Developing a Chart of Accounts

for the Farm or Ranch

EB 132
April 1995
 Developing a Chart of Accounts
for the Farm or Ranch
by Genice Garner and Duane Griffith*

When you make the decision to create
and use a record-keeping system for your
farm or ranch, the first step is to establish a
chart of accounts. A chart of accounts is a
list of expense, revenue, asset, liability and
equity account names. Each individual farm
or ranch has different asset and liability
configurations and different sources of
revenue and expenses. While there are
many similarities among agricultural
operations, each will need its own specific
chart of accounts. The chart of accounts
also establishes the level of detail tracked
in the record-keeping system and the extent
to which a fully implemented record-
keeping system is utilized.
Record-keeping activities can be
viewed as a continuum (Figure A). At one
end is the most elemental record-keeping
system, the shoe-box method, consisting of
keeping receipts and writing a memo on a
check to indicate the purpose of the expen-
diture. At the other end is a record-keeping
system that captures all management
information, including purely financial
information and data regarding physical
inventories and the production process.
As you begin to formalize your record-
keeping system, you should determine
where you presently are on the continuum
and where you would like to be. This will
enable you to set up a chart of accounts
which suits the level of information gather-
ing you wish to accomplish.
There are two basic reasons for keeping
records:
• to provide information for tax reporting,
and

Figure A: Record-Keeping Continuum • to provide information for management

purposes.
Keep Record only cash Use asset,
receipts transactions liability, income,
expense and Since most farm/ranch businesses will file
Memo on Separate into income/ EQUITY
checks expense and non- accounts tax returns, there are accounts common to
income/expense most operations. Tax-oriented records
categories
usually are limited to a checkbook register
where each cash transaction is recorded.
This generally suffices for tax reporting
purposes. This method, however, tracks
Capture all only a portion of information required for
Use asset and financial and
Track only cash good management records. If you want a
liability accounts physical
transactions
plus income and inventory good set of management records, you will
Record in expense ac- information of have to add details beyond those needed for
record book counts the operation tax records. A management-oriented
record-keeping system provides enough
information to generate an “accrual ad-
*Montana State University Department of Agricul- justed” income statement and both cost and
tural Economics and Economics, Bozeman, MT
59717
market value balance sheets.

Chart of Accounts - Page 1

 Although the term “accrual” may cause
prospective users to cringe, current com-
puterized record-keeping systems minimize
the effort required for management records.
The primary difference between the accrual
method and the cash method is the timing
of when income and expenses are recog-
nized and recorded in the record-keeping
system, and hence, on financial statements.
Whatever method you choose, cash-
based or accrual, the starting point is the
construction of a chart of accounts. This
publication illustrates the items that need to
be considered when setting up a chart of
accounts for either method. It also dis-
cusses differences in some of the accounts
used in various types of business organiza-
tions: sole proprietorships (individuals),
partnerships, corporations and subchapter S
corporations.
The Chart of Accounts
for Tax Purposes
If your primary purpose in record-
keeping is for tax reporting, the record-
keeping system used should produce
enough information to complete the basic
tax forms for the appropriate type of
business ownership. Figure B identifies and
describes typical tax forms for four basic
types of business ownership.
A sample chart of accounts is included
as Figure C. This chart of accounts lists the
items that provide the basis for a good set
of tax records and was developed using the
Figure B. Typical Tax Forms
INDIVIDUAL
Form 1040 General Return
Schedule A Itemized Deductions
Schedule F Profit or Loss From Farming
PARTNERSHIP
Form 1065 General Return
Schedule Profit & Loss
Schedule K Partners Share of Income
CORPORATION
Form 1120 or 1120A General Return
Schedule J Tax Computation
Schedule L Balance Sheet
Schedule M-1 Reconciliation
Schedule M-2 Retained Earnings Analysis
SUBCHAPTER S CORPORATION
Form 1120S General Return
Schedule A Cost of Goods Sold/
Operations
Schedule K Shareholder Analysis
Schedule L Balance Sheet
Schedule M-2 Adjustment Analysis
Chart of Accounts - Page 2
line items on typical tax forms for individu-
als. It also lists items that help provide a
more complete set of management records
(the additional accounts necessary for
management information have been itali-
cized and their headings are shaded).
Setting up a chart of accounts using the
appropriate tax forms as a guide will
provide:
• the basic tax information required, and
• a basic income and expense summary.
Taxable income, which most producers
compute on a cash basis, is often used as a
measure of business performance. Unfortu-
nately, this can be very misleading. A
business can be going broke and still
generate a positive cash basis income for
several years. This can happen when
accounts payable are allowed to grow
substantially because expenses are not paid,
or when depreciable capital assets are not
replaced in a timely manner. Keeping
accounting records solely on a cash basis is
not sufficient if good financial management
is a goal.
An annual cash flow statement gives an
indication of a business’ ability to cover its
cash flow requirements, its margins of
safety for debt service, and its ability to
finance new debt. The cash flow statement
alone does not provide the management
information necessary for complete finan-
cial analysis. For that you will also need an
accrual adjusted income statement, begin-
ning and ending balance sheets, and a
statement of owner’s equity.
The Chart of Accounts for
Management Purposes
With the addition of appropriate
accounts, a record-keeping system can
generate both an accurate income (profit
and loss) statement and an accurate balance
sheet (listing all assets and liabilities of the
business), in addition to providing accurate
tax and cash flow information. A chart of
accounts can also include details for
different enterprises within the farm or
ranch business, such as cow/calf and wheat
enterprises. Allocating transactions to
various enterprises allows for better man-
agement decision-making. Records orga-
nized by enterprise can be used to address
questions such as, “Was the spring wheat
 Figure C. Sample Chart of Accounts

