExpenseDateDescriptionCalvesCu llCornFeedSuppliesFuelCows10/1 Sold 10 calves$4,000@ 500 lbs/hd10/1 Purchased feed$475(2 tons)10/3 Sold 2 cows$1,250@ 1050 lbs/hd10/6 Purchased$165 Supplies10/8 Purchased 1500$1,400gals of diesel10/11 Sold 2000$4,600bu of cornFigure 1.

7 Example of Whole- farm Record KeepingTHE UNIVERSITY OF TENNESSEEAGRICULTURAL EXTENSION SERVICE4 Figure 2. Example of Enterprise Record KeepingIncomeExpense Enterprises Cow/calf CornDateDescriptionCalvesCull CornFeedSupplies FuelIncome ExpenseIncomeExpenseCows10/1 Sold 10 calves$4,000$4,000@ 500 lbs/hd10/1 Purchased feed$475$475(2 tons)10/3 Sold 2 cows$1,250$1,250@ 1050 lbs/hd10/6 Purchased Supplies$165$125$4010/8 Purchased 1500$1,400$200$1,200gals of diesel10/11 Sold 2000 $4,600$4,600bu of cornA hand systemA large number of handsystems are available. One of thesimplest systems involves the re-cording by hand of all financialtransactions in a journal and sales activities arelisted by hand as they occur. Theentries show 1) the date, 2) the iteminvolved (quantity, size, etc.) and 3)cash involved in sale or ,figure 1por-trays awhole- farm record-keeping date and a short description ofeach transaction are listed first,followed by the dollar amount ofeach transaction under the appropri-ate income or expense category.

8 Thenumber of income and expensecategories depends on the amount ofspecificity desired by the 2 is similar to figure1, but adds an enterprise account-ing section. In addition to the in-come and expense categories, thetransaction is also listed in an enter-prise category. For example, the purchased supplies expense of$165 is first listed under the sup-plies category. But $125 of theexpense is listed under Cow/calf expenses, and $40 is listed under Corn expenses. Again the numberof enterprises used depends on theamount of detail desired by the learn how the farm busi-ness stands on a cash basis, incomeTHE UNIVERSITY OF TENNESSEEAGRICULTURAL EXTENSION SERVICE5and expense categories can be totaled weekly,monthly or during any time period desired. Thedifference in the two totals is the cash number of record-keeping manuals orrecord books can be obtained from private orgovernment lending agencies.

9 Regardless of thesystem selected, entries should be made addition, disciplining oneself to makeevery transaction through a bank checkingaccount will ease record-keeping reconciling bank statements with farmrecords insures record-keeping systemHistorically, many farm managers havefound keeping and analyzing financial records achallenge. However, a number of challengeshave been addressed through computerizedrecord-keeping systems. The advantages of usingsuch a system depend on the expectations of theaccounting system, the amount of time availableto keep records and theattitude towardinitial invest-ment acomputerizedrecord-keepingsystem maymake enteringincome andexpense items easier, itmay also take several daysto learn the computer is also a cost to purchase both the com-puter and the record-keeping a 1994 report, Pena, et. al., evaluatedsix computerized farm record-keeping range of prices among the six programs was$ to $ Each program had uniquefeatures, but all six performed the basic record-keeping a computerized record-keepingprogram should be done on the basis of featuresneeded.

10 Some programs will allow for enterpriseaccounting. Some programs will calculatepayroll reports for employees. Many will haveincome tax options, but may vary on the com-pleteness of the tax information supplied. Fewfinancial record-keeping programs allow forproduction records to be kept simultaneouslywith financial records. For example, in manyprograms, sales of grain or livestock can bereported in dollars only, with no accounting forbushels or computerized record-keeping systemwill not necessarily save time. Its real advantageis in record analysis. Once the information isposted in the computer software, reports andanalyses can be created, changed and systems quickly and accuratelysort and report a great deal of information. Theycan also provide monthly or annual summariesfor identifying strengths and weaknesses of a hand system can provide the detailedinformation required by the manager to makequality farm decisions, it may be the best , if a hand system does not give thedesired level of financial information, a comput-erized system should be farmrecordsOnce a farm record-keeping system hasbeen established, analyzing the records canbegin.