The beginning of the year is busy for businesses in finalizing records and filing annual income taxes. Farm and ranch operations are no exception. Beyond the net income or loss showing on the farm’s Schedule F, analyzing the true picture of the operation’s net farm income, and earned net worth change for the year is important.
Preparing an income statement using accrual adjustments will tell us more about the operation’s profitability and performance beyond what income tax statements provide. The income statement tells the story of revenue, expenses, and depreciation between the beginning of year balance sheet and the end of the year balance sheet. Hence, an important use of an income statement is to relate true profitability from the beginning of the period to the end as we observe changes in the balance sheets.
Farm accounting is most often done on a cash basis. Making necessary accrual adjustments to the cash accounting figures at the end of a year, along with adjusting the annual depreciation expense used on the Schedule F for tax purposes to actual use or what some refer to as “management” depreciation, assists in calculating true net farm income, otherwise known as profit (or loss in some cases). The net farm income figure is key in the relationship between earned net worth changes on the balance sheet.
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