What is Accounting Basis?
The word “basis” is one of the most prevalent terms in agriculture. You can use it to talk about marketing, taxes, and accounting, and it means three completely different things.
Having conversations about “basis” with clients is one of the major reasons why this blog exists (other than Farm Futures being kind enough to post it, which I would like to start by thanking them greatly for this opportunity).
So today, we are going to focus on accounting basis.
Accounting basis is essentially your Rosetta Stone when working with your accountant, estate lawyer, loan officer, or whichever third-party needs the information. It defines the underlying logic of how the amounts in the year-end balance sheet and profit/loss statement were developed.
We generally see accounting used to determine three different things: compliance (tax filing, debt covenants), investment (profitability and net worth), and analysis (cost of production and compensation).
Focus on your method
Different accounting methods look at different aspects of your operation, so it is important to understand what method you are using and what is the focus of that method. In my line of work, there are essentially two types of accounting: cash and accrual. Accrual accounting is broken down even further because it looks at economic effects and enterprise analysis – so we generally see four different methods of accounting. I’m going to list out the methods below and get into them more in later postings – so this is a very high-level summary:
- Cash - Operational and Compliance
- Financial - Compliance and Benchmarking
- Managerial - Cost of production and Manager compensation
- Fair Market Value - Net worth and Retirement / Succession planning
The major take-away of this posting is that before you start posting checks and invoices into your accounting software, you want to make sure you know what you are actually measuring and make sure it aligns with your end goal. Call your accountant or CPA and ask if you’re not sure. They will probably appreciate the question so much they won’t even bill you (maybe, I don’t know).