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

“You have one of the highest net accrual incomes we’ve seen this year.” 

That’s what we excitedly told one FBFM cooperator recently. 

Instead of being thrilled about his accomplishment, though, this farmer’s reaction was, “Oh no. How much tax does that mean I’m going to have to pay?” 

Equating high income with high taxes is a natural assumption. And if those income numbers had been pulled from the producer’s cash accounting, it may have meant a higher tax bill. 

But it was his accrual income that stood out. 

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

Tax preparation focuses on cash accounting: aka dollars in and dollars out during that calendar year. A cash accounting method helps you zoom in to the exact numbers you need to include on your tax return. 

Accrual accounting, however, zooms out. This method aligns the income and expenses from a given crop year. Instead of determining what net income was for 2025, accrual accounting helps you answer the questions: 

• What income did the 2025 crop generate? 

• What costs did that crop incur? 

…regardless of whether you paid those expenses in the same calendar year as the income arrived.

Cash accounting looks through a narrow window into a given 12-month period. 

But accrual accounting helps paint a truer picture of a process — growing and selling a crop — that doesn’t always fit tidily into a one-year window.

Both accounting methods serve distinct purposes that are important in any farming operation. But for long-term, strategic decision-making, accrual accounting is a must.

What cash accounting does and doesn’t do

One simple mistake on a tax return could be the difference between paying a manageable amount of income tax versus thousands of dollars more than expected. 

Every farmer instinctively understands how vital accuracy is on that stack of forms they send to the IRS. Cash accounting serves this purpose well. 

This method also helps you stay on top of day-to-day cash needs. How much money is in your bank account? Is there enough to pay that chemical bill due Friday? Is now the right time to fill our diesel tank at the farm? Cash accounting shines with answering these shorter term questions.

Still, if cash accounting is the only method you use on your operation, some limitations exist. 

It’s easy to put blinders on and just worry about your daily cash balance. But when you stay in that narrow window, you may miss more strategic long-term opportunities, like the best time to invest in new land or equipment. 

Relying solely on cash accounting can also paint a misleading picture of where you truly stand financially. This method hinges on: 

• When do you sell grain? 

• When do you pay expenses?

If the answers to those two questions bleed over into multiple calendar years, cash accounting can struggle to keep up. 

This limitation is usually most obvious early in Q1. Many cooperators hold grain inventory over to the following year to minimize their tax liability. So on January 2, they’re sitting on $1.5 million in inventory. Between then and mid-February, they’ll move that grain and collect checks. 

Cash accounting recognizes this cash influx, but doesn’t necessarily take into account the expenses that were accrued for that crop — the expenses that now need to be paid down. That line of credit you took out in October to prepay fertilizer costs, for example, is going to come due. Along with all the other costs you incurred over the previous growing season. 

By June, you’ve used most of that cash influx. Your financial picture suddenly looks very different. 

Alternatively, the last quarter of each year may feel more in the red than you actually are. Many farmers incur high expenses during this time to lock in prepay prices and avoid higher tax liability. If you only use cash accounting to visualize where you stand, things may feel stressful as that checking account ticks lower.

Why every farmer needs accrual accounting

Integrating accrual accounting can help you more clearly understand your big-picture finances during these awkward points in the farming calendar. 

The accrual method considers: what did this crop cycle make, and what did it cost to produce it? 

Focusing on these high-level questions — regardless of whether income or expenses spill over into the next calendar year — gives you a firmer grasp of where your operation stands. 

This bird’s-eye 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 crop, you’ll have a better idea of when to make critical investments or cutbacks. 

Accrual accounting at a farming operation can also help ease transition planning. Net accrual income reports 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 also are 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 also get access to their projected farm income statement. This report is all based on accrual information and helps establish their financial big picture. With this kind of data, farmers can more clearly understand their financial standing, make smarter investments, 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.