How to Keep Good Records on the Farm

Financial recordkeeping on farms is often neglected. Amid all the other responsibilities that farmers face, balancing the checkbook is usually not high on the list of priorities. However, orderly recordkeeping now can save both you and your accountant time and reduce the costs of preparing your tax return. It also makes it easier to plan for potential future financial downturns and track your farm’s performance across time to determine what areas need improvement.

Think about the beginning of the year when you take the prior year’s financial information to your accountant to prepare your tax return. Your accountant will either:

1. call you multiple times to clarify an operating expense or to ask for more information on a cattle sale, or
2. not call you at all and assume that the trip to the hardware store for repairing that ancient fence was for personal supplies and not the deductible farm expense it was.

Both of these scenarios can lead to a higher tax bill and a bigger payday for your accountant because of all the extra footwork required to get your books in good order.

Having organized records is essential to making plans in good economic times and during an economic downturn. After all, no one knows your farm like you do, and keeping accurate records can help you to make more informed decisions in managing your livelihood by giving insight into the true financial situation of your farm.

What Does Good Recordkeeping Look Like?

Reliable recordkeeping is a way to reasonably estimate what impact a change in operations will have on the profitability of the entire farm. You should have the following information for each expense transaction (see Table 1):

• date
• check/reference number
• payee
• amount paid
• type of expense

Similarly, for income, you should have the following information (see Table 2):

• date
• reference number
• purchaser
• amount deposited
• type of income

Having the date, reference number, payee, and amount paid/deposited are each very important to identifying a specific transaction when looking back at records. Most importantly, however, is keeping track of the type of expense/income; this will ensure that you know the purpose of each transaction when reviewing your books. The more detailed information you have on each transaction, the better your decision-making will be and the easier your accountant will be able to determine your appropriate tax burden.

What Should You Bring to Your Accountant?

If you know what your accountant needs at the end of the year to prepare an accurate tax return, you will have most of what you need to figure out what it takes to operate your farm. Though you know the ins and outs of farming, tracking a farm’s performance from year to year can help you diagnose any potential trouble areas and give you insights into how to correct those issues. Having numbers to refer to might show you, for example, that you need to cut back on personal purchases from the business account. It might show how much more expensive feed has gotten and encourage you to think of alternative feeding sources. Or it could show you that you have used less fertilizer while still seeing high yields.

Here are some ways you can keep your records more organized that will also be helpful for your accountant.

1. Generally, it is a good idea to make personal purchases from a personal checking account rather than a farm or business bank account. Keeping business and personal expenses separate ensures that accountants—and you—do not over- or underestimate farm expenses.
   • If you must use the farm bank account for a personal expense, be sure to make note of it.
   • For a farm business operating under sole proprietorship or general partnership, the line between personal and business use might be unclear, but you still should keep track of all income and expenses.
   • A farm business under another type of business entity, such as a limited partnership, limited liability company (LLC), or corporation, must distinguish between personal and business use and use separate accounts for each.
2. If you are handwriting checks, be sure to write legibly and always write a note in the memo line describing what the purchase is for.
   • For example, if you are writing a check to a man who occasionally helps you with various tasks, you might write “contract labor” in the memo line. If he fixed your tractor, then writing “tractor repair” might be more appropriate. This will help both you and your accountant decide how to categorize checks for tax or management purposes.
3. When it comes to deposits, be sure to make note of who or where each deposit is from and what it is for.
   • If it is revenue from a sale, note the type of income.
   • Alternatively, if you are putting money into the farm account, note that the amount was not a sale of some kind.
4. Review bank statements each month.
   • Make note of where each deposit came from and what it was for.
   • Similarly, for each draft transaction, make sure you note the payee and any details of the purchase.
   • Checks should already include the payee and a description, but make sure they are legible on the bank statements. If not, make an additional note to clarify.
5. For any fixed assets that you are paying off, be sure to separate principal and interest payment figures. The last statement of the year, or a 1099 from the entity you are paying, usually has that information.
6. If you pay any contract laborer more than $600 within the tax year or you pay payroll taxes for any employee, make sure you have those social security numbers and addresses on hand for your accountant to file 1099 or W-2 forms.
   • In the case of a farm employee, be sure to consult your accountant for information on paying the proper payroll taxes.

Please note that this is not a comprehensive list of all that you or your accountant might need at the end of the year, but it is a good start to ensure you are keeping useful records. Ask your accountant if there are other items needed to complete your taxes.

Why Is Keeping These Records Important?

Providing a detailed description of each purchase and deposit allows you or your accountant to categorize it correctly. Your accountant is not as familiar as you are with your business, its needs, and its transactions; providing these details will allow them to accurately categorize your income and expenses. The categories are important because they determine how those numbers are presented in the financials (balance sheet, income statement, etc.) and how healthy your business appears in the financial ratios (return on assets, current ratio, etc.), which are calculated using the figures from the financial statements.

This type of information will be examined when you apply for loans, whether from a commercial bank, a farm credit system institution, or the USDA Farm Service Agency. Additionally, since farming is a cyclical business, maintaining past records can help you forecast cash inflows and outflows at different times of the year. For more information on financial statements and analysis, see the Farm Financial Analysis Series of publications:

• P3713 Balance Sheet
• P3710 Cash Flow Statement
• P3707 Income Statement
• P3712 Ratios to Measure Farm Financial Health
• P3709 Managing Farm Finances in Turbulent Times

If you do not know how your farm is doing, you cannot make informed decisions. Keeping records and keeping track of your performance is key to making decisions that will positively impact your farm business.

Table 3. Blank cash farm expenses.

Date	Check/Reference Number	Payee	Amount Paid	Notes	Type of Expense

Table 4. Blank cash farm income.

Date	Reference Number	Purchaser	Amount Deposited	Notes	Type of Income

Note: The PDF above includes fillable versions of Tables 3 and 4.

The information given here is for educational purposes only. References to commercial products, trade names, or suppliers are made with the understanding that no endorsement is implied and that no discrimination against other products or suppliers is intended.

Publication 4088 (POD-02-25)

By Kitty Charlton, Extension Associate, Brian Mills, PhD, Assistant Professor, and Kevin Kim, PhD, Assistant Professor, Agricultural Economics.