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Accrual Farm Accounting
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Flagship
Posted 1/18/2011 17:28 (#1556941 - in reply to #1556789)
Subject: RE: Accrual Farm Accounting


Disclaimer:  My company markets QuickBooks add-ons for agriculture, so I have a vested interest in this topic....but that also gives me a strong opinion about it!

There really are two options relative to your question:  full accrual accounting, and making accrual adjustments to cash-basis accounting records.

Full accrual accounting.

Reading between the lines, I can see some anxiety about jumping into accrual accounting with both feet. You're not alone. Most people want to just keep records in the way they already understand rather than spending a lot time re-learning how to do things they already, basically, know how to do. But having accrual reports at year's is very desirable; in fact, it's the only rational way to evaluate profits from one period or year to the next. So is it worth the time & effort?

Accrual accounting basically just means matching expense with the income it is related to. If you plant winter wheat in the fall and pay for seed & fertilizer in November, then file cash-basis income taxes at year's end, you'll deduct the seed & fertilizer as expenses. But with accrual accounting, you'd record the seed & fertilizer as inventories, and they wouldn't be converted to expense until the following year--the year the wheat is harvested.

When I say "full" (or perpetual) accrual accounting, I mean doing accrual accounting throughout the year. The litmus test for whether you're really doing full accrual accounting, I suppose, is whether you can print out an accurate accrual-based Balance Sheet and Profit and Loss statement at any point in time, or after making just a handful of inventory adjustment entries. If you can't, you're not doing full accrual accounting.

Without going into all the details, I'll say that most people who already are the "keeper of the books" can learn the necessary techniques to do full accrual accounting; the day-to-day stuff isn't all that hard. What is hard are these:  (1) when you run into an accounting situation that's outside of your understanding/experience, and (2) when you run into one of QuickBooks' limitations with respect to doing accrual accounting in agriculture.

When item (1) happens--and it will, especially as you're learning--you need someone you can call to help straighten you out on what to do or how to make the appropriate accounting entries. Or, you have to be good as using Google & Web forums to find answers.

But item (2) is the clincher that makes it more difficult to do full accrual accounting with QuickBooks. To do full accrual accounting effectively, you need (QuickBooks needs) a good inventory system. But QuickBooks doesn't have one, at least not for the manufacturing-type inventories which is essentially what agricultural inventories are. QuickBooks' inventory system is pretty much crippled/lame; it works "OK" for buy-wholesale/sell-retail businesses, but not for any business that makes or grows things. (Yes, manufacturing inventory add-ons are available, but I've yet to see one that is ag-friendly or fully appropriate for the unique inventory management needs of a farm or ranch.)
 
QuickBooks has other minor limitations too. For instance, if you're really doing full accrual accounting in QuickBooks, you'll have a dickens of a time getting a correct cash-basis income tax report without knowing a lot about accounting. And there aren't many farmers who are ready to notify the IRS that they've decided to file income taxes on an accrual basis.

But I will say this:  if QuickBooks had an appropriate inventory system, a lot more farmers and ranchers would be using it for full accrual accounting right now / already / and for the past 10 years, because most other parts of QuickBooks are about as easy as accounting gets relative to the sophistication QuickBooks offers.

So how do you work around the inventory system? The short answer is:  you can use QuickBooks the same way you could use any other double-entry accounting system; namely, you can make inventory adjustment entries on your own. That's what some people do--they make their adjusting entries to correct inventories for Balance Sheet purposes, for example. But that requires a lot of accounting knowledge/comfort, and even if you have that, it's still all very messy and error prone (unless you're one of those rare people whose eyes don't glaze over from looking at too many lines of numbers on a screen, too late into the eventing...).

The short answer isn't the only one, though. Depending on the types of enterprises that comprise your operation, you may have a few easier alternatives. For example, it's easier to do some kinds of workarounds for grain inventories than for most livestock inventories. But the mere fact that those workarounds are too messy to discuss much here, implies they're not completely effortless, either.

So are accrual adjustments the answer, then?

Of course there is no "the" answer, only different choices.

My opinion is that most people in agriculture are most comfortable with using QuickBooks to keep either cash or "partly accrual" books (for example, we use QuickBooks' Enter Bills approach for managing payables, but do everything else on pretty much a cash basis), and to be efficient & timely, that's how they should continue keeping records with QuickBooks. Then at year's end or whenever accrual statements are needed, they should adjust those cash-based records to an accrual basis outside of QuickBooks (i.e., not by making a bunch of accounting adjusting entries in QuickBooks). 

Mostly this involves taking a physical inventory count and value (bushels/head/pounds on hand) at the beginning and end of the year, and using that to adjust the cash records. This "moves" expenses into the accounting period where they're matched with the income they helped produce.

The adjustments are pretty simple.  Here's a good Texas A&M article on the difference between cash & accrual accounting *and* on how to adjust cash records to an accrual basis: http://trmep.tamu.edu/cg/factsheets/rm5-16.html .

And you can probably find some spreadsheets around the Web that will help you make these adjustments by giving you a form for plugging your numbers into and doing the math. (Sorry, not links for you--I haven't looked for any of these lately.)

I so firmly believe this is the "right" (most comfortable & least grief) way for most farmers & ranchers to use QuickBooks, that this is the direction in which we're taking our company's QuickBooks add-on software products. To be clear:  no, we do not yet have anything available for that, though we will support the ability to allocate across QuickBooks Classes (cost centers & profit centers) before year's end. Together, (a) inventory adjustments, and (b) allocation between cost and profit center Classes, are the two critical pieces necessary for producing accrual-based Profit and Loss statements for individual enterprises within the business.

Mark Wilsdorf
Flagship Technologies, Inc.
QuickBooks™ Add-Ons and Solutions You Can Use
http://www.goflagship.com



Edited by Flagship 1/18/2011 17:34
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