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Explanation

The balance sheet is referred as such because it adheres to the Universal Accounting Equation:

Assets = Liabilities + Net worth (Owner’s equity)

• Assets: Items owned by the farm business that have value.
• Liabilities: Financial obligations (debts) of the farm business that are owed to others.
• Net Worth (Owner’s equity): The value of the farm business owned and free of debt.

The balance sheet is also known as a “net worth statement” or “statement of financial position” because of the importance of net worth with respect to representing the farm business’s financial position.

Assets are classified on the balance sheet as to their useful life in the farm business: current (used or sold within 1 year or within the normal operating cycle if longer than 1 year) and non-current (held for more than 1 year). Liabilities are classified similar to assets: current (due within 1 year) and non-current (due beyond 1 year).

In agriculture, non-current assets and liabilities may be further divided into intermediate (more than 1 year but less than 10 years) and long-term (more than 10 years). The purpose of comparing intermediate or long-term liabilities to intermediate or long-term assets is to determine whether the debt is structured consistently with asset life and to evaluate the overall balance sheet structure.

The Farm Financial Standards Council (FFSC) provides the specific standards and structