What to know about cash vs accrual accounting — and how to use both on your farming operation

If you’re a producer who only uses cash accounting practices in your operation, it’s natural to assume that higher income = a higher tax bill. But producers can change their thought process to higher income = higher profitability. 

More income doesn’t always have to mean a more stressful tax season. In fact, high accrual income could be an important indicator of your long-term financial health.

So what’s the difference between cash accounting and accrual accounting?

Cash accounting is your cash income and cash expenses received and paid in any given 12-month calendar or fiscal year. Many producers operate on and use cash accounting for tax planning purposes, and this method provides flexibility to defer revenue and prepay input expenses.

Accrual accounting aligns your crop revenue and expenses in the proper crop year. This method removes tax planning tactics (prepayment or crop sale deferment) for more accurate financial statement preparation. Accrual accounting helps paint a truer picture of the profitability of growing and selling a crop, which doesn’t always fit neatly into a calendar or fiscal year.

It’s easy to put blinders on and only focus on taxable income. But staying in that narrow window,  may cause missed opportunities. If cash accounting is the only method you use on your operation, true profitability measurement is incomplete.

This method hinges on the timing of certain transactions:

• When do you sell grain? 

• When do you pay expenses?

This means that cash accounting can require multiple accounting years to measure one crop's profitability. For example, by mid-2026, farmers may be sold out of their 2025 crop and will begin to sell their 2026 crop in a few months. Many farms also paid the majority of their 2026 crop’s fertilizer, chemical, and seed in 2025.

To help illustrate the differences between cash and accrual accounting, please see the examples below:

Table 1. Effect of a negative inventory change

Cash vs. Accrual
Cash		Accrual
Grain Sales	500,000	Grain Sales	500,000
		Inventory Change	(100,000)
		Accounts Receivable	50,000
Operating Expense	400,000	Operating Expense	400,000
		Prepaid Expenses	50,000
		Accounts Payable	(20,000)
Net Income Before Deprecation	100,000	Net Income Before Deprecation	20,000

Table 2. Effect of a positive inventory change

Cash vs. Accrual
Cash		Accrual
Grain Sales	500,000	Grain Sales	500,000
		Inventory Change	25,000
		Accounts Receivable	50,000
Operating Expense	400,000	Operating Expense	400,000
		Prepaid Expenses	20,000
		Accounts Payable	(20,000)
Net Income Before Deprecation	100,000	Net Income Before Deprecation	175,000

**Examples provided by FBFM WOW, Illinois FBFM.

Both accounting methods serve distinct purposes that are important in any farming operation. But for long-term, strategic decision-making, accrual accounting is an important addition to your management tool box.

Why farmers can benefit from accrual accounting

Integrating accrual accounting can help you more clearly understand your big-picture finances  for enhanced management strategies.

The accrual method considers: revenue as it is earned and expenses when they are incurred regardless of when they are converted to cash. 

This more complete financial view from crop year to crop year empowers more confident decision-making. When you have a firmer grasp of the true cost and profit from each enterprise, you’ll have a better idea of when to make critical investments or cutbacks. 

Accrual accounting for a farming operation can also help key management decision making. Net accrual income reports are the first step to help you answer: 

• What is my current debt repayment capacity? 

• How much do we need to expand an operation before bringing on or transitioning to additional family members?

How FBFM helps cooperators leverage both accounting methods

For more than 100 years, FBFM has helped Illinois and Indiana farm families with tax planning and day-to-day accounting. The cash method will always play an important role here.

But we are also committed to keeping those farms running for generations to come. And that longevity requires an accounting method that shines the light beyond a single calendar year, considers the unique seasonality of farming, and enables more strategic decision-making.

When partnering with FBFM, cooperators can develop their projected farm income statement. This report is based on the producer’s historical accrual information and helps establish their financial big picture. With this kind of data, farmers can more clearly understand their financial performance, make more informed decisions, and ensure smoother transitions to the next generation.

For more support with your on-farm accounting, find your nearest FBFM location here, or reach out to our team.