Income Statement

Other names used for this important accounting statement include: a profit-and-loss statement, an operating statement, and an income and expense statement. The income statement lists the income and expenses of a business over a period of time, called the accounting period. The accounting period for most farm businesses is the calendar year, since they report income for tax purposes on the calendar year. The income statement measures the profitability of the business over this period. It is a capsule view of what the farm produced over the time period and what it cost to produce it.

The difference between these two categories is called the net income, profit or loss for the period. The most common income statement for farm producers is the income statement, since it is this statement that is prepared in support of an income tax return. The cash income statement considers only cash transactions at the time they are made, be that income or expenses. The other type of income statement is called an accrual income statement. The accrual income statement lists all the income when the goods are produced, not necessarily when they are sold. Expenses are recorded when they are incurred, not necessarily when they are paid for.

The accrual income statement does a much better job of reporting income and expenses as they relate to the production cycle, and this provides the basis for a more thorough analysis of the income and expenses. In most cases, producers prepare a cash income statement, and make the accrual adjustments for inventory changes, accounts receivable and payable, etc. Farm plan follows this format by reporting the cash income and expenses and then making all the adjustments to this cash statement to produce an accrual income statement.

Net Farm Income refers to the 'bottom line' profit that is earned (or projected to earn) by the business during the accounting period. It represents the business' return (calculated on an accrual basis) to the producers labour, management, and capital. Net Farm Income is calculated by taking the cash income less the cash expenses, including the depreciation for the period, and then making the appropriate accrual adjustments to
this cash income.