I don’t suppose many people spend a lot of time thinking about their chart of accounts. But, if you were to spend some time thinking about it, you might be surprised at how it could help you make better decisions and improve your understanding of how things are going financially on your farm.
The chart of accounts is the list of categories used to organize incomes and expenses in your bookkeeping program. An effective chart includes categories for all income and expenses. It also includes bank accounts and things like accounts receivable, inventory, accounts payable, and equity—but we won’t be talking about those today.
Your bookkeeping program will have a recommended list that can help you create a chart. Some, such as QuickBooks, even customize it for different industries. You can, however, create any account you want for your chart, and have a lot of flexibility in how it can be organized.
On my farm, (which, since I’m a sole proprietor, includes the other parts of my life) I use these income accounts:
Live animal sales
A few years ago a friend recommended that I organize my chart in a series of groupings (or major accounts) that I could use to quickly assess changes from period to period. Major income accounts he used on his farm were FARM INCOME, and NONFARM INCOME. His expense accounts were grouped into: INFRASTRUCTRE AND LAND, MACHINERY AND EQUIPMENT, PRODUCTION, MARKETING, and OVERHEAD.
I really liked his idea, and so now my QuickBooks chart of accounts income list looks like this (note that you can organize it in whatever order makes sense to you—it doesn’t have to be alphabetical):
Live animal sales
Every time I deposit income it gets assigned to one of the accounts. I have another complete list with major accounts and sub-accounts for expenses.
Here is where the organization makes a difference. After I’ve made entries (entered income or paid bills), I can run a report. QuickBooks (and many other bookkeeping programs) gives you the option to run a “collapsed” report. If, as you set up your accounts, you make them “sub-accounts” of a broader category (major account), when you run a “collapsed report” it will only show the top tier of major accounts.
If I run a collapsed report, it will show these income categories, listing the totals of everything grouped under them:
FARM INCOME $XX,XXX (a number that includes all my broiler sales, turkey sales, lamb meat, live animal sales, feed resale, rent income, and government payments).
NONFARM INCOME $XX,XXX (total of wages, contract work, gifts, interest, misc.)
If you use my friend’s groupings for all of your expense accounts, too, the collapsed report would include all of those as well.
Here’s where the management comes in.
Although I’ll certainly need to track how much income I’ve brought in from my broilers, to make enterprise and pricing decisions, I might only want to know how the farm is doing income-wise compared to non-farm. Or, on the expense side, I might just want to be sure that my overhead isn’t creeping up, and that I haven’t spent too much on marketing this year compared to last year.
By creating groupings and sub-accounts, I can run a quick report anytime I want—compared to budget, or compared to last year if I really want to know how we’re doing—and get a quick overall view.
So, do you see the trick here? Being able to run a condensed report means that you will want to think before you create those major accounts (groupings). What groups of information will be most useful to you in this quick format? How can you best utilize this feature? I’ve found that fewer major accounts are more useful than great numbers of them, so the difference between the detail and the collapse is more dramatic. That said, you want enough detail that you aren’t looking at all of the activity for your business in just one or two groups. You want enough information so that you can zero in on places that need troubleshooting.
As an example, I could have created major accounts called: POULTRY SALES, SHEEP SALES, MISC FARM INCOME, OFF-FARM JOB, OTHER INCOME. You might want FARMERS’ MARKET INCOME, WHOLESALE SALES and CSA INCOME. The secret is to select groupings that will give you meaningful and useful information.
You can, of course, run a full report anytime, with maximum detail. These quick reports, though, are where the real management might happen—they don’t take much time, and can provide a very useful overview that you might find yourself using more often just because it is so easy.
The nice thing about an electronic bookkeeping program is that you can rearrange your chart of accounts any time you want. Don’t delete any accounts that you’ve used, and I caution against creating so many accounts that your reports are pages long. But, you can move the accounts around, rename them and put them in groups under major accounts.
If you are just starting out, play around with the chart of accounts until you get something that fits your needs. I recommend that, once you settle on something, don’t adjust it too often. Even though any data will follow a given account even if you move or rename it, you will mess up any comparison to information you have outside your bookkeeping system, such as spreadsheets or budgets or previously printed reports.
Well-chosen categories in your chart of accounts will allow you to pull an easily scanned but meaningful collapsed report. I recommend that you take a bit of time to organize your chart of accounts into major accounts that allow you to get a “5-minute view” in just that amount of time.
See more on the chart of accounts in Chapter Five of Fearless Farm Finances.
Jody Padgham is the Financial Director for MOSES, and Editor of Fearless Farm Finances.
April 29, 2014