Farm Accounting Types
Which one works for your business?
The questions most farm managers ask are, what is the right accounting type for the farm? Management, Financial, or Tax Accounting? Which type will enhance decision making and improve efficiency?
With the ever-changing marketplace, together with the unpredictability of world trends and climate, farmers today must do more than just break the soil to remain in business. They must also research, innovate, and implement sound financial management.
Accounting provides farmers with essential information to make sound economic decisions. It helps you to manage farm finances better to ensure profitability. The three main types of accounting include Management, Financial, and Tax Accounting.
Management accounting is also known as managerial accounting or cost accounting. It is a method that identifies, interprets, analyses, and communicates financial and non-financial information. It provides charts, tables, forecasts, and other various analyses as may be required.
Accounting standards do not dictate the techniques used in Management Accounting. Therefore, there are many tools, techniques, and methods that you can use to meet your needs. These include:
- Product costing and inventory valuation: This involves identifying and analysing actual costs associated with a farm’s product inventory.
- Cash Flow Analysis: This determines the cash impact of business decisions. You can use this analysis to optimize cash flow to ensure you have enough liquid assets to cover short-term obligations.
- Constraint analysis: Involves analysing production lines to identify significant bottlenecks, the inefficiencies caused by these bottlenecks, and their impact on the farm’s ability to generate revenues and profits.
- Margin Analysis: It involves determining the breakeven point, highlighting the farm’s products’ optimal sales mix. It is mainly concerned with the incremental benefits of increased production.
- Budgeting, Trend Analysis, and Forecasting: This involves identifying patterns and trends of product costs and recognising unusual variances from the forecast values and the reasons for the same.
Management accounting informs planning, controlling, organising, and co-ordination.
Financial accounting is the practice of recording, summarising, and reporting business transactions through financial statements. It is usually for the benefit of various stakeholders of the business, including investors and lenders. The four basic financial statements are:
- The income statements: It presents the farm’s net income for a certain period, total revenue less its total expenses.
- The balance sheet: shows the farm’s assets and liabilities, i.e., what the business owns, vs. what it owes as at a particular date, along with stakeholders’ equity.
- The cash flow statement: details all the farm’s income and debts over a specific period. It is only concerned with cash.
- Statement of retained earnings: This is the amount of money left after the farm business has paid dividends to its stakeholders.
Tax accounting deals with the preparation and payment of tax returns. It is accounting for tax purposes, governed by the legislation. It concentrates solely on those transactions that affect an entity’s tax burden and how the different items are related to proper tax calculation and tax document preparation.
The Australian Tax Office (ATO) requires the use of specific documents and forms to submit tax information. Components of tax accounting include deferred tax assets, deferred tax liability, goods and service tax (GST), transfer pricing, and income categorisation.
Tax accounting is derived from the need to recognise:
- Current year: Recognition of tax liability or tax asset based on the estimated amount of income taxes payable or refundable for the current year.
- Future years: The recognition of deferred tax liability or tax asset based on the estimated effect of temporal differences and future years carry forwards.
Managerial vs. Financial vs. Tax Accounting
Factors to consider for your farm business
All three types of accounting are useful to farmers, depending on the need (and are all available to you when using Phoenix Farm Management products). However, farming is a unique business. You need to consider key issues such as the production year, the owner’s labour, and many other things when accounting.
Factors to consider when understanding the accounting types include:
- Your farm needs: Your accounting type should be aligned to the current and future farm needs. The good news is you can use more than one type of accounting. Management accounting informs both financial and tax accounting.
- Plans for the future: The accounting method you choose needs to be flexible to adapt to your business’ changes or growth.
- Your business’s current size: If you have more than one production unit, it would be ideal to know which unit is more profitable and which is not. Management accounting is ideal.
- Your business’s legal structure: The law mandates some businesses to prepare financial statements following the set standards.
- Do you want to bring in investors or want to sort for external funding: If the answer is yes, you will need financial accounting.
Farm Management Software
Accounting software provides the best way to track your business transactions. However, farming is a highly specialised activity that requires more than just financial information to make informed decisions. You need both financial and non-financial information.
Farm management software helps in recording, measuring, and understanding farm activities and enhances enterprise reporting. While mainstream financial software has limited functionality in this area, Phoenix Farm Management and Accounting Software is designed for one purpose, to have better informed farmers. It provides integrated solutions that encompass financial, budgeting, payroll, cropping, livestock, mapping, and weather products. Mainstream software has created their products to try to accommodate all business types, but in our opinion, trying to turn the birth of a calf into the delivery of a box of bolts does not cut it.
Phoenix lends itself to any type of accounting. The available modules are customised to perform management, financial, and tax accounting. It provides both financial and non-financial information for better decision-making. Phoenix is by AGDATA, a proudly Australian company with decades of experience providing solutions to Australian farmers’ specific needs! So, you can be sure that regardless of your accounting needs or unique situation, they have got you covered!
Farming is a unique business that needs industry-specific solutions to enhance efficiency, profitability, and productivity. When understanding your accounting requirements, consider your individual farm’s unique needs. Always keep in mind that you do not have to do this alone. Phoenix is here for you and the AGDATA team will help you use it to optimize and manage your farm operations and production activities. It is the right software tool for your farm business!