Wednesday, January 9, 2019

Financial Recordkeeping- An Important Life Skill!

Jesse Fulbright, MSU Liberty County Extension

Many, if not all of us, use some sort of recordkeeping in our lives.  That used to involve a checkbook register primarily.  While some still keep financial records that way, there are other, more efficient ways, especially if you are running a business, such as a farm corporation. 

In many cases people feel overwhelmed by record keeping because it takes time, a change in behavior and for some, the requirement to learn a new skill or software.  For many, when they need a new equipment part they may run to town and purchase it, put the receipt in their pocket or throw it on the dash of their truck.  Perhaps this is a stereotype or a broad, sweeping generalization.  However, the image can be painted fairly easily, no matter if we are talking a piece of equipment or a drink at the store.  Often, the receipt from a transaction is either destroyed in the laundry or blows out the window and never does get recorded.  The result is inaccurate records. 
Good record keeping requires the discipline to record each and every transaction that occurs for your business regardless of how great or small.  Without having basic knowledge of our income and expenses how can someone make an informed decision about their business?  Proper accounting can assist many farms and businesses in knowing the value of their business. 

According to a Michigan State University Extension publication there are two basic forms of accounting that are considered standard: accrual accounting and cash accounting.
Accrual accounting is used by most businesses outside of production agriculture.  It necessitates recording all transactions when they take place regardless of whether or not cash has actually been exchanged.  For example, if producer A has done some custom work for neighboring producer B, producer A sends producer B an invoice for the custom work.  Although producer A has not yet been paid, the transaction is recorded in the accounting as an Account Receivable and Producer B would record the transaction as an Account Payable.  This system makes it very easy to track all services rendered (income and expenses) thereby allowing a producer to see exactly what has occurred within a year’s period of time.

Cash accounting, which is accepted for use within production agriculture and only a few other industries, means recording transactions only when cash is either received or paid out.  In the previous example no record would be entered because no cash transaction has occurred.  Once producer B finally pays producer A, a transaction would be recorded.  When using the cash accounting system accrual adjustments have to be made in order to provide the necessary information to create financial ratios that can help determine the strength of the farm or business.  Cash accounting is the most used and widely accepted method of accounting for production agriculture.

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