Thanks to GPS-based field mapping and harvest data, it's getting easier to use managerial accounting, says Paul Gorman, a farm management specialist who has taught farmers better record keeping at South Central College in North Mankato, Minnesota.
Gorman has long been an advocate of using accrual accounting along with the cash accounting nearly all farmers use for income tax reports.
Speaking at the annual meeting of the Farm Financial Standards Council in St. Louis, Missouri, Wednesday, Gorman said that most farmers have excellent cash accounting systems these days that often balance with their checkbooks to the penny.
But if you really want to know if your farm is financially sound, cash accounting is inadequate.
"I've always been troubled by the disconnect between the balance sheet and income statement in farm computer records," he said.
Gorman described how he teaches the difference between accrual accrual accounting and cash accounting.
For example, he shows how fertilizer, seed and other inputs bought this fall for the 2011 crop are treated by both systems. Under cash accounting, it's an expense a producer can claim for 2010 taxes. But under accrual, it's treated as an inventory asset, he said.
"We see things in the accrual that we will never see in cash," he said.
The accrual system can be used to generate a cost of production per bushel by individual field at harvest.
That takes a lot less time than it used to, he said, because transferring data from the computer card of a combine yield monitor saves key strokes.
When asked how much time accrual accounting might take, Gorman said, "If they have the self discipline to do monthly records monthly, I don't think this takes more than two hours a month," he said.
Later, Gorman said that allocating hedges and options to the right crop remains a challenge. Many of the farmers he works with rely on records from their brokers, who also may not know which crop the trade was made for. The farmers' accounts may show only deposits and withdrawals in a brokerage account, he said.