Overview of Farm Balance Sheets
A farm balance sheet is a financial statement that provides a snapshot of a farmer, rancher or agribusiness’ financial position at a specific point in time.
Farm balance sheets are one of the key farm financial statements and are often used in conjunction with farm income statements to measure and track financial performance.
Similar to most all balance sheets, it contains of three main sections: assets, liabilities, and equity.
In other words, the balance sheet provides an overview of what farmers, ranchers and agribusiness current own, what they owe and what is left over.
Balance Sheet Formula
The balance sheet follows the fundamental accounting equation, where the total assets of a company are equal to the sum of its liabilities and equity.
Assets − Liabilities = Owner’s Equity
Another way of stating the accounting equation is as follows:
Assets = Liabilities + Owner’s Equity
As you can see, assets will always equal the sum of liabilities and owners equity.
The two will always be the same and balance each other on the two sides of the equation; hence where we derive the term balance sheet.
Major Sections of a Farm Balance Sheet
Farm balance sheets contain three major sections: Assets, Liabilities and Owner’s Equity. Asset are further broken down into current assets and long-term assets, whereas, liabilities are broken down into current liabilities and long-term liabilities.
Farm Current Assets
Current assets are any asset which can be converted to cash within one year.
Farm Long-Term Assets
These are permanent assets or those with a useful life exceeding one years. The primary example is farmland, but long-term assets also encompass investments and land improvements.
Current Liabilities
Current liabilities represent debts due within a year.
Farm Long Term Liabilities
These are debts due after 10 years. A common example is a real estate mortgage on farmland.
Owners Equity
Owner’s equity represents the residual
interest in the assets of a business after deducting liabilities.
In simple terms, it’s the ownership claim on the company’s assets once all debts and obligations have been settled. Owner’s equity is a crucial component of a company’s balance sheet and reflects the owners’ stake in the business.
Farm Current Assets
Farm current assets are any asset which can be reasonably converted to cash in the next twelve months. Current assets are sometimes referred to as short term assets.
Current assets are listed in order of liquidity, which is how easily an asset can be sold or converted into cash. The most liquid assets are listed at the top. Cash is the most liquid of assets and will be at the top of the current assets.
The most common accounts in farm current assets include:
- Cash & Equivalents
- Marketable Bonds & Securities
- Accounts Receivable
- Crop Inventory
- Growing Crops
- Livestock Products
- Livestock & Poultry
- Inventory
- Prepaid Expenses
- Other Current Assets
Each agricultural operation may have unique short-term assets which should be included in the set of chart of account line items.
Always be sure to include other items which can quickly be converted to cash within the coming year. See below for an overview of the most common short-term asset account included in the agricultural balance sheet.
Definitions of Common Farm Current Assets
Cash & Equivalents represents the amount of money and cash equivalents held which can be used to pay expenses or meet immediate needs. This includes physical currency and coins as well as money held within checking and savings accounts.
Marketable Securities on an agricultural balance sheet are any short term-investments held at a given point in time which can immediately be converted into cash. This typically includes stocks, bonds, or other highly liquid assets which an be sold quickly to meet short term needs.
Accounts receivable on agricultural balance sheets refer to the amounts owed to a farmer or rancher by its customers for goods sold or services rendered on credit.
Inventories refers to the goods or products that a farm or agricultural business holds for sale or production. The inventory account typically includes various items such as feed, supplies and other finished goods. Note that on some agricultural balance sheets, inventories may be more specific, such as in the accounts mentioned below.
Crop Inventory on a balance sheet represents the estimated value for crop inventory currently held and expected for resale. Examples include corn, wheat, soybeans or any type of row crop. This may also include citrus, fruits, or timber, which may also be considered crops as well.
Livestock and poultry on an agricultural balance sheet represent the value of any live animals owned by the farmer or rancher.
Livestock products represent the estimated value of any livestock derived product which can be resold or reused. This may include wool, leather, or honey.
Growing crops are the estimated value associated with crops currently not harvested or available for sale. Examples include growing corn, wheat, soybeans or any type of row crop currently being raised. This may also include citrus, fruits, or timber, which may also be considered crops as well.
Prepaid Expenses are any costs paid for in advance for goods or services expected to be delivered or performed at a future date.
Farm Long-Term Assets
Long-term assets are any asset which can be expected to have an economic life of over one year. On an agricultural balance sheet, this may include real estate, farm land, buildings, and equipment.
