To find out how much of what came in is really revenue, go through the period’s deposits one by one and mark each one revenue or not. On a bank statement, a crop sale and a loan look the same. A loan lands as a deposit, a sold tractor lands as a deposit, money moved in from your own savings lands as a deposit, and each one makes the year look bigger than what the farm produced and sold. What you end up with is an inflow sheet: one page with every deposit of the period marked revenue or not, the reason beside it, and a total of only the revenue lines.
Counting every deposit as revenue is easiest to do in a year when the balance looks great. A loan came in, an old tractor sold, the balance is the best in years, and so you buy a planter, hire a hand or take a larger draw on money that production never earned.
Why isn’t the money that came in the same as revenue?
The money that came in is not the same as revenue because all a deposit carries is the fact that money arrived, not where it came from. Revenue is what the farm earned by producing and selling: the crop, the animals, the milk, the custom work done for a neighbor. The University of Arkansas extension guide to a farm income statement keeps the revenue section to what the farm produced and sold, telling a farmer to record income only from the farm business during the calendar year. The University of Wisconsin extension puts the same idea in one line: the income statement is a statement of the financial value of the farm’s production for the year.
Borrowed money, the price of something the farm already owned, and money moved in from another account arrive as deposits too, and none of them is production the farm sold.
Which inflows are not revenue?
Three kinds of deposit look like revenue and are not, each for a different reason. Borrowed money is the first: the Internal Revenue Service’s farm tax guide says, Generally, you don’t report loans you receive as income, because it has to be paid back. The sale of a capital asset is the second: the University of Arkansas guide tells the farmer to include the sale of a grown crop but do not include items such as sold land or machinery, because a sold asset is value the farm already held and only turned into cash. How that sale is taxed is a separate question for your accountant.
Money moved between your own accounts, or put into the farm from your own pocket, is the third. It is not revenue because nothing was produced or sold to bring it in.
| Deposit | How you know it | Why it is not revenue |
|---|---|---|
| Borrowed money | A loan or financing landed in the account | It has to be paid back |
| Sale of a capital asset | Land, a machine or breeding stock sold | You turned something you already owned into cash |
| A transfer or money you put in | Money moved between your own accounts, or put in from your own pocket | Nothing was produced or sold to bring it in |
Which inflows are revenue, even when they aren’t a plain sale?
Some deposits that are not crop sales still count as revenue, and a hurried marking gets these wrong. The University of Arkansas guide counts, inside the revenue section, government payments (including crop insurance proceeds) and custom work income. None of them was borrowed, moved from another account or raised by selling something the farm owned.
A crop insurance payment stands in for a harvest that did not come in; custom work is a service the farm sold with its own machines and labor. Neither is a grain sale, and both are revenue.
A few small deposits go the other way: they look like income and are not revenue. A refund for an input you returned is a cost coming back, so it goes against the expense it cancels. Interest the bank pays into the account can count as income on a tax return, but it is a return on money, not production the farm sold. Each of these adds a little to the year’s total, one line at a time, which is why the reason goes beside every line and not just beside the loan.
Why does a padded total skew your decisions?
A padded total skews your decisions because you decide on the total, not on the lines behind it. The University of Wisconsin guide keeps operating revenue apart from capital gains (losses), and from a figure that mixes the two you can tell neither how the farming went nor what the sale brought. If you read a loan and a sold tractor as revenue, you are reading a year of production that did not happen, and then you buy a planter, hire a hand or take a larger draw against it.
Each kind of deposit skews the reading in its own way. A loan raises this year’s total and weighs on the next, when the payments go out; counted as revenue, the same money looks like income now and still has to be paid back later. A machine sale will not repeat, and it can even point to a bad year, since a farm short of cash is often the one that sells a machine to cover the gap. Money moved in from your own savings is money you already had, counted again.
What stays outside the sheet?
Whether the loan or the sale was a good move stays outside the sheet. A farm may have every reason to borrow or to sell a machine. On the sheet you only mark that deposit as financing or as an asset turned into cash, so it is not counted as production. Whether to borrow, and how much, is a separate decision.
Money you put into the farm from your own pocket is not revenue the farm earned, just as money you take out to live on is not a farm expense. Mark both as transfers, so neither is read as production. The marking is much easier once farm money is kept apart from family money, in a bank account used only for the farm; if the farm does not have one yet, start there.
What do you need before you start, and what comes after?
You need the farm’s bank statement for the period and a list of the sales you made in it. If you keep a written record of every sale, with date, buyer and amount, most of the revenue lines are already there. What the inflow sheet adds is the reason beside everything else in the account: the loan, the machine, the transfer.
The revenue total you end with is the number to use later. Setting two years of revenue side by side, month by month, to tell growth apart from a price that moved only works if each year’s revenue was cleaned of these deposits first; otherwise a one-off machine sale reads as a boom year the farm never had.
Checking that the number behind a big decision came from what the farm sold, and not from what it borrowed, is a small, regular part of managing a farm. More on farm money is in the finance section of the library.
Where to start
One afternoon with the period’s bank statement and your list of sales on the table, and by the end you have the sheet. Nothing here needs software or a bookkeeper, only the account the farm already uses.
In a year with a loan or a machine sale, the number you end with is smaller than the one the account showed. It is the part of what came in that the farm produced and sold, written down instead of guessed, and it is the number to plan next year on.