Posting Farm Production into QuickBooks Inventory - Part 1

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Most US-based farming and ranching operations use cash accounting, and the majority prepare market-value balance sheets for purposes such as borrowing operating capital. A big hurdle these agricultural businesses face in using QuickBooks, is how to get inventories of things the farm or ranch produces into QuickBooks—and assign estimated market values to them—in a way that is compatible with cash accounting.

Like those Web site ads that claim they will tell you "How to lose weight with this one weird trick...", this article shows "one weird trick" (actually, just a simple workaround) for getting the inventory done, plus a lot more.

The techniques in this article apply to QuickBooks desktop editions (Pro, Premier, and Enterprise) but not to QuickBooks Online, because differences in its inventory system prevent practical application of these techniques. Also, understand that these techniques apply to raised farm production, not things bought for resale such as resale livestock. (Federal income tax regulations require that farm resale inventories be handled on an accrual basis, just like the resale inventories of a retail business.)

Introduction

From an accounting standpoint, farms are manufacturing businesses:  they apply inputs (seed, feed, fertilizer, chemicals, labor...) to their factories (land, breeding livestock, greenhouses...) and make products (harvested grain, market livestock, hanging basket plants...). Some agricultural products, like harvested grain, are put into storage and may not be sold for months. For those inventories, a question arises:  "How can I assign a value to my inventories for preparing a balance sheet with QuickBooks?"

In accrual accounting, a Work in Process (WIP) inventory account would be used to accumulate the cost of labor and supplies used in manufacturing a product. For a grain crop, a WIP account would accumulate the cost of labor, fertilizer, seed, chemicals, fuel, and so on, while the crop is being grown. When the crop is harvested and put into storage, the amount accumulated in the WIP account would be transferred to an asset account representing the grain inventory, as the inventory's value (asset value).

But with cash accounting the cost of production inputs is not accumulated anywhere:  fertilizer, seed, chemicals, and other inputs are expensed at the time of purchase. So there is no accumulated production cost total available anywhere in QuickBooks for assigning to a crop when it is harvested, as its inventory value. How then, can you assign a value to grain or livestock inventories for preparing a balance sheet?

Worse, how does an inventory of grain or livestock make its way into QuickBooks in the first place? A balance sheet lists the values of the farm's assets, but you cannot assign a value to assets (farm inventories) which do not exist in QuickBooks! The assets must be represented in QuickBooks in some way, usually as an inventory. Purchased inventories are added to QuickBooks by entering a purchase transaction, but crops are raised, not purchased. And calves, lambs, and pigs are born, not purchased. So how can an inventory be established for them? Do they need to just "magically appear" in QuickBooks?

This is a common problem for many small business owners who use QuickBooks for cash accounting. A floral shop might make dozens of fresh evergreen wreaths to sell during the Christmas holiday each year. Someone who runs a roadside produce stand might make and sell concrete yard statuary and related items (concrete raccoons, deer, garden foot bridges...and those gnomes which some people can't seem to get enough of). The point is that a lot of cash basis businesses create inventories which need to be accounted for and should appear on balance sheets, though the inputs for producing those inventories have already been expensed.

The solution? By setting up Inventory Part Items in a non-standard way, you can to trick QuickBooks into handling farm production inventories properly in a cash accounting situation. Here are the necessary steps:

  • Set up an equity account to use when setting up Items (more on this later).
  • Set up Inventory Part Items for things the farm produces, but set them up in a special (non-standard) way.
  • Use inventory adjustments to establish quantities and inventory values; for example, the number of bushels of grain in storage and their net market value (estimated market price, less transportation and other selling costs).

Once you have some Items set up and have established an inventory for them, you are ready to enjoy the benefits of using them for entering sales, having inventory information available whenever you want it, getting detailed sales reports, and more.

Setting-up an Equity Account

Before you set up Inventory Part Items you need to have at least three accounts in place:  an income account (where sales income will be posted), an asset account (to represent the Item's value on the balance sheet), and—normally, at least—a Cost of Goods Sold (COGS) account.

COGS accounts are an accrual accounting idea. When inventory is sold, a COGS account is used for accumulating the inventory's cost (or purchase cost) as an expense—because in accrual accounting, the cost of an inventory is not deductible as expense until the Item is sold. But remember, the Items we will be setting up do not have a cost associated with them—not accounted for in QuickBooks, anyway. For that reason, we need to use an equity account in place of a COGS account when setting up these Items (...the "one weird trick" mentioned at the top of the article). When an Item is sold, this will cause its market value to be discarded rather than treated it as an expense—something which needs to happen, since the market value does not represent an actual (accounting) cost.