Remember that in some cases, producers and agribusiness may also identify assets as an intermediate assets in the their balance sheet as well.
The most common long-term assets on a balance sheet include:
- Machinery & Equipment
- Farm Vehicles
- Raised Breeding Livestock
- Purchased Breeding Livestock
- Notes Receivables
- Buildings & Improvements
- Real Estate & Farm Land
- Intangible Assets
Each agricultural operation may have unique long-term assets which should be included in the set of chart of account line items.
Farmers should strive to include all long-term assets within their balance sheet to get an accurate picture of the overall set of assets they own.
See below for definitions of common farm long-term assets.
Definitions of Common Farm Long-Term Assets
Farm Machinery & Equipment on an agricultural balance sheet are any tangible assets used as a part of the farm operation to generate income. This may include any assets used in the production of growing crops, raising and sustaining livestock and generating livestock products.
Farm Vehicles on an agricultural balance sheet include any cars, trucks, utility vehicles or other transportation vehicles which are owned by the farmer, rancher of agricultural operation for the purpose of transportation and/or business related activities. This may include personal vehicles owned by the producer as well.
Raised Breeding Livestock on an agricultural balance sheet are animals owned which have been raised by the producer.
Purchased breeding Livestock on a balance sheet are animals owned which have been bought, as opposed to raised. These are typically valued at the purchase price under the accrual basis of accounting, however, some producers and ranchers may value these at market price.
Buildings and Improvements on an agricultural balance sheet are the value of any structure owned as well as any improvements or enhancements which alter or improve the value of the owned building.
Real Estate and Farm Land on an agricultural balance sheet represents the estimated value of any land owned and used as a part of the farming or ranching operation.
Farm Current Liabilities
Current liabilities are any amounts owed to others which are due to be paid out within the coming 12 months. Current liabilities are also known as short-term liabilities.
This includes monies owed to employees, suppliers, creditors (lenders and bankers) or taxes owed to the local, state or national government within the coming year.
Common current liability accounts in the balance sheet include:
- Accounts Payable
- Wages Payable
- Income Taxes Payable
- Real Estate Taxes Payable
- Current Deferred Taxes
- Notes Payable
- Current Portion of Long Term Debt
- Current Portion of Capital Leases
Each agricultural operation may have unique short-term liabilities which should be included in the set of chart of account line items.
It is critical that farmers measure their current liabilities in order to forecast upcoming payments and maintain their liquidity and solvency of the operation.
See below for definitions of common current liabilities often found on farm balance sheets.
Definitions of Common Current Liabilities on Farm Balance Sheets
Accounts payable (sometimes abbreviated “AP”) represents the total outstanding debts owed to suppliers or vendors for goods and services received. In other words, it represents the amount of money a business owes to its creditors for purchases made on credit.
Wages payable are any outstanding amounts owed to employees, contractors or workers that have provided services to the farmer or rancher.
Income taxes payable are any outstanding amounts owed to the local, state or national/federal government related to income derived from personal or business operations. These amounts are outstanding obligations owed, but not yet paid, for the year.
Real estate taxes payable are any outstanding amounts owed to the local or state government related to the ownership of real estate. These amounts are outstanding obligations owed, but not yet paid, for the year.
Current deferred taxes are the result of temporary differences between the accounting and tax treatment of certain items. Current deferred taxes specifically refer to the portion of deferred taxes that is expected to be realized or settled within the current fiscal year.
Current notes payable represent the outstanding amount of money owed to to a lender, but have not yet been paid. These are written promises or formal agreements made by a farmer, rancher, or agribusiness operation to repay a specific amount of money to a lender at a future date. There may be a long-term portion of the debt owed as well.
Current portion of long term debt (CPLTD) is the outstanding amount of loan payments due within the coming twelve month period. This is the amount of unpaid principal from long-term debt that has accrued on a farm’s normal operating cycle (typically less than 12 months). It is considered a current liability because it has to be paid within that period.
Current portion of Capital Leases is the outstanding amount of unpaid lease obligations which have accrued during a farm’s normal operating cycle (typically less than 12 months). It is considered a current liability because it has to be paid within that period.
Farm Long-Term Liabilities
Long-Term Liabilities are any amounts owed to a creditor, such as a banker or dealership financer, for a debt in which the maturity on the loan is greater than one year.
