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Accrual accounting lets you see profit margin by crop year instead of tax year.

Bob Krogmeier, CPA

June 2, 2021

2 Min Read
corn soybean field
iStock/Getty Images

One of the biggest changes when starting your accrual accounting books is getting used to recording payables. We’ve discussed reconciling your bank account at this blog, and recording and releasing payables is an extension of that same process.

Recording payables is important for accrual books so that expenses are reflected when they are incurred. In practical terms, the expenses hit your books when you receive the invoice, not when you pay them.

Why does this matter? Having the expenses show up in the period they are incurred allows you to line up your expenses with your revenues so you can see your profit margin by crop year instead of tax year.

For an example, let’s say you have hog barn pumped to spread on your fields after your 2020 harvest. You hire it out to the local pumpers and they pump and spread your manure in early November and get you the invoice before Thanksgiving. You have your annual tax planning meeting in December and – before you go – you talk to the pumpers and they are okay with you waiting until January to pay.

When you have cash basis only books, your transaction looks like this:

Cash basis books compared to accrual basis books.

Here’s the interesting part

If you are a cash basis taxpayer – which most farmers are - the cash basis expense is in your 2021 tax deductions because of when you pay it. Most accounting software can make the adjustment to remove the expense from 2020 so it only comes up in your 2021 expenses for tax purposes. The trick is you need to make sure you apply the check to the accounts payable correctly; otherwise you’ll end up double counting the expenses.

If you’re not sure if your accounts payable is correct in your accounting software – or if you are interested in keeping accrual records – contact professional bookkeepers and tax preparers. It may cost a little more but you get the benefit of having accounting records that allow you to get the greatest benefit from your taxes and decision-making information.

The opinions of the author are not necessarily those of Farm Futures or Farm Progress. 

Read more about:

Taxes

About the Author(s)

Bob Krogmeier

CPA, CliftonLarsonAllen LLP

Bob Krogmeier is a CPA at CLA (CliftonLarsonAllen LLP) in Eastern Iowa. This blog – “By the Books” – is geared to the why and how of farm accounting transactions and the information they convey for farm management, taxation, and succession/transition planning.

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