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Cash vs Accrual Accounting

My area of expertise is in the ranching industry. I suspect most ranchers use the cash method. For my ranch, I use the cash method for tax purposes. The cash method is considerably less costly than the accrual method.

The IRS graciously allows most of us to use the cash method. Small business taxpayers. Effective for tax years beginning after 2017, the Tax Cuts and Jobs Act (P.L. 115-97) expanded the eligibility of small business taxpayers to use the cash method of accounting.

With that being said, I do use the accrual method for my ranching operation’s books. Cash method for the IRS and accrual for cost control. Ranching is a very competitive market, thus the margins are small. Without through accounting it is impossible to determine what your true costs are.

No one would sell a 1500 pound round bale of hay for less than what they have in it. It is easy to determine your fertilizer and net-wrap cost per bale. Not so easy to determine all of the many other incidental cost to produce that round bale. With a good team working together to keep accurate records of daily transactions, the accrual method of accounting will allow accurate cost reports for greater decision making.

A big part of ranching is inventory control. That includes hay and feed, fuel, raised cattle, purchased cattle, and equipment use. Every revenue stream should have a corresponding cost stream. Gross Profit may then be calculated. Overhead costs is everything else. The more of your costs that you are able to put into a corresponding cost stream, the less your overhead will be. Overhead is paid for out of Gross Profit.

Cost control requires the use of spread sheets and pivot tables for analysis. This is what accountants are for.

Brett Bickham, May 24, 2020

Clifton, TX

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Run It Into the Ground?

I have been asking myself this question for years.  How long should I keep my tractor or any other item I am depreciating?  I am not alone in this question.  This debate has been around for as long as accounting has been around.  Well maybe not.  Accounting began in the 15th century to aid merchants in European and Mediterranean countries.  Florence, Italy was a mecca for international trade back in the day.  About that same time was the shift from Roman numbers to Arabic numbers.  Depreciating capital assets came later. 

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Accounting for Short Term Assets

Fixed costs are the overhead costs of a business. 

    Amortization (charging to expense of the cost of an intangible asset). …

    Depreciation. …

    Insurance. …

    Interest expense. …

    Property taxes. …

    Rent. …

    Salaries. …

    Utilities. …

The greater quantity produced, the lower fixed cost per unit.  Fixed cost will include an expense debit each month.  Fixed costs may, or may not, include a cash credit each month.  Fixed costs are added to the General Journal by monthly adjustments. 

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Rule Accounting

Rule Accounting is a managerial accounting firm formed in 2017.  I specialize in managerial and tax accounting for family ranches. 

Rule Accounting derived their business name from all of the many rules in accountancy.  Bookkeeping is the day to day process of journalizing the temporary accounts of revenue and expenses. There are six major steps in the accounting process.  The bookkeeping part is step two.   Accounting goes into greater detail and includes the Balance Sheet accounts of Assets, Liabilities, and Retained Earnings (Capital).  Accounting rules include domestic rules, international rules, and generally accepted accounting principles (GAAP).  The domestic rules, or standards, are developed by the Financial Accounting Standards Board, or FASB.  The international rules are developed by the International Financial Reporting Standards, or IFRS.  The international rules are similar to the USA rules for the most part.   Livestock rules are different abroad but here in the USA those differences don’t affect most of us. 

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What Most Ranchers Do Not Know About Their Expense Write Offs

When ranchers raise their own replacement heifers, the money spent on raising those heifers cannot be expensed.  Meaning, the feed that is paid for out of the ranch account is not to be deducted, as an expense, come tax time.  Of course, there are many other cost related to raising heifers too.  None of those cost are to be deducted as business expenses.

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Prepare Your Financial Statements

You need records to prepare accurate financial statements. These include income (profit and loss) statements, cash flow statements, and balance sheets. These statements can help you in dealing with your bank or creditors and help you to manage your business.

Proper financial statements require journal entries of all your assets, liabilities, revenues, and expenses. The checkbook part is easy, but the asset entries are complicated. Best to have an accountant do that.

Rule Accounting is ready and available to assist you in preparing your financial statements. Most banks will work with you to prepare the financial information they want to see. To really impress them, have your financial statements professionally prepared.

Of course, the main reason to prepare financial statements is to protect your business. Comparing your companies historical financial statements will show you important trends in your business.

Remember, accurate financial statements are for your benefit.

Brett Bickham, 3/12/19

Rule Accounting

Clifton, TX

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Assets

Assets are the property, such as ma- chinery and equipment, you own and use in your business. You must keep records to verify certain information about your business assets. You need records to figure your annual depreci- ation deduction and the gain or (loss) when you sell the assets. Your records should show all the following.

  • When and how you acquired the asset.
  • Purchase price.
  • Cost of any improvements.
  • Section 179 deduction taken.
  • Deductions taken for depreciation.
  • Deductions taken for casualty losses, such
  • as losses resulting from fires or storms.
  • How you used the asset.
  • When and how you disposed of the asset.
  • Selling price.
  • Expenses of sale.
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Inventory Cattle

Inventory is something that you sell. Prepaid supplies are used to assist your business. Raw materials are used to produce inventory. Inventory, prepaid supplies, and raw materials are all current assets. Inventory cattle are raised cattle, available for sale.  Current assets are available for sale. Fixed assets are part of your business to generate income. From Schedule F (Form 1040), Profit or Loss from Farming, they refer to mama cows as livestock and other resale items.  Implies that cow/calf operations buy cows to resale them.  Granted, a lot of cows are culled and sold, but I would not classify them as resale cattle. Calves put on feed and sold the following year, are inventory cattle.

When you do sell mama cows, the IRS wants to know how much you paid for those cows.  That amount is to be reported to the IRS on schedule F as “Cost or other basis of livestock or other items reported on line 1a”.  The “other basis” is to include any feed given to replacement heifers or bulls.

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What is a Derivative?

Just what is a derivative?  Well first let’s define a function.  A function is a relationship between any two dependent numbers.  One number is the independent variable and the other is the dependent variable.  This may be used for many applications such as supply and demand, marginal cost and fixed cost, rate of change, velocity, etc.

A derivative is the rate of change at a particular time, or the instantaneous rate of change.  On a continuous curved domain line, the derivative of a particular point is the slope, rise over run, of the tangent line to that point.  Average rates of change in data are based on multiply points.  A rate of change at a particular point is a derivative.

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