Finances can be a sensitive topic. However, tracking your finances is essential in all industries, including agriculture. When it comes to farming, there are a lot of expenses to take into consideration, whether you are a new farmer or have been in the industry for decades.
Shannon Dill, an agriculture and food systems educator for University of Maryland Extension, hosted a webinar to teach farmers how to set up a farm chart of accounts. Dill feels that having a chart of accounts is “the basic thing that you need to have when you’re starting to create a financial recordkeeping system.”
When it comes to applying for loans or grants, or even filling out your taxes each year, you need to have accurate financial records.
A chart of accounts is a systematic way to list all of your expenses and income in one place. You decide how you will categorize each expense/income, in order to use the data to make decisions on your farm. Dill explained, “You need to think about your farm business. How you receive money and how you spend money, and how you want to track that overtime” – while making sure you can add and retrieve data easily.
This type of financial record can assist you in reevaluating your budget each year, help you analyze your records throughout the year and ensure “consistency to be able to look back… and very quickly find the information that you need.”
Some software options to use include Quickbooks, which is the most popular option, as well as Excel.
The five main account types that Dill covered were assets, liabilities, owner’s equity, revenues and expenses. Assets are any resources or items that you own, such as cash, accounts receivable, inventory items, equipment and land. Liabilities would be any obligations that the farm owes, such as your mortgage.
Owner’s equity is the “interest in the farm,” such as any retained earnings or capital contributions.
Farm revenue would include any income from crop or livestock sales as well as any government payments being received. Expenses include the cost of seed, fertilizer, labor, equipment repairs, utilities, insurance and more. When tracking your farm expenses, make sure to not include any personal living expenses, inventory losses, personal losses, etc.
Dill provided a list of organization tips to keep in mind while designing your chart. Create a consistent naming or numbering system, group similar accounts together, customize your chart to your farm’s needs and consider what you need and want to know about your finances.
When finally implementing the chart of accounts, make sure to review your current financial records, categorize your expenses into the appropriate categories, choose the program you want to use, ensure all data are accurate and review and update the accounts regularly.
It’s important to keep in mind that “once you start making an effort for your financial recordkeeping system, all of a sudden you have a lot of information,” Dill said, “and it’s easy to get overwhelmed.”
Try not to overcomplicate your system, as an “overcomplicated chart of accounts means you may abandon your recordkeeping.” It takes a lot of work upfront to design the best system for your operation, “but once you have it, you can create a lot of really great reports from that and get information very, very quickly.”
The IRS document used to report farm income and expenses is Schedule F, and there are plenty of resources to help you fill out this form. USDA has some information at farmers.gov to help you work with tax information in general. Iowa State has an interactive link to learn more about Schedule F documents, which can be accessed at calt.iastate.edu.
Additionally, IRS.gov has great documents about filling out Schedule F forms and a tax guide explaining how federal tax laws apply to farming.
In conclusion, Dill explained, “A well-organized chart of accounts is really helpful in your financial management of the farm, and it really helps with accurate financial reporting.”
by Kelsi Devolve
