Farm machinery and equipment refer to the various types of mechanical devices and tools used in agricultural activities to enhance efficiency, productivity, and overall farm operations. These tools and machines perform a wide range of functions, from planting and harvesting to irrigation and pest control.
Farm machinery and equipment is often a major capital component of a balance sheet. As such, it is important to make sure that an accurate value of machinery and equipment is included.
In This Section
What is Machinery & Equipment?
Farm Machinery and Equipment on an agricultural balance sheet represents the value of any machinery and equipment used in the operation to produce agricultural goods or render agricultural services. The scope of farm machinery and equipment varies greatly, ranging from simple tools to expensive combines and harvesters. Machinery and equipment is considered either an intermediate asset or a long-term asset due to the multi-year economic lifespan of the asset.
Types & Examples of Machinery & Equipment
There are hundreds of categories and thousands of various types of machinery and equipment used in agriculture. This ranges from common types like tractors, combines and seeds to very specialized equipment used within niche sectors of the agriculture industry.
Some of the more common examples include:
- Tractors: Versatile vehicles used for pulling and powering various farm implements. They are essential for plowing, planting, harrowing, and transporting materials.
- Plows: Implements attached to tractors for tilling the soil, turning it over to prepare for planting.
- Harrows: Tools used to break up and smooth the soil after plowing, providing a finer soil structure for planting.
- Seeders and Planters: Machines that precisely plant seeds in rows or spread them over a field, ensuring consistent crop spacing and depth.
- Harvesters: Equipment used to gather mature crops from the fields. This includes combines for grains, cotton pickers, and forage harvesters.
- Balers: Machines that compress cut and raked crops (like hay, straw, or silage) into compact bales for easier handling, transport, and storage.
- Sprayers: Devices used to apply pesticides, herbicides, and fertilizers to crops, helping manage pests, weeds, and nutrient levels.
- Irrigation Systems: Equipment that provides water to crops, including sprinklers, drip irrigation, and pivot irrigation systems.
- Cultivators: Tools used to stir and pulverize the soil, either before planting or to remove weeds and aerate the soil during the growing season.
- Tillers: Machines similar to plows but generally smaller and used for preparing garden plots and smaller fields.
- Combines: Multi-function machines used to harvest grain crops, combining reaping, threshing, and winnowing into a single process.
- Feed Grinders and Mixers: Equipment used to process and mix animal feed, ensuring a balanced diet for livestock.
- Silage Harvesters: Machines used to cut and chop forage crops for silage, which is then stored and fermented for animal feed.
- Livestock Handling Equipment: Tools and structures such as cattle chutes, feeders, and waterers that help manage and care for farm animals.
These pieces of equipment are crucial for modern farming, enabling farmers to manage large areas of land more effectively, increase yields, and reduce labor costs.
An accurate value of these expensive assets is critical to keep maintained on a farm balance sheet.
Machinery & Equipment on the Balance Sheet
Machinery and Equipment usually has an economic, or usable, lifetime of several years. As such, machinery and equipment is considered a long-term asset on the balance sheet.
It is noteworthy that machinery and equipment often depreciates, or loses value, over time. This is similar to how a car loses value over a period of years. Machinery is records at cost, but the lower value is also included on a separate Depreciation account. See below for more information on how this is included in the balance sheet.
Purpose of Machinery & Equipment
Modern agricultural requires a significant amount of machinery and equipment to effectively run an operation. These assets often require significant upfront cash to purchase. For example, a modern tractor can easily cost more than $150,000 and combine harvesters can often fetch more than $1 million at sale. As such, machinery and equipment represent significant investments for many businesses, particularly in the agricultural sector. Detailing these assets on the balance sheet allows businesses to track and manage their valuable resources effectively.
Machinery and equipment are tangible assets with economic value that contribute to the overall financial position of a company. Including detailed information about these assets on the balance sheet provides stakeholders, such as investors, lenders, and management, with a clear understanding of the company’s asset base and its potential for generating future revenues and cash flows.
How to Record Machinery & Equipment on Balance Sheet
Machinery and equipment are typically valued on a balance sheet at their historical cost, less accumulated depreciation.
Here’s how this valuation process works:
- First, Machinery and equipment are initially recorded on the balance sheet at their historical cost, which includes all costs directly attributable to acquiring and preparing the asset for its intended use. This may include the purchase price, transportation costs, installation fees, and any other directly related expenses.
- Second, over time, machinery and equipment are subject to depreciation, reflecting their gradual wear and tear, obsolescence, and decline in value due to use or the passage of time. Depreciation is the systematic allocation of the asset’s cost over its estimated useful life.
- Net Book Value: The net book value of machinery and equipment is calculated by subtracting accumulated depreciation from the historical cost. The net book value represents the remaining value of the asset on the balance sheet after accounting for depreciation. It reflects the portion of the asset’s cost that has not yet been expensed as depreciation.
Historical Cost – Accumulated Depreciation = Net Book Value
It’s important to note that depreciation methods may vary depending on accounting standards and company policies. Common depreciation methods include straight-line depreciation, which allocates an equal amount of depreciation expense each period, and accelerated depreciation methods, such as the declining balance method or units of production method, which allocate more depreciation expense in the early years of an asset’s life.
Exclusions from Machinery & Equipment on the Balance Sheet
Anything that does not fall into the strict definition of machinery and equipment should be classified under a separate area of the balance sheet. Due to the wide variation, interpretation and meaning of machinery and equipment, mistakes are made, however.
On a farm balance sheet, common exclusions from the “Machinery & Equipment” category include:
- Depreciation: Accumulated depreciation is shown as a separate line item, reducing the book value of machinery and equipment but not included in the initial cost listing of these assets. This is one of the more common and misinterpreted sections of a farm balance sheet.
- Buildings and Structures: Farm buildings, barns, silos, and other structures are considered fixed assets but are listed under a different category from machinery and equipment.
- Vehicles for Personal Use: Any vehicles used primarily for personal rather than farm business purposes are excluded.
- Inventory: Seeds, fertilizers, pesticides, feed, and other consumable goods are part of inventory or current assets, not machinery and equipment.
- Leasehold Improvements: Enhancements or modifications made to leased land or buildings are recorded under leasehold improvements, not machinery and equipment.
- Intangible Assets: Items such as patents, trademarks, or goodwill are intangible assets and are listed separately from physical machinery and equipment.
- Non-Farm Vehicles: Trucks or cars not used for farm operations but for personal or unrelated business use are excluded from farm machinery and equipment.
By correctly categorizing these exclusions, a farm balance sheet accurately reflects the assets related to farm operations, ensuring proper financial reporting and asset management.
Frequently Asked Questions
Why are Machinery & Equipment and Farm Vehicles Held in Separate Accounts on the Balance Sheet?
On a farm balance sheet, vehicles and machinery are typically held in separate accounts to provide clear and accurate financial reporting. This distinction helps in better managing, depreciating, and tracking the assets.
Vehicles have a distinct depreciation schedule and also specific regulatory and tax implications apart from machinery.
Additionally, the repair and maintenance of farm machinery is usually tracked separately from vehicle maintenance which is helpful in estimating and managing finances of the operation.