To set up an equity account for this purpose:

1. Open the Chart of Accounts window (Lists > Chart of Accounts), then select Account > New from the button menu at the bottom of the window.

The Add New Account: Choose Account Type window will open.

2. Select Equity as the account type, then click the Continue button.

The Add New Account window will open.

3. Fill in the account's details:

4. Click the Save & Close button to save the new account and close the window.

Setting-up a Soybeans Item

You should set up an Inventory Part Item for each of the farm's major products, especially those you may have as an inventory, such as stored grains or stored produce, or growing market livestock. However, until you see how all of this works, there's nothing wrong with setting up just one Item at first to give it a try.

Let's set up an Inventory Part Item for soybeans, an oilseed crop grown throughout much of the United States and worldwide. The Item will be useful for entering sales of soybeans, maintaining soybean inventory information, getting sales reports, and representing the market value of soybean inventories as assets on the farm's balance sheet reports.

To set up a soybeans Item:

1. Open the Item List window (Lists > Item List), then select Item > New from the button menu at the bottom of the window.

The New Item window will open.

2. Fill in details for the new Item:

3. Click the OK button to save the new Item and close the window, or the Next button to set up another Item.

Establishing a Soybean Inventory

Once you have Items set up, you can establish inventories for them with an inventory adjustments. Let's enter an adjustment for the Soybeans Item created above. (From an accounting standpoint the adjustment will create a soybean inventory "out of thin air":  based on an arbitrarily assigned market value, not the accounting cost associated with producing the soybeans.)

1. Open the Adjust Quantity/Value on Hand window. One way to do this is to select Vendors > Inventory Activities > Adjust Quantity/Value on Hand from QuickBooks' menu.

2. Fill out the window as shown below:

3. Click the Save & Close button to save the inventory adjustment and close the window.

Using the Soybeans Item

With a Inventory Part Item set up for soybeans, and an inventory quantity and value established for it, you can...

  • Use the Item for entering sales, on the Sales Receipts or Invoices forms. QuickBooks will automatically maintain an updated inventory quantity and value for the Item as you enter sales.
  • Have up-to-date inventory and sales information whenever you want A quick glance at the Item List (Lists > Item List) will show the current quantity on hand. And when you want to know how many bushels of soybeans were sold last month or last year, or to a particular customer, you can open a report such as a Sales by Item report (Reports > Sales > Sales by Item Detail).
  • Prepare market value balance sheets. If the market value of soybeans has changed, you can make an inventory adjustment to update the inventory value of the Soybeans Item before preparing a balance sheet report.
  • Make inventory adjustments when you harvest crops, or have losses. At the end of soybean harvest, you can update inventories for the new quantity in storage. Likewise, if you lose some inventory due to spoilage or theft, you can make an inventory adjustment to update the quantity and/or value remaining.

Oh...and what happens in the Capitalized Inventory account?

As you enter sales and make inventory adjustments, the balance in Capitalized Inventory will rise and fall to offset the changes in market value that you assign to farm inventories. By maintaining assets at market value rather than book (or accounting) value, the balance in Capitalized Inventory will have no real meaning concerning owner's equity in the farm business, regardless of whether its balance is large or small. Its only purpose is to offset changes in the market value of inventories.

About Part 2

Part II will explore some of the management information you can have "for free" simply by using Inventory Part Items to keep track of farm production inventories and sales in QuickBooks.

Acknowledgements

This article is mostly excerpted from Chapters 2 and 5 of The QuickBooks Farm Accounting Cookbook™, Volume II: Raised Farm Production Inventories, Sales, and More...,, by Mark Wilsdorf.

About the Author

Mark Wilsdorf has worked with QuickBooks users in agriculture since the 1980s. He was editor of AgriComp, the first national magazine for agricultural computing, has authored books about using QuickBooks in agriculture (The QuickBooks Farm Accounting Cookbook™ series), has done consulting work for Fortune-500 businesses serving agriculture, and has been the lead developer on several software projects for developing QuickBooks add-ons. He currently writes an agriculture-oriented QuickBooks blog at QBAgCenter.com.

For proof that Mark always has at least one foot in agriculture, you might look around his office at home....there you would find things like a folder of soil test reports, calf obstetrical supplies, a seed sample waiting on a germination test, a stack of machinery parts catalogs...and a lariat that he will never learn to use really well.