This may include debt obligations used toward the purchase of farm real estate, buildings, structures, etc.
Please note that some debt obligations may be classified as an intermediate term debt as well (see above) and should not be double counted.
Common long-term liability accounts in the balance sheet include:
- Long-Term Debt
- Long-Term Capital Leases
- Non-Current Deferred Taxes
Each agricultural operation may have unique long-term liabilities which should be included in the set of chart of account line items.
It is critical that farmers measure their long-term liabilities in order to forecast upcoming payments and maintain a long-term strategic outlook for the farm or ranch operation.
See below for definitions of common current liabilities often found on farm balance sheets.
Definitions of Common Long-Term Liabilities on Farm Balance Sheets
Long Term Debts are any amounts owed to a creditor, such as a banker or dealership financer, for a debt in which the maturity on the loan is greater than one year. This may include debt obligations used toward the purchase of farm real estate, buildings, structures, etc. Please note that some debt obligations may be classified as an intermediate term debt as well (see above) and should not be double counted.
Long term capital leases represent the amounts owed as part of a leasing agreement. This includes situations where a lessee (the party using the asset) acquires the right to use an asset for an extended period that is significant enough to cover the majority of the asset’s useful life. These leases are sometimes also referred to as capital or finance leases.
Non-current deferred taxes represent the amounts owed to local, state or national governments for any deffered tax liability. Deferred taxes are the result of temporary differences between the accounting and tax treatment of certain items. Current deferred taxes specifically refer to the portion of deferred taxes that is expected to be realized or settled within the current fiscal year.
Owner's Equity on Farm Balance Sheets
Owner’s equity, also known as shareholders’ equity or stockholders’ equity, represents the residual interest in the assets of a business after deducting its liabilities.
In simpler terms, it’s the ownership interest of the business owners or shareholders in the company’s assets.
There are usually two common items in the Owner’s Equity section:
Each operation may have unique aspects requiring a further breakout of accounts in the owner’s equity section. This can be particularly important for larger, more sophisticated agribusiness operations with more complex ownership structures or stock issuances.
See below for definitions of common current liabilities often found on farm balance sheets.
Definitions of Common Owner's Equity Accounts on a Farm Balance Sheet
The owner’s investment account on an agricultural balance sheet includes the amount paid by the farmer, rancher or agribusiness directly into the agricultural operation.
Retained earnings represent the cumulative net earnings or losses of a farm or ranch that have been retained and reinvested in the operation rather than distributed as dividends to shareholders. In general, this amount reflects the portion of profits that the company has kept over time.
Farm Balance Sheet Valuation Methods
Market Based Valuation
A market-based balance sheet is a financial statement that values assets and liabilities at their current market values rather than historical costs.
This practice is very common in the case of production agriculture and ag lenders generally accept these types of financial statements when reviewing creditworthiness of a borrower.
In the context of agriculture or any other industry, a market-based balance sheet may take into account the current market values of assets such as land, machinery, and inventory.
This can be particularly relevant in industries where the value of assets fluctuates based on market conditions.
Under the market basis:
- Assets are generally based on market value estimates and what the asset would sell for if it were sold today.
- Asset prices may fluctuate greatly, up and down, based upon the current market price.
- The market basis may not always accurately value particular assets and can be subject to change very quickly.
Cost Basis Method
The cost basis balance sheet is a financial statement that values assets and liabilities at their historical costs, rather than the market basis.
This practice is much more in line with traditional accrual based accounting used by certified public accountants.
It’s important to note that the cost basis may be adjusted for certain events, such as improvements made to the land or equipment. These adjustments can affect the final cost basis when the asset is sold.
Additionally, when assets are inherited, the cost basis may be adjusted to the fair market value at the time of the original owner’s death, providing heirs with a stepped-up basis.
Understanding the cost basis is crucial for accurate financial reporting, tax planning, and calculating capital gains or losses when agricultural assets are sold. Farmers and agricultural businesses often work closely with accountants or tax professionals to ensure proper accounting practices and compliance with tax regulations specific to the agriculture industry.
Under the cost basis:
- Assets and liabilities are recorded on the balance sheet at their original historical cost. Assets may be offset by their accumulated depreciation.
- The current value that an asset may fetch if it were sold on the open market may not be reflected on this balance sheet.
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