Revenue Categories Expense Categories & Subcategories Asset/Liabilities

Business Revenue Business Expenses Personal Expense Assets

Agricultural Program Bad Debt Auto Expense Accounts Receivable
Payment Breeding Fees Breeding Herd
Bank Charges
CCC Loans Under Election Chemicals Buildings
Charitable Contribution
CCC Loans Forfeit-Repaid Conservation Expense Bulls
Childcare
Crop & Disaster Insurance Cost of Goods Sold Cash
Clothing
Custom Work Income Custom Hire Cooperative Stock
Dining Out
Dividend Income Depreciation Deferred Tax Asset
Dues
Hedging Income/Loss Feed Purchased Futures Margin
Education
Interest Income Fertilizers Inventory/Barley
Entertainment
Livestock & Other Resale Gas, Fuel & Oil Invent./Purchased Steers
Gifts
Long Term Capital Gain Diesel Inventory/Wheat
Groceries
Other Revenue & Gas Tax Gasoline Land
Household Expenses
Refunds Oil & Lube Insurance Money Market
Miscellaneous Income Hedging Interest Raised Hogs
Other Tax Related Income Insurance (not health) Investment Expenses Replacement Heifers
Quantity Increase/Raised Interest/Mortgage Medical Savings
Realized Gain/Loss Interest/Other Miscellaneous Swather
Sales/Barley Grain Investment Interest Mortgage Interest Tractor A
Sales/Raised Livestock Miscellaneous Recreation Tractor B
Sales/Purchased Livestock Dues Subscriptions Vehicles
Sales/Raised Hogs Payroll Supplies Accumulated Deprec.
Sales/Wheat Co. Medical Contribution Taxes Vehicles
Short Term Capital Gain Co. FICA Contribution Telephone Buildings
Total Cooperative Distribution Co. FUTA Contrib. Utilities Swather
Unrealized Gain/Loss Co. St. Unemployment Tractor A
Unrealized Market Gain/Loss Gross Wages Tractor B
Pension & Profit Sharing
Personal Revenue Liabilities
Rent & Lease Machinery
Dividend Income Rent & Lease Other Accounts Payable
Interest Income BLM Leases Accrued Interest
Investment Income Forest Service Leases
Capital Leases
Miscellaneous Income Private Leases Deferred Taxes
Off-Farm Wages Repairs Notes Payable
Baler
Mortgage Liability
Pickup Operating Lease
Swather Payroll Taxes Payable
Tractor A Unearned Revenue
Tractor B
Seeds & Plants Owner’s Equity
Storage & Warehouse Owner’s Equity
Supplies
Taxes Enterprises
Federal
Personal Property Wheat Hogs
Real Estate Winter Cattle
State Income Tax Spring Cow-Calf
Trucking & Freight Hay Replacement Heifers
Utilities Alfalfa Feeder Steers
Electricity Grass Dairy
Natural Gas
Veterinarian & Medical

