Risk Management Series
Financial Management:
Cash vs. Accrual Accounting
Danny Klinefelter, Dean McCorkle and Steven Klose*
EAG- 036
February 2017
*Professor and Extension Economist, Extension Program Specialist–Economic Accountability, and
Assistant Professor and E xtension Specialist–Risk Management , The Texas A&M System.
Selecting a record-keeping system is an
important decision for agricultural producers.
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
favor ably.
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 creation 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 measuring business performance.
A business can be going broke and still generate
a positive cash basis income for several years
by building accounts payable (accruing 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) the accounting
principles of an accrual system can be complex;
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 adjusted to approximate
accrual income. This can be very beneficial to
producers, giving them the simplicity and tax
flexibility of using cash accounting and the ability
to evaluate profit more accurately. The process
has been recommended by the Farm Financial
Standards Council (FFSC), which is made up
of farm financial experts from across the U.S.
The only requirements for using this process
are accurate records of cash receipts and cash
disbursements for the period being analyzed, and
complete balance sheets (including accrual items)
as of the beginning and end of the period.
The process yields an “accrual adjusted”
income statement. It differs from accrual income
