A “Chart of Accounts” is an accounting concept that refers to a complete listing of the expenses, revenues, assets, liabilities, and equity that together describe a business’s holdings and activity. Bookkeepers and accountants need a comprehensive Chart of Accounts to prepare financial statements and keep record of important distinctions for accurate tax reporting.
With Ambrook, the power and importance of your Chart of Accounts only starts with bookkeeping and accounting — a carefully calibrated Chart of Accounts enables easy budget management, live analytics for decision making, and of course more formal reporting. This guide, in conjunction with Ambrook Support Staff, will help you set up your Chart of Accounts to achieve all of those goals.
If you want to skip this article, here’s the short version: Your Chart of Accounts is the blueprint from which Ambrook will build insights about your farm’s business health, and those insights can only be as specific as the blueprint. So if you have specific questions about your business, make sure your Chart of Accounts is specific enough to gather the data necessary to answer them. But don’t worry too much, Ambrook makes it easy to add to your Chart of Accounts as you go, because we know your business is never standing still.
Accounts That Track “What Your Business Does” (Revenues, Expenses, Capital Expenditures, and Other Cash Flows)
Revenues and expenses are “what a business does”. Any money coming into or out of your business needs to be categorized properly, and this is where a carefully considered Chart of Accounts will save you time and empower you to answer questions about your business.
You’ll see in the examples below that Ambrook allows you to create subcategories. This is a powerful tool that lets you analyze your business at multiple levels of granularity, so you should consider whether it makes sense for you.
You are probably familiar with the IRS Schedule F form, which is the main way that farmers in the US report their income and calculate tax liability on a yearly basis. Don’t worry about the Schedule F when you are preparing your Ambrook Chart of Accounts. Ambrook makes sure that your Chart of Accounts is at least detailed enough to fill out the form at the end of the year, and we also ensure that your categories are correctly tied back to the boxes on the Schedule F.
These categories should represent all the ways that your business earns money. Usually for farms and ranches this is primarily through the sale of produce or livestock, but farms often have other forms of income, like land rent, custom hire income, or even consulting fees. Set up accounts for all of the different channels through which you earn income and that way you’ll know which of those channels to focus on or even which ones to abandon.
You may even want to get even more specific and track differences within an income stream; i.e. not just that I sold this to a processor, but I sold this to a specific processor. Feel free, but remember that there is a balance between a fully comprehensive chart of accounts and one that is feasible for you or your bookkeeper to keep up with during the busy season. We’ve found that it's easier to start with a smaller set of accounts and make it more detailed as you get used to Ambrook and the ways it can save you time in the bookkeeping.
Farm Product Sales
Farmers Market Sales
Land Rental Income
Animal Rental Income
Likely the biggest section of your Chart of Accounts, expenses are all of the things your business spends money on. This includes direct costs of the products you sell (often known as “Cost of Goods Sold” or just “COGS”), as well as any other operating expenses or overheads that are required to keep a farm running. We start you with a suite of common expenses, but every business has different ones. If it's money that you spend on goods or services for your business (and it's not a Capital Expenditure), it's an expense. Setting up your Chart of Accounts to track your expenses at the right granularity can be a huge advantage when you want to figure out how to cut costs later.
On Ambrook we let you get as specific as you want, and we make it easy to tag expenses from a long list, so feel free to get very detailed if you want to get very detailed insights about where you and your team are spending money.
Feed Grain & Meal
Shipping & Freight
Capital expenditures are kind of like expenses, but usually bigger and more permanent. They aren’t deductible like regular expenses because they are the purchase or construction of an asset that will be added to your Balance Sheet. You can start with a small list of Capital Expenditures categories and grow it as you purchase new assets.
Other Cash Flows
There are a number of instances when money enters or leaves your business for reasons other than sales or expenses. Ambrook provides some default categories that capture these situations, and you are welcome to subdivide and customize them if desired.
Transfers are cash flows that go from one of your accounts to another, such as moving money from checking to savings, or depositing cash at an ATM. They are important because they tell you where your money is, but they don’t provide much in the way of business intelligence.
Equity Deposits and Withdrawals
When a business owner deposits their own money in the business account or just directly spends money on the business, it's an Equity Deposit. Likewise, when an owner draws income from the business that isn’t wages for work performed, it's an Equity Withdrawal.
Paying off a Loan
When you make payments towards the principal of a loan, it’s not a regular expense because it reduces a liability on your Balance Sheet. In Ambrook, we tag this as “Loan Principal Repaid”, as most of your assets will be connected to live auto-adjusting balances.
If a loan payment includes interest, however, you will want to split it up and tag the interest payment as a regular expense so you can deduct it!
To assist with reporting and analytics, Ambrook groups your tags together under broad headings that help you find them during tagging and also structure your financial reports. By default, we start you with the following Reporting Categories, but you are welcome to add more:
Cost of Goods Sold
Enterprises, Funding Tags, and Entities
What sets Ambrook apart from other accounting software is that we let you add a few more dimensions to your Chart of Accounts to track more things you might care about at the same time you do your normal bookkeeping. Those additional dimensions are Enterprise, Funding, and Entity tags.
These tags allow you to associate revenues and expenses with a particular line of business so you can zoom in and compare your cost and profit centers without being distracted by overhead costs. For most farms and ranches, their Enterprises are the products they raise, but some farms have additional forms of income like ‘Agritourism’ or ‘Contract Production’.
Like categories, Enterprises can be nested for even more granular analysis.
Funding tags let you associate transactions to a particular funding source for easy review and reporting. A common example where a Funding tag can help is a reimbursement-based Cost Share or Grant like NRCS EQIP. Simply apply this tag to every transaction related to the funding source and reporting becomes a breeze.
Choosing what Funding tags to create when you start on Ambrook is easy; create a tag for each source of funding you currently use that might require some sort of transaction report on a periodic basis.
Some farms and ranches are made up of a group of separate legal entities, like LLCs or S-Corporations. Entity tags on Ambrook are used for keeping track of transactions across those entities. If you run your farm across more than one legal entity, and you want to manage them all from one place, set up an Entity tag for each one.
Accounts That Track “What Your Business Has” (Assets, Liabilities, and Equity)
Assets, Liabilities and Equity can be thought of as “what a business has”. These can be physical things like land or equipment; monetary holdings or obligations like a bank account balance or loan; or even intangible accounting concepts like Equity.
These are sometimes called “Balance Sheet” accounts and together make up the “Fundamental Accounting Equation”:
Assets - Liabilities = Equity
In English, this can be thought of as “What I own minus what I owe is what my business is worth.”
On Ambrook, we use partner services to connect to your bank accounts and lines of credit so we always have the most up-to-date information about their balances and reduce manual data entry. Any account you connect to on Ambrook is automatically added to your Chart of Accounts.
There will be assets and liabilities that cannot be digitally connected. These are things like Equipment and Vehicles that you will add manually as you purchase them or all at once when you start on Ambrook. These will be added to your Chart of Accounts as they are created, and eventually end up on your Balance Sheet.
Equity is calculated automatically by finding the difference between your Assets and Liabilities, and you can split it among multiple equity holding accounts as necessary.
Generally speaking, there are not many hard choices when it comes to choosing your “Balance Sheet” accounts. Simply add all of your bank accounts, loans, and physical assets. As with everything else on Ambrook, these accounts exist to serve you and the questions you want to answer about your business. If you want to track the value of every single one of your vehicles, buildings, and pieces of equipment then you can and should add them all to Ambrook individually with identifying names like “2005 JD Tractor”. If it's enough for you to know the value of all your vehicles aggregated together, then add them as a grouped account like “Vehicles” instead.