Transcript Why keep records? -income tax reporting requirements

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