Chart of Accounts - Page 3

 enterprise as profitable as the winter wheat
enterprise?” This level of detailed record-
keeping (enterprise records) requires more
effort in the day-to-day record-keeping
process. You would only keep enterprise
records if you feel comfortable with the
increased level of detailed record-keeping.
As an example, if you spend 15 minutes a
day recording transactions for your tax
records, expect to spend 20 to 30 minutes a
day on enterprise records.
When designing a chart of accounts, it
is important that the integrity of major
categories relating to tax reporting or line
items on financial statements be main-
tained. In other words, under the title of
“Miscellaneous,” there may be items such
as postage or office supplies, or under
“Rent & Lease” the sub-categories of BLM
permit payments, Forest Service permit
payments and private leases. These sub-
categories must be maintained as sub-
categories under the main headings to
facilitate tax and financial reporting (see
Figure C).
Moving from the General
to the Specific
Start your set-up of the chart of ac-
counts with general areas of expense and
revenue, such as “repairs” and “seed.”
These general categories are all that are
required for tax reporting and come directly
from the tax forms appropriate for your
type of business ownership. However, to
aid in determining profitability of selected
activities or enterprises within your busi-
ness, it is a good idea to divide each
general category into more specific sub-
categories. For example, under the general
category “Repairs,” you might have the
subcategories: Chevy Truck, Ford Truck,
J.D. Tractor, Toolbar, Swather, etc. Under
the general category of “Hired Labor,” you
might have FICA, State Withholding,
Federal Withholding and Medical Insurance
categories. In the case of hired labor, your
record-keeping system then helps track
information needed for state and federal
payroll tax obligations. The additional
detail under repairs is not required for tax
purposes; however, the additional detail for
hired labor is needed for tax reporting.
In addition to separating your expenses
and revenues into more specific categories
(i.e., Chevy repairs, winter wheat seed,
etc.), you may wish to divide expenses and
Chart of Accounts - Page 4
revenue according to the enterprises, or
segments, of your business to which the
expenses or revenues pertain. For example,
does income generated relate to your wheat
operation or cattle operation? If wheat, is it
spring wheat or winter wheat? Allocating
each income or expense item to an enter-
prise within the business will provide for
enterprise analyses at year end, helping to
determine which enterprises are profitable.
Examples of possible enterprises for the
farm/ranch are:
Wheat Dairy
Alfalfa Hogs
Oats Cow-Calf
Barley
Additional detail can be added to the
enterprises listed above. For example:
Wheat Hay
Winter Wheat Mixed grass hay
Spring Wheat Alfalfa hay
Beef
Cow-Calf
Fed Steers
Replacement Heifers
You might consider breaking down
these enterprises into even more specific
classifications. For example, instead of
simply using the enterprise “Winter
Wheat,” you could classify it as “Winter
Wheat/Field 5,” or “Winter Wheat/Dry-
land.” This allows you to track revenue and
expenses for each sub-classification sepa-
rately. A computerized record-keeping
system should allow you to easily add as
many levels of detail as you desire, and
whenever you wish. It should not force you
into an “all or nothing” record-keeping
mode. Remember, record-keeping is a
continuum and you can do more as you feel
comfortable with increased record-keeping
activity. Each additional level of detail
does require additional effort in the day-to-
day record-keeping process. For example,
to track repairs for tax purposes, you
simply have to keep track of total repairs. If
you keep enterprise records, each repair
expense must be allocated to the appropri-
ate enterprise(s). If the repair bill is for a
tractor that is used on the winter wheat,
barley, summer fallow and spring wheat
enterprises, you must split the repair bill
four ways. This requires four separate
expense items to be entered into your
records. Only one entry is needed for tax
reporting. Computerized record-keeping
systems can usually help by storing this
extra detail after the initial transaction and
allowing you to reuse it at a later date.
In addition to the revenues and ex-
penses for tax purposes, accounts should be
set up for each of your business’ assets and
liabilities if you want management informa-
tion. Typically, assets are recorded at their
purchase cost, and liabilities are recorded
at the amount owed. For long-lived assets,
you must keep accumulated depreciation
accounts to track yearly depreciation
expense, and to compute the book value
(cost + capital improvements minus depre-
ciation) of the assets. The asset and liability
