MYFB — Ep. 8: Accrual Accounting as a Tool for Measuring Profitability

What comes to mind when you hear the term “accrual accounting?”

Perhaps you flashback to filing your taxes last year when your accountant suggested switching to accrual accounting, but you’re weren’t sure what it meant and why it would be worth the hassle. Maybe your mind immediately goes elsewhere — what’s for supper tonight?

Well, as dry as it may sound, accrual accounting can be a valuable tool in making better decisions for your farm business.

Dean Klippenstine of MNP joins Lyndsey Smith for this Mind Your Farm Business episode to discuss the scintillating topic (Lyndsey’s words) of accrual accounting and how it can help with understanding cost of production and making decisions that impact the profitability of a farm, like crop selection.

Accrual accounting differs from the traditional cash basis in that it takes into account the value of inventory and prepaid expenses, explains Klippenstine. With the cyclical nature of grain and livestock sales, this can have a big impact on understanding a farm’s financial picture.

Hear more from this series here!

As an example, he describes a farm where the accrual accounting method shows a 40 bushel/acre canola yield returns exactly $10/acre and a 42 bushel/acre yield makes them $30/acre, or three times as much profit. While that two bushel difference might not seem significant in the coffee shop, there’s a clear incentive for the farmer to pursue a 42 bushel/acre crop, notes Klippenstine.

It’s decisions like this — those that involve understanding cost of production, knowing differences in profitability between crops or fields, determining a reasonable land rent to pay — where accrual accounting comes in handy, he says.

So how hard is it to implement? What does accrual accounting look like? What are some of the common changes Klippenstine sees on farms that implement accrual accounting? Take a listen:

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Disclaimer: Royal Bank of Canada and its subsidiaries are not responsible for the information provided in this podcast, and this information does not necessarily reflect the views of Royal Bank of Canada or any of its subsidiaries. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its subsidiaries.

One thought on “MYFB — Ep. 8: Accrual Accounting as a Tool for Measuring Profitability

  1. I don’t think that accountants are necessarily trying to move farmers to accrual accounting. Actually, one of the primary reasons to keep doing cash accounting is because of the flexibility it gives when doing submitting tax forms at the end of the year.

    Switching to accrual accounting is mainly for the benefit of the farm owners/managers themselves. It will give a much clearer picture of the health of the business.

    Modern bookkeeping software makes accrual accounting just as easy as cash accounting because it handles all the necessary accounting entries in the background, so the user doesn’t need to think about it at all.

    Most farms can greatly benefit from using ag-specific accounting software.
    Why? Because farms are different! I wrote more about that over here:
    https://www.farmbooster.com/Blog/why-farm-accounting-is-different

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