3 Key Differences to Remember When Comparing Traditional to Agribusiness Accounting | Agriculture is one of the most important industries in America, but it’s one that often goes undiscussed. The agricultural industry produces most of the food available to American families, and it operates a little differently than most industries. The good news is, the agricultural industry’s use of cash reporting means that ag accounting is actually more straightforward than typical business accounting.
Entrepreneurs and business professionals switching over to agriculture from diverse fields often find themselves blindsided by the differences between agribusiness and traditional business accounting. Those who are new to the field can read on to find out what they should know.
- Cash vs. Accrual
The best thing about agribusiness accounting is that it uses cash-based recording. Agribusiness owners record income when cash is received and expenses when they write checks. This clear-cut process is much less confusing than creating profit and loss statements for businesses in other industries, but it requires some specialized skills.
Typical business accountants follow the industry’s Generally Accepted Accounting Principles (GAAP). One of the key values of the GAAP is known as the matching principle. Accrual accounting records revenue as it is earned and expenses during the same period, regardless of when they are incurred. The actual, real-world timing of the expenditure or cash collection doesn’t matter.
- Differences in Valuation
Items are valued on balance sheets differently depending on the industry. More specifically, agribusiness companies record assets using market values, while other businesses value items at cost. Let’s take a look at an example to clarify the implications of this key difference.
Say a farmer purchases land for $100,000, and its value rises to $500,000 over the course of several years. Ag accountants will record the value of the land as $500,000 since that’s how much it’s worth in the present day. If a typical business owner purchases $100,000 worth of assets, they’ll always be valued at their historical cost, regardless of how much they are worth in the present day.
- Key Terminology
Ag accountants use different terminology to describe similar transactions. The most obvious example relates to the discussion of cash income and expenses vs. accrual. While typical accountants use the terms “debit” and “credit” in their bookkeeping, ag accountants use the comparable terms “increase” and “decrease.” This discrepancy in terminology may seem minor, but it points to the larger underlying differences between cash and accrual accounting.
It makes sense for traditional business accountants to think about bookkeeping in terms of debits and credits. Their focus is the true profitability of the client’s business, not how much cash flows through it each year. The good news is, thinking about bookkeeping in terms of increases and decreases in cash flow can help to keep ag accounting more accessible and easier for farmers or agribusiness owners to understand.
The Importance of Hiring a Specialist
The bottom line when it comes to ag accounting vs traditional business accounting is that farmers and agribusiness owners need to work with a specialist who is familiar with industry bookkeeping standards. Ag accountants can help with everything from bookkeeping to asset management, estate or succession planning, inventory management, and more, so don’t assume they’re only worth the money when tax season rolls around. Get in touch with an industry professional to schedule a consultation as soon as possible to get the farm’s finances on track.