accounts can provide information for the
preparation of balance sheets using either
cost or the current fair market values. It is
recommended that you do not try to track
both cost and fair market value in your
computerized record-keeping system unless
it is specifically designed to track both.
Tracking the cost basis of assets provides
the most information for measuring busi-
ness performance and it also is more
closely related to tax record-keeping
requirements.
Each move to a more specific revenue
or expense item provides more detail and
better management records, but it also
requires increased effort to record daily
activities in the record-keeping system.
Cash vs. Accrual Records
The distinction between cash and
accrual records is important. Cash records
recognize income and expense only when
cash or property is actually received or
paid. In contrast, accrual records recognize
income and expense when they are con-
structively incurred, and not when they are
actually received or paid. For example,
seed is purchased on account and used in
September, but not paid for until the
following February. Under cash basis
record-keeping, the expense is not recog-
nized until it is paid in February, affecting
the following year’s taxes and profit and
loss figures, assuming a calendar year is
used. Under the accrual method, the
expense is recognized and reduces profit
for the current year when it is incurred,
even though it is not paid until the follow-
ing year. To be helpful for both tax report-
ing and management purposes, your record-
keeping system should distinguish between
cash transactions and accrual transactions.
An appropriately-designed chart of ac-
counts, in conjunction with a good record-
keeping system, will allow for this type of
separation. Such a system will generate
cash-based tax information and accrual-
based management information, the best of
both worlds. The sample chart of accounts
(Figure C) lists the minimum additional
accounts necessary to move toward accrual
based management record-keeping. The
additional accounts are in italics in Figure C.
Expenditure vs. Expense
A distinction must also be drawn
between the terms “cash expenditure” and
“business expense.” A cash expenditure is a
cash outflow to cover a business or per-
sonal expense, or a purchase of a capital
item. The mere expenditure of cash may
not decrease the profit of a business. When
a piece of farm equipment is purchased,
cash is decreased, but there is no decrease
in profit because cash was merely ex-
changed for another asset. Additionally,
non-business expenditures may not be tax
deductible.
A business expense, unlike an expendi-
ture, may not involve actual cash outlay
(such as when repair expenses are put on
credit), but nevertheless decreases the
profit of a business. An expense may or
may not be tax deductible, depending on
whether cash is disbursed or not. It is
important to remember these distinctions
when setting up and using your record-
keeping system. Figure D shows a few
common examples of expense/expenditures
and the financial statements in which they
Figure D. Common Expenses and Where to List Them
Example Business Cash Financial Statement
Expense Expense Statement
Depreciation Yes No Profit & Loss, Balance Sheet
Principal payment No Yes Cash Flow, Balance Sheet
Owner draw* No Yes Cash Flow, Balance Sheet
Gift of fully-depreciated No No Balance Sheet
equipment
Interest Yes Yes Profit & Loss, Cash flow and
Balance Sheet
* In a sole proprietor form of business
Chart of Accounts - Page 5
Chart of Accounts - Page 1
 would be listed. The design and detail of
the chart of accounts will help track rel-
evant cash inflows and outflows (expendi-
tures), and will track those that are actually
tax-related. Whether an item is a business
expense or simply an expenditure will vary
by the type of business ownership.
Sample Chart of Accounts
The sample chart of accounts for a sole
proprietorship, Figure C, will require
modification to suit your particular busi-
ness; however, it provides a basis from
which to start. This example includes
business and personal accounts. Most are
self-explanatory; however, some may
require additional clarification.
An accrued liability occurs, for in-
stance, when a customer pays you for a
product in advance. Under accrual account-
ing the amount received should not be
included in income until the product is
delivered to the customer. If the product
has not been delivered at the time financial
statements are prepared or at year end, a
liability for the amount of pre-payment
should be noted on your books.
Prepaid expenses result when you pay
for a product or service in advance. A good
example of this is hazard insurance. If you
pay for coverage for a year in advance, you
would include a prepaid asset on your
books until all of the coverage is “used up.”
For example, consider that in November
