Cash accounting is the most basic accounting method and is the backbone for the accrual, managerial, and fair market value. Cash accounting – honestly – is just to make sure you know how much cash you have so you can make your payments. At the end of day, the money you earned minus the money you spent plus whatever you had when you woke up is what you have. It’s that simple. I consider cash basis an operating basis because you can’t operate if you don’t have cash – period.
To have good cash basis books, you need to be reconciling two major account types: cash and loans. If you don’t already, you should reconcile your bank statement, loan statements, and check register every month. If you don’t want to do it, work with a bookkeeper.
Agricultural accounting is some of the most technical of any industry because a farm operation can get to a pretty large size before it is required to use accrual accounting for tax filing. Even that is a misnomer because some accounts are required to use accrual accounting even if you’re a cash basis filer (payroll and livestock inventories but more on those in a later posting).
Using cash basis for taxes
Most farmers use the cash basis method for filing their taxes, which require you to have different categories of income and expenses so the Internal Revenue Service can compare your information with information that other people and businesses report (think of those 1099’s that you file every year to your contractors and landlords and probably receive a couple yourself). Since cash basis is used so heavily for tax purposes, we generally see cash accounting as a compliance method.
The major difference between your cash and tax basis (other than those weird accruals I mentioned) is depreciation and fixed assets. We will discuss depreciation more in-depth in a later posting but it is essentially the wear-and-tear on a purchase that should last more than one year. For tax purposes, this is where bonus depreciation and Section 179 come into play (again – more on those later).
Having good cash basis books makes tax time smoother, less costly to prepare your return, and allows better year-end planning so you can slide into that lower tax bracket.