By Mary Faber of Mary T. Faber Solutions
As a Virtual Bookkeeper servicing Schedule F clients from coast to coast, I understand that keeping track of your farm’s financials can feel overwhelming. One of the most critical tools in managing your farm’s finances is a well-structured Chart of Accounts (COA).
What is a Chart of Accounts?
A Chart of Accounts is a complete listing of all accounts a business uses, categorized into five main groups:
- Assets – What your business owns.
- Liabilities – What your business owes.
- Owner’s Equity – The owner’s investment in the business.
- Revenue – Income generated by your business.
- Expenses – Costs associated with running your business.
Think of your COA as the financial framework for your business. It mirrors your business operations and organizes transactions in a way that makes financial reporting accurate and efficient. While every business has a COA, no two farms will have identical ones because each operation is unique. It’s up to you to decide the level of detail you want in your accounts.
Why is a Chart of Accounts Important?
Your COA is designed to support two essential financial reports:
- Balance Sheet – Shows what your business owns and owes at a given time.
- Income Statement – Tracks your revenue and expenses over a period of time.
Each transaction must be recorded correctly in the appropriate account to ensure your financial reports provide an accurate snapshot of your business’s health. Your COA serves as a roadmap, helping you determine where to record each transaction before entering it into your accounting system.
Who Uses the Chart of Accounts?
Your COA isn’t just for your benefit—it provides crucial financial data for multiple users:
- Owners – To assess profitability and cash flow.
- Managers – To make informed operational decisions.
- Creditors & Banks – To evaluate loan eligibility.
- Government Agencies – To file taxes correctly, especially for IRS Schedule F.
A well-organized COA allows you to track transactions in a way that best fits your needs while also meeting external reporting requirements.
Creating a Chart of Accounts for Your Farm
If you’re setting up a COA for the first time, start by brainstorming. Consider the following:
- Balance Sheet Accounts: What assets do you own? What liabilities do you owe? Who owns the business?
- Revenue Accounts: How does money come into your business?
- Expense Accounts: What are your costs? (This is typically the longest section.)
A great starting point is the IRS Schedule F, which outlines the main revenue and expense categories for farm operations.
Customizing Your Chart of Accounts
Your COA should reflect how you operate your farm. While you can start with a basic structure, you can always expand or refine it later.
For example, if you currently categorize fuel purchases under Gasoline/Fuel & Oil, you may later decide to track fuel types separately and create subcategories for Clear Diesel, Gasoline, and Dyed Diesel. Similarly, for Seeds & Plants, you might want subcategories for different crops to gain better insight into your production costs.
Reviewing & Maintaining Your Chart of Accounts
Your COA should be reviewed at least once a year to ensure it remains relevant. If you are no longer using an account, mark it inactive rather than deleting it—this preserves historical data while keeping your system organized.
Bottom Line
Your Chart of Accounts should be tailored to fit your farm’s unique needs. It should help you track the financial details that matter most while ensuring compliance with tax requirements. By taking the time to set up a structured and effective COA, you’ll gain better insights into your farm’s financial health, allowing you to make confident business decisions.
Mary Faber is an experienced Certified ProAdvisor virtual bookkeeper helping direct-to-consumer makers ditch the stress and overwhelm of juggling transactions and reporting by managing the day-to-day operations of their business so they can make savvy financial decisions.
She brings ten years of experience as a former controller for a major ag cooperative, overseeing a portfolio of five divisions with annual sales of over $50M during my tenure. She has earned her MBA, and certification as a Quickbooks Certified Advisor.