you purchase a year’s worth of hazard
insurance. At year end, only one month of
the coverage has been used. Therefore, the
remaining eleven month’s worth of insur-
ance for which you have paid would be
considered an asset at December 31 and
must be so reflected in the balance sheet.
The accrual adjustments are made for
situations like this at year end when the
balance of the prepaid expense account is
changed to reflect the situation appropri-
ately. This allocates the expense correctly
and provides better financial management
information. However, it also increases the
effort required to keep accurate records.
This publication includes samples of
financial statements which show how the
different accounts in the chart of accounts
are organized for financial reporting. These
illustrate that there are some accounts
required in the financial statements which
are not shown on the tax forms (for a sole
proprietorship). For example, asset ac-
Chart of Accounts - Page 6
counts such as “Savings,” “Prepaid Insur-
ance,” or “Deferred Tax Asset,” or liability
accounts such as “Accounts Payable” or
“Accrued Interest” appear on the financial
statements but not in the tax forms. (See
Sample Financial Statements.) The sample
financial statements show only one of many
ways in which statements are prepared;
others may contain more or fewer indi-
vidual line items and may be organized
differently. However, if you wish to pre-
pare financial statements from your ac-
counting records, the easiest way is to
include all of the desired line items of the
financial statements in your chart of
accounts. If you need, for example, to track
BLM Rent Expense separately for financial
reporting, it should be kept under the
general category of “Rent & Lease Other”
for tax reporting.
Preparing Financial Statements
from The Chart of Accounts
As mentioned above, the basic tax
forms do not include all of the accounts, or
line items, required on a set of financial
statements. If only tax-related items are
included in a chart of accounts, the follow-
ing items must be tracked separately if you
wish to prepare financial statements: A list
of the operation’s assets, including their
purchase price, and a list of the operation’s
liabilities. (Refer to sample Financial
Statements at the end of this publication for
details.)
Modifications to Chart of Accounts
for Other Business Forms
If your business form is not a sole
proprietorship, but a partnership or corpo-
ration, a few additional accounts should be
included. The main differences arise in the
equity or capital accounts. Equity accounts
are those that keep track of the difference
between total assets and total liabilities,
the net worth of your business. In contrast
to the sole proprietorship type of business,
which typically has only one owner’s
equity account, corporations and partner-
ships generally have a more complex
capital structure and therefore, different
equity accounts. For example, if your ranch
is a corporation, you should add the capital
accounts “Capital Stock” and “Additional
Paid in Capital.” If your farm is a partner-
ship, you must keep capital accounts for
each partner.
Additionally, if the operation is a
corporation, balance sheets are required in
the tax forms; therefore, it is important to
include the assets and liabilities of a
corporation in the chart of accounts and to
track them accordingly, instead of just
tracking revenues and expenses.
The accountant who prepares your
taxes can help you fine-tune a chart of
accounts for your particular business. You
will need to modify the sample chart of
accounts given in this publication to
conform to your business needs. Remem-
ber, whether you wish to maintain records
solely for tax purposes or for tax and
management purposes, the chart of ac-
counts is your starting point for establishing
good financial records.

Summary
• Determine the type of records desired for
tax reporting only or tax and management
records.
• Develop a chart of accounts using tax
forms and financial statements as per
objectives specified in this publication.
• Move from the general to the specific by
adding detail to your chart of accounts.
Keep the major categories of revenue,
expense, assets, liabilities and equity
related to line items on either the tax forms
and/or on the financial statements.
• Check that your finished chart of accounts
will produce the information your tax
accountant requires to complete your
taxes.

Chart of Accounts - Page 7

The programs of the Montana State University Extension Service are available to all people regardless of race, creed,
color, sex, disability or national origin. Issued in furtherance of cooperative extension work in agriculture and home
economics, acts of May 8 and June 30, 1914, in cooperation with the U.S. Department of Agriculture, Andrea Pagenkopf,
Vice Provost and Director, Extension Service, Montana State University, Bozeman, MT 59717