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Ohio Ag Manager

Apr
26
2012

Farm Accounting Systems: Ledger vs. Computerized

By: Bruce Clevenger, Assistant Professor & Extension Educator

Farm financial records are necessary for accurate, end-of-year tax reporting.  While tax reporting is a necessity, farm financial records should do more for the farm manager.  A record system needs to be designed to meet the needs of the farm manager and every effort should be made to keep it simple, yet complete enough to include details needed for analysis and tax purposes. 

Before selecting a farm accounting system, farm managers should ask, “what do I need to know about the farm business to make good economic decisions?”  If realistic trigger market prices are difficult to select, maybe a cost of production per unit report is needed.  If cash is short at times when bills are due, maybe a cash flow analysis is needed.  If the income is realized months or a year after the expenses are incurred, maybe an accrual income statement or enterprise analysis is needed.  Changes in inventories of crop and livestock, depreciation and capital gains or losses may comprise a significant part of annual earnings.  These must be accounted for to gain a true picture of the financial status and growth.

Paper ledgers serve as the standard for many farm operations to track financial records.  Ledgers are published by universities and some financial institutions to help farm managers track income and expenses by month on sheets that are manually totaled and subtotaled by category (Schedule F line).  The ledger still is an acceptable system and with year-end calculations, many of the financial management questions can be answered about the farm business with a paper ledger system.

A computerized farm accounting systems does not, or should not, promise a time savings for data entry right away.  In fact, during the adoption of a computerized farm accounting system, farm managers will need to spend the necessary time to organize the computerized system to best mirror the way the farm operates.  This means, having a place to record the kinds of income and expenses seen on the farm.  No different than finding a row or column in a ledger that best describes the transaction.  Computerized systems will more likely have a time savings when the farm manager needs to summarize and analyze transactions.

In general, the more specific questions the farm manager wants to answer, the more detailed the data entry must be, regardless if the farm account system is a paper ledger or a computerized system.   Greater value can be placed on a farm accounting system that can track income and expenses from one tax-reporting year to the next, because in reality, it happens on the farm.  An example: the 2011 crop was sold in 2012 but had pre-paid/fall applied expenses in 2010.  The “across tax-reporting year” is referred to as accrual accounting.  Accrual records track the income and expenses of the production unit produced regardless of the year the transactions occurred.   A short fall of the calendar year basis tax return is it only summarizes the income and expenses that occurred during calendar year rather than tracking expenses that belong to the actual income generated by those expenses.  It is not recommended to make production economic decisions about the farm operation based on the annual tax return other than income tax management.

Some farm managers have an emotional gauge or their “gut” to analyze income and expenses.  However, a farm accounting system will be more accurate for continual analysis and communicating the performance of the farm with others involved with the business.   At a minimum, two types of records are needed. One record is needed for financial transactions to summarize and analyze the year’s business.   A second record of the farm inventories and depreciation is needed year-over-year to account for changes of “on-hand” assets.  Additionally, it is recommended for farm managers complete an annual balance sheet and an accrual income statement.   Keeping, analyzing and using good farm records will yield high returns for the time spent.  A few minutes spent on the records each day will insure completeness and accuracy and will minimize the job at the end of the year.

Contact your local OSU Extension office for farm accounting books.  Contact Bruce Clevenger (clevenger.10@osu.edu) for OSU Extension Computerized Farm Recordkeeping Workshops and Resources with Quicken.

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Keith L. Smith, Ph.D., Associate Vice President for Agricultural Administration and Director, Ohio State University Extension TDD No. 800-589-8292 ( Ohio only) or 614-292-1868