Introduction to Record Keeping

Introduction to Record Keeping

• Without good record keeping, managing a successful business is difficult.
• Accurate records are essential for making sound business decisions.
• Records are a valuable asset for business managers.
• Good record keeping is necessary for complying with tax requirements.
• Records are also crucial for planning and management, including obtaining credit and participating in government programs.
• Records are needed to help determine what to produce.

Kinds of Records

• Chart of Accounts: A set of records providing details for financial statements to analyze farm business health and profitability.
  • Includes income and expense ledgers, inventory of current assets, machinery depreciation, loan amortization, and land accounts.
• Net Worth Statement: A snapshot of a business's financial condition at a specific moment. Shows assets, asset values, and liabilities. Also known as a balance sheet or statement of financial position.
• Income Statement: Reflects the profitability of a business over a period, typically a year. Also known as a profit and loss statement or operating statement.

Useful Record Uses

• Assess farm/ranch business financial health
• Evaluate profitability
• Make business decisions
• Secure loans
• Analyze investment opportunities
• Prepare tax returns/manage taxes

Record System

• The Kendalls' (example business) initially used file folders for their records.
• They realized this system was cumbersome and not efficient for making timely business decisions.
• A better system is needed to provide current information on financial and production situations.
• Four-step process to set up a record system:
  • Select a suitable record-keeping system
  • Select appropriate accounting system
  • Determine the method to report income and expenses
  • Develop a procedure for retrieving needed information from records

Kinds of Records (cont'd)

• Financial records: Capture receipts, expenses, assets, and liabilities for financial statement creation.
• Physical records: Track production of crops and livestock, as well as input usage (crop yields, percentages of weaned livestock, etc.).

Levels of Record Keeping Systems

• Level 1 (Income Tax Purposes Only): Records are for income tax compliance only, including cash receipts, cash expenses, and depreciation.
• Level 2 (Income Tax Purposes + Business Analysis): Records for tax purposes plus business analysis, including complete inventory and labor/production records.
• Level 3 (Complete Farm/Ranch Analysis): Complete records for all tax and financial statements and detailed enterprise analysis.

Accounting Systems

• Accounting Period: Calendar year (January 1st to December 31st) is most common for farmers and ranchers. A fiscal year could be used if more appropriate.
• Cash vs. Accrual Accounting:
  • Cash method records transactions when cash changes hands (received or paid).
  • Accrual method records income and expenses when they are earned or incurred, respectively, regardless of when cash changes hands.
• Single vs. Double Entry Accounting:
  • Single entry: Records just one side of each transaction.
  • Double entry: Records both sides of each transaction to maintain a balance.

Financial Statements

• Net Worth Statement (Balance Sheet): Shows assets, liabilities, and equity (net worth) at a point in time.
• Income Statement: Summarizes revenue and expenses over a period, reflecting profitability. Essential for business analysis and decision-making.

Other Important Records

• Chart of Accounts: Categorizes accounts for financial record keeping.
• Cash Account: Records cash inflows and outflows.
• Accounts Receivable: Tracks amounts owed to the business.
• Accounts Payable: Records amounts owed by the business.