ACCOUNTING & BOOKKEEPING FOR AGRICULTURE & FARMING
In many ways, a farm is like any other: goods and services are purchased; these are processed, consumed or resold; Income comes from the sale of goods and to a lesser extent from the sale of services.
However, some farm features are significantly different from most others. Many relate to how agricultural businesses can account for their transactions for income tax purposes.
In this article, we will discuss some of the unique features relevant to farm accounting.
Much of the following is devoted to accounting for farms to produce net income, useful for income tax reporting. On many farms, most of the bookkeeping is geared toward creating an accurate income tax number.
Set up accounts
As with any other business, an agricultural business’s accounts must reflect the underlying nature of the transactions it conducts. Thus, revenue accounts could distinguish between grain sales and separately account for wheat, oats, barley, etc., livestock sales, poultry, and all other product categories that the company produces and sells. Separate income accounts are required for state subsidy payments if the farm is eligible.
Similarly, expense accounts reflect the nature of the business inputs involved: fertilizers, fuel, casual labor, contracted services (eg, spraying, blending), etc.
However, the main distinguishing feature of farms in Canada is that farms and fisheries are the only operations that are allowed to use some form of cash accounting to report their income for income tax purposes.
Because cash accounts are generally easier to prepare than accrual accounts, a farming or fishing business that chooses to use cash accounting for income tax reporting often prepares its records on a cash basis from the principle, instead of establishing accrual accounting. Create and adjust invoices.
Cash Versus Accrual Accounting
The starting point is to understand how cash accounting and accrual accounting differ.
Cash accounting records income when cash is received and expenses when it is paid. Accrual accounting recognizes income when it is obtained and expenses when the corresponding liability is incurred. Cash accounts always distinguish between capital and operating expenses, so capital expenses are capitalized and amortized rather than deducted when incurred.
The main differences one would expect between the two, therefore, is that accrued accounts include accounts receivable, payable, prepaid expenses, and accrued (unearned) income; money accounts no.
Under Canada’s income tax law, most taxpayers are required to report their transactions for income tax purposes using accrual accounting, with a limited exception for taxpayers reporting business income from farming and fishing. , as stated above.
Despite being an arbitrary measure of income, cash accounting is very commonly used in the real world. The most common use is to capture daily transactions and simply summarize those transactions for a specific reporting period (month, fiscal quarter, or year). After entering and summarizing the cash transactions for the year, the accountant finds that it is relatively easy to quantify, record, and account for the adjustments necessary to convert cash accounts to full accrual accounting and from those accounts to the balance sheet to create the statement of results. and other financial reports.