1. Farm & Ranch Business Management
Chapter #2
Record Keeping

2. Why keep records? income tax reporting requirements
assist in planning and management
obtaining credit

3. 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

4. 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

5. 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

6. 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

7. 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.

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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)

15. What is an Inventory?
list of all assets and values

16. 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

17. 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

18. What items are inventoried?
hedging contracts
crop and livestock supplies
capital assets
breeding livestock
machinery & equipment
buildings & land
accounts receivable & payable
liabilities

19. Guidelines for making inventories
measure quantities in commonly used units (bushels, tons, cwt., pounds)
group like items (cows, bulls, replacement heifers, calves)

20. 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)

21. How do you place a value on inventory items?
Farm Production Costs: actual amount invested in crop
Actual Amount: value of liability owed

22. 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

23. 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

24. Hired Labor Records
social security and unemployment taxes may need to be paid by employer