Dl'2-Lancaster Farming Saturday, June 27,1987
The Whys And Hows Of Setting
Up A Good Farm Record System
BY VIRGIL E. CROWLEY
Professor of Farm Management
Since many of _
you have recently /
gone through the | ft
process of filing *Sf
your income tax W
returns it pro- i
bably isn’t nec
essary to remind
you how impor
tant records are.
This is especially true if you have
just discovered that your record
system is not as complete as you
thought it was.
While everyone recognizes how
important records are at tax time,
too many people keep only the
records that are required for filing
a tax return. Unfortunately many
people still believe that the only
use of farm records is for tax
purposes. Of course that isn’t the
case, there are many other uses for
farm records.
If your farm record system isn’t
meeting your needs or if you are
keeping your records in a shoe box
it isn’t too late to set up a good
farm record system and really
keep track of what happens on the
farm in 1987. While I have been
using the term farm records I
should point out that I am using
that term to refer to both the
financial and production aspects of
the farm business. A more ac
curate description would be to call
it a farm account and record
system.
If you are just setting up a record
system or are planning to improve
on the one you now have, your first
step is to select the accounting
method you want to use. There are
two principal accounting methods
in use and they are the cash and
the accrual method. There are
major differences between the two
methods.
The cash method does not
require the use of inventories and
entries are made in the cash
receipts and cash expense sections
of the record book only when cash
is actually received or paid out.
The accrual system requires
beginning and ending inventories
and a purchase or sale is recorded
in the income or expense sections
of the record book at the time the
transaction takes place even if no
cash is received or paid out.
Many farmers use what is called
a combination method, that is they
use the cash method of accounting,
but they also use inventories and
keep a credit account. This per
mits them to determine net farm
income with the same accuracy as
with the accrual method and to use
the cash method for tax filing.
Regardless of which accounting
method you Select your second step
is to decide if you are going to do
your own recordkeeping or hire a
professional recordkeeping ser
vice. Many farmers would find it to
be a worthwhile investment to hire
;he services of a professional. If
you hire a professional record
keeping service they will supply
the account book. If you keep your
own records you will have to obtain
a record book. A good place to
obtain one is your local county
Cooperative Extension Service
office. Other possible sources of
account books would be your farm
supply dealer or your bank.
The foundation of any good
record system is the inventory.
Once you have selected an account
book the next step is to take a
complete inventory. Part of this
will have already been done and is
found in the depreciation schedule
listing those depreciable items of
machinery, equipment and
buildings you have. A complete
inventory not only includes all
depreciable items, it must also
include the farmland and the
operator’s home (for sole
proprietorships). Since a complete
inventory includes all assets of the
farm business it also includes all
feeds on hand and all farm sup
plies, plus any grain and/or
forages being held for sale.
Accurately accounting for the
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amounts of feed on hand when
inventory is taken is one of the
problems encountered. For
example, how many bushels of ear
com are in the cribs, how many
tons of silage and haylage are in
the silos? How many tons of hay
are in the stored bales, etc., in
addition to determining the
quantities of feed and supplies on
hand?
Taking an inventory is not an
easy task, and it is especially
difficult the first time you dq. it.
There are three basic problems
associated with the inventory, and
these problems may help explain
why a limited number of farmers
take a complete inventory an
nually.
The first problem is that taking
inventory is time consuming and
demands careful attention to detail
to insure accuracy.
The second problem is deter
mining the actual physical
quantities of grain, hay silage and
farm supplies on hand. Silage
and/or haylage amounts stored in
silos must be estimated as does the
grain in bins and the ear com in
cribs. Often the amounts of some of
the purchased farm supplies must
also be estimated. For example,
how many gallons of herbicide
remain in the 50-gallon barrel that
has been partially used.
A third problem is placing values
on the items in the inventory. This
is most difficult for some of the
major items in the inventory such
as land and raised livestock. Also
how do you deal with the prices of
grain and hay in the beginning and
ending inventories. This is a
critical question when change in
inventory is used to calculate net
farm income as with the accrual
accounting method; or the com
bination cash and accrual method.
This is because the change in
beginning and ending inventories
is calculated on the basis of dollar
values for nondepreciable items
such as feeder livestock, raised
dairy livestock, raised feeds and
purchased farm supplies.
For example, suppose on Jan. 1,
1986 a farmer had 10,000 bushels of
shelled com in inventory which
had a market value at the farm of
|2.65 per bushel, an inventory
value of $26,500. Now that same
farmer has 10,000 bushels of
shelled com in inventory on Dec.
31,1986 only now the market value
is $1.35 per bushel and the in
ventory value is $13,500. If there
were no other changes in inventory
values this farmer has lost $13,000
in inventory.
To further complicate the
question of evaluating inventory
suppose this same farmer has 100
raised dairy cows that are valued
at $l,OOO per head on Jan. 1, 1986
and that on Dec. 31,1986 those cows
are worth $l,lOO per head. Does the
farmer reflect this $lO,OOO increase
in value as income or are values
for the dairy cows kept constant.
Also what about land values which
also may change from the
beginning of the year to the end.
A convincing argument could be
made for adjusting the values of
the cows and the land to market
values for both the beginning and
the end of the year. However
valuing dairy cows and land is
quite different from valuing corn
which has an established market
where prices are given daily,
based on established standard
measures of grain quality. The
values of the dairy cows and land
are usually estimated values
which are not actually established
until the cows and/or the land are
actually sold. In the final analysis
the value of land and cattle is
determined by the price that a
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CRAFT-BILT
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