“The majority of farms still report their incomes and expenses on a cash basis via their annual income tax returns with the goal of avoiding or postponing income tax,” explains Dean Dyck, farm business management specialist at the Alberta Ag-Info Centre.
“Very few actually have an accurate accrual statement prepared to give them a true picture of profitability, and if their farm made a profit. The goal, after all, is to make a profit.”
“Accruing your income and expense statement also gives you the information so that you can drill down and really know your cost of production, reflect on those decisions you made during the last cropping season, to see if they generated a profit.”
He adds that with the right information, farmers can convert those cash statements to accrual, as it will give a true picture of income and expense for the farm and if it made a profit.
“This information is invaluable in developing your projected income statements and marketing plan for 2020. It will allow you to make better decisions into the future and fully understand your cost of production. You will have a better understanding of what your breakeven points are and when you can take a profit. This knowledge will direct your marketing plans, and your adoption of risk management tools to protect that profit. If you are currently operating as a corporation, the financial statements generated will include an accrued income statement.”
Items that will affect the calculations are year-end numbers for inventories of livestock, crops for sale, feed on hand, purchased supplies, accounts receivable, accounts payable and accrued interest.
“Now is the time to collect those numbers. Most farmers will have these numbers available either from the year-end statement that they provide to their banker or accountant or from their annual AgriStability returns. The only number that may not be readily available is the accrued interest at year-end, so that number can be requested or calculated at this time.”
He says that producers need to have the required numbers for the beginning of the year and end of the year for the accrual adjustments to be calculated properly for any given year.
“The 2019 year-end numbers become 2020 beginning year numbers. Ask your accountant or business advisor to assist you in accruing your cash statement.”
“Depreciation is the tricky one,” he notes. “Income tax returns may have capital cost allowance (CCA) numbers, but those can be quite different from the actual depreciation numbers that should be charged as a business expense.”
For the historical accrued net farm income numbers to be meaningful, he adds that depreciation amounts must reflect true depreciation of the assets used to generate an income.
“This may be close to 16% for your equipment line and 2 to 4% for your grain and machinery storage. If you are in an intensified livestock operation, depreciation on building and equipment could be higher.”
“The primary goal of any business is to generate a positive net income and make a profit. Profit is not a dirty word. Once you make a profit, the issue is how to invest it and protect it from being taxed.”
To learn how to accrue income and expense statements or for more information call the Alberta Ag-Info Centre at 310-FARM (3276).