Trial Balance – First Report Used By CPA’s

If you provide a Quickbooks or other electronic file for your tax preparer, chances are the first report they look at is the trial balance report. When opening a set of books from a client, especially if that entity is a corporation or partnership, the first thing the tax preparer wants to see is if the previous year’s account balances match what was used on the tax return.    The trial balance simply gives the debit or credit balance for all accounts on the day the report is run. The following picture is an example.

Trial Balance, Quickbooks

Trial Balance Example from Quickbooks

 


Often times, those balances do not match.  When that is the case, someone needs to make an adjustment to reconcile the differences.

Here are just a few things we have seen that can throw those balances off when working with clients over the past 10 years.

  1. A check that was written, but then voided in a new year because the payee did not cash it.
  2. Checks or deposits that are entered with the wrong date putting that income or deduction in a previous year.
  3. Unreconciled transactions that are later deleted because they were double entered or incorrectly entered.
  4. Going back to edit the details or splits on a deposit or check that changes the accounts that were used.

Trial Balance and Other Year End Action Items

At the end of the year, we recommend three things to archive the records. Continue reading

“Why Do My Accrual And Cash Reports Look Identical?”

Most accounting software programs allow reports to be run both accrual and cash reports.  Often times a client or prospect will ask me why the reports look the same.

In order to show differences, you first have to have a way to show two different dates for the transactions, a cash date and an accrual date. The most simple way most software programs do this is through the use of forms. The general rule of thumb is if you enter a transaction once and are done with it, it will be the same on a cash and accrual report.

The following image is from Quickbooks, but most software follows a similar process.

The red numbers show either a 1 step (cash) process or a 2 step process (accrual) expense transactions. The blue numbers show the same example for income.

By splitting the transaction into two forms, the software is able to split the date of when the transaction occurred from when it was paid, hence cash and accrual reports. Continue reading

Check Grain Buyers Approved Variety List

Last week I received a letter from one our farm’s grain buyers stating there are certain GMO traited varieties at certain locations will not be accepted and that we should contact those locations to know what those varieties are. They were protecting themselves from contaminating supplies of corn and soybeans that will end up in the export market.

On Tuesday, Reuters had a great article on how we are losing corn export business even though our corn is lower priced on the world markets. Highlights included the following:

  • U.S. suppliers have changed terms of their contracts putting the cost of rejected loads on Chinese corn buyers.
  • U.S. corn is $13, a ton cheaper than Ukraine corn.
  • Ukraine passed the U.S. in terms of corn exports to China in January.
  • Buyers are afraid Beijing will turn away corn that contains Syngenta’s Agrisure Duracade trait which is not approved.
  • China has cleared the import of Syngenta’s MIR 162 (Viptra) event which caused the rejected exports in the past

For producers, managing our risk includes knowing which elevators will take our products and which won’t. In reference to the Durcade trait, Syngenta can provide a list of those locations. In February, they claimed a list of 1,652 locations out of approximately 8,700 nationwide that will accept the Duracade trait.

Before planting this year, you may want to check with your primary grain buyers to insure they will accept all the grain varieties you are going to grow this year, whether those are Syngenta, Monsanto, DuPont or other varieties.

Additional Resources:

More U.S. grain elevators accept GMO Syngenta corn banned by China

Syngenta Right to Grow Program/Information

Example: Posted policy by a grain buyer not accepting the Duracade trait.

Falling Oil Prices Will Lower Crop Input Costs

Falling oil prices should reduce our crop expenses by $10 to $20 per acre this coming year. That is good news for farmers, but also gives us a chance to reflect on how we need to compete on the global level.  It also may give us an opportunity buy inputs at below someone else’s breakeven price which will be addressed later in the article. Continue reading

Fertilizer Prices Not Following Grain Prices… Yet!

One of the biggest questions I am getting from clients is, “Do I buy fertilizer now or wait for lower prices?”   Most clients are assuming that fertilizer prices will be lower due to falling commodity prices.   That is exactly what happened when we came out of 2009 and went into 2010.  Fertilizer prices had spiked higher and farmers cut back on applications going into 2010.  As you can see from data provided by the USDA, all products fell significantly.

Fertilizer 2008 to 2013 prices

Source: USDA

 

DTN tracks fertilizer price trends and is a good place to look  for price trends.   According to DTN, 7 of the 8 major fertilizers used in row crop operations are higher than a year ago, some significantly.  Here is a summary of the price trends mentioned in the article.

Product

Change from 2013

Urea

+13%

DAP

+12%

NH3

+12%

10-34-0

+8%

MAP

+6%

UAN28%

+5%

UAN32%

+1%

Potash

-2%

Markets have a funny way of bringing supply and demand back into balance. I suspect the market will push prices lower before they go higher in 2015.

Dave

 

Accrual Income Statements – Do You Need Them?

Last night I was reviewing a presentation made by Dale Nordquist at the 2013 National Ag Bankers conference entitled “Shortcuts to Accrual“.  The following items are some highlights that stuck out as I read the presentation.

  • 16 of the 21 ratios endorsed by the Farm Financial Standards Council require accrual adjusted income statements.  Balance sheets are not enough.
  • Cash basis income statements average 41% to 67% difference from accrual adjusted statements.
    • For Farms with over 40% debt levels, that average profit difference has been consistently over 60%.
    • Recent history shows cash statements understating income.  That may change in 2014 and 2015.
  • There are two methods mentioned to calculate accrual income: Schedule F and Earned Net Worth Change.
  • The Schedule F method requires fiscal year end balance sheets.
  • If you don’t have fiscal year end balance sheets to match the tax return, then you need to use the earned net worth change method.
  • Handling depreciation and cost vs. market values on fixed assets correctly is important for accuracy.

I would encourage you to download and review the link. It is a good presentation with several key challenges and issues highlighted.

 

Dave

Deferred Grain Sales Lending Index

The Chicago Federal Reserve recently released their 3rd Quarter newsletter on agricultural land values and credit conditions. They included the following graph which shows a huge jump in non-real estate farm loan demands over the past two years going back to the beginning of 2013. I suspect the last two years have included a lot of new paint, buildings and even a few personal expenses in that loan demand.

Deferred Grain Sales Lending Index.

I thought I would have a little fun with the data.    I pulled out the 4th quarter survey results and compared them to the following 1st quarter going back to 1971.   Historically demand for credit goes up in the 1st quarter.  That trend changed dramatically in 2008 as commodity prices took off.  2014 saw a significant reversal of that trend.

As one banker responded when asked who his biggest competitor was, he said “Cash!”

The graph below goes through the Q4’13/Q1’14 and shows how that trend has now moving back to more normal levels.

It will be interesting where we are at after the end of the 1st quarter in 2015.  I’ll update this chart in April when we have the 1st Quarter numbers available.

Dave