Page 12 - Account for Ag - 2019

1-4 Accounting for Agriculture CH 1]

Income Tax and Social Security
Any profitable agricultural business has to file and pay federal income taxes. In most states they are also
required to pay state income taxes. Along with income tax filings, the extension of social security coverage to
farmers, who are self employed, is another reason for keeping good records. All self-employed farmers with
sufficient income are now covered by Old Age and Survivors Insurance and must pay taxes accordingly.
Some people use a "suit case" or "shoe box" system of accounting. They simply toss receipts of sales and
purchases into one of these containers during the year and add them up in January to "see how they did." Or
they take the container to their "Tax Man" who will give them a "shoe box return" and charge them accordingly
for the service. This is sloppy and inaccurate. It lends itself to no useful knowledge during the year, and it
provides little data for analyzing the business or making decisions on changes to increase profits.
The conscientious owner of an agricultural business who does not keep records often will find that he
overestimates his income and also his tax liability. Without records, he must recall all transactions, from
memory, and is more likely to forget expense items than sales and income. Farm sales are often represented by
large and infrequent transactions so are easily recalled; but many expenses are small items that occur weekly,
or even daily, making them difficult to remember at the end of the year. Consequently, profits and taxes will be
overestimated.

Management Analysis and Business Decisions
As important as accurately reporting and filing tax information is, records for this purpose are not the most
important. The prime objective of accounting records are to provide control over the business and improve the
management of the business to increase profits. If the farm activity is to increase either for specialization or
diversification, a greater use of and better records are called for. The farmer who does not keep accounting
records for these purposes probably depends on the county agent or copies what his neighbors are doing. This
farmer is likely to be a year late and a year behind everything.
With sufficient detailed accounts, the farmer not only knows which enterprises are making or losing money,
but also which ones are returning the most on labor and capital. The agriculture supply and service company is
better able to control their inventory for stock items when their customers have demand calls. The farmer is able
to determine whether the business should move more into specialized production or add new activities to boost
the rate of return on capital. Practices that were best for raising corn or cattle last year may not be so next year.
Crop rotations and livestock combinations that returned the most over the last ten years may need to give way to
a new cropping and fertilization system in the next five years. Agricultural business success depends more than
ever before on "keeping ahead of the crowd." Good accounting records help show labor and capital returns for
various practices and enterprises and provide the basis for comparisons with new ones to be used.
Accounting records provide details of prior year's operations. They show which enterprise gave the greatest
return on capital and the amount of technical and economic efficiency attained in the various business
departments or enterprises. To illustrate, accounting records can show the tonnage yield per acre for tomatoes or
bushels of wheat; they can show the pounds of milk per cow or pounds of calf per cow; they can show the
average number of pigs weaned per sow or the number of eggs per hen. Even farther, showing the gain per
pound of feed, or the return per animal unit for $100 of feed cost. To the retail firm these same efficiencies can
be expressed as return per square foot of floor space or shelf space. Considering alternatives, the agri-
businessman can then decide whether to shift his land, labor, and capital to other enterprises or practices.
After being kept for a few years, the accounting records show the historical performance of the business.
They not only indicate progress made in enterprise performance, crop yields, marketing efficiency, and return
on investment but also show progress in capital accumulation, net equity, and overall efficiency in management.
New business directions can be determined effectively only if the owner has the input-output, yield, labor
requirements, feed outcome, and similar data to fit into alternative plans. In this sense, they provide a basis for
judging how the year's operation is functioning as compared with the original plan. This comparison allows
management to make modifications for control and decisions in the year ahead.

Other Uses For Records
Accounting records are essential for business arrangements such as crop-share or livestock-share leases.
They provide the basis for determining net income under both crop-share and labor-share agreements, where the
amount shared depends on the records kept. Records even prevent misunderstandings where joint decisions are
made and payments are shared on selected expenses. Records are important for credit and financing. Most

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