Where the business sources of income are, how much of it is from crop sales, livestock sales, custom work, government payments, etc. should also be determined, he said. Most farm businesses use cash basis accounting for income tax purposes. Changes in grain, feed, and livestock inventories are not considered. Accounts payable and accounts receivable are not included. Beginning and ending balance sheets can be used as to measure profitability.
Balance sheets reflect assets and liabilities existing at a point in time.
When comparing a business balance sheets from different years, it is important to observe changes in asset values. Quantities may have changed or the preparer may have used different values per unit on each balance sheet, noted Madsen. Changes in unit values represent appreciation or depreciation, not earned income. Unit values should be held constant to measure earned income changes, he said. Cash withdrawals for family living or non-business purchases affect balance sheet values.