Accounting Assumptions and the Farm Business

Farmers in Nebraska and the surrounding area have been slow to adopt accrual accounting methods. This is no surprise; the alternative, cash accounting, is simple, provides a real-time analysis of the cash position of the firm, and works well with income tax preparation. However, cash accounting has no methodology for the special timing of agricultural production or specific processes to evaluate profitability, liquidity, or solvency. Accrual accounting, GAAP (Generally Accepted Accounting Principles), and finally the FFSC (Farm Financial Standards Council) rectify these shortcomings. Adoption of GAAP, and subsequently the FFSC “tweaks” will allow farmers and ranchers in Nebraska to make more informed decisions, contributing to greater short and long-run profit. This article will look at GAAP accounting assumptions as they apply to agricultural production. Subsequent articles will tackle specific accounting methodology. Going Concern The going concern assumption means the business entity has no end date. Even if the farm business is organized as a sole proprietorship or partnership (where the business ends when the proprietor or either partner passes), this assumption is easily met by farmers and ranchers. Decisions farm and ranch managers make usually address long-run consequences. Whether explicitly stated in mission statements, or tacitly implied, one common goal shared by producers is preserving the land for future generations