Cash vs. Accrual Accounting
Danny Klinefelter and Dean McCorkle*
Selecting a record-keeping system is an important decision for agricultural pro-
ducers. The system should help with decision making in a risky environment and
calculate taxable income. Most producers keep their records with the cash
receipts and disbursements method or with an accrual method.
Either method should be acceptable for calculating taxable income (except for
corporate taxpayers who have revenues exceeding $25,000,000). However, it is not
acceptable to keep books throughout the year using one method of accounting and
then convert at year-end to another method, solely because the second method
might compute taxable income more favorably.
The main difference between accrual basis and cash basis accounting is the
time at which income and expenses are recognized and recorded. The cash basis
method generally recognizes income when cash is received and expenses when
cash is paid. The accrual method recognizes income when it is earned (the cre-
ation of assets such as accounts receivable) and expenses when they are incurred
(the creation of liabilities such as accounts payable).
Accrual accounting is more accurate in terms of net income because it matches
income with the expenses incurred to produce it. It is also more realistic for mea-
suring business performance. A business can be going broke and still generate a
positive cash basis income for several years by building accounts payable (accru-
ing but not paying expenses), selling assets, and not replacing capital assets as
they wear out.
However, most farmers and ranchers use cash basis accounting because: 1) they
do not understand the accounting principles that an accrual system requires;
2) given the cost of hiring accountants to keep their records, accrual accounting is
more expensive; and 3) cash basis accounting is more flexible for tax planning.
Getting the Best of Both Systems
There is a process by which cash basis income and expense data can be adjust-