No matter what kind of entity you use to operate your farm, someone has to account for all of your annual farm transactions.

Every grain sale, seed purchase, equipment sale, fertilizer application, and utility bill must be tracked, at least according to the IRS. You are growing crops, buying equipment, paying taxes, and hoping to have some money left over after everyone else has been paid, but you won’t know if there is any left over without a good accounting system.

By now you have had discussions with your CPA, attorney, or family friend about a legal entity with which to operate. You may have created an LLC, partnership, corporation, or something else to hold title to your land and carry on farming operations. If you haven’t set up a legal entity, that’s fine; you are a sole-proprietor-farmer.

Whichever way you choose to operate, the farming operation should maintain a separate bank account. Why? To keep from comingling your personal transactions with your farm transactions.

If you have a legal entity, this step is important to maintain the liability protection that your entity offers. Even if you don’t, if you ever get audited, you don’t want the IRS sifting through your personal cable bills, underwear purchases, and vacation expenditures when they really just want to see the farming revenue and expenses.

Each year at our firm we see a spectrum of profit-and-loss statements and balance sheets when we go about preparing tax returns. Some clients bring in flawless reconciled financial statements and others have questionable numbers written on the back of an envelope. If you ever get audited, you don’t want to present the IRS with the back of an envelope. So how do you produce farm financial statements that will stand up to scrutiny?

Maintain a comprehensive check register or transaction detail. You can keep everything on the computer, or maintain the old-fashioned paper check register as a backup to the computer. (I do). If you have deposits going into the bank account that aren’t revenue, such as loan proceeds, make sure those are clearly documented. If you have payments coming out of the account that aren’t expenses, like profit distributions to yourself, specify that in your check register.

Purchase a simple accounting program, such as Quickbooks, EasyFarm, or FarmBiz.  It’s important that you or your bookkeeper fully understand the software. (Tip: Virtually any accountant in your county can help you with Quickbooks.) Record all transactions in the software that go in or out of the farm bank account. There must be proper accounts (categories) set up in the program to post transactions to, such as livestock sales, grain sales, feed, seed, fertilizer, gas, etc. If the accounts are established correctly, your software can spit out a slick P&L in a few seconds. When I say established correctly, I mean that revenue-type accounts are marked as revenue, and expense-type accounts are marked as expenses.

Reconcile the bank account every month. Preferably this will be done by the end of the following month in order to catch unrecorded transactions and anomalies quickly. Bank errors do occasionally happen, along with unexpected charges, and even cyber criminals sucking money out of your account unexpectedly.

Save bank statements and receipts. Having a solid P&L is good, but backing up those numbers with invoices and receipts is critical if those numbers ever get challenged.  We recommend keeping at least four years of support on hand.

Maintain a proper balance sheet. The P&L tracks your revenue and expenses, but there is more to the story. The balance sheet reports your cash balances, land and equipment costs, accumulated depreciation, and debts owed. In order to account for all farms transactions, these balance sheet-type accounts must be established and then updated monthly. Equipment is purchased or sold, debts are paid down, and allowable depreciation is recorded.

By :Shawn Williamson, Certified Public Accountant (CPA) MBA in Missouri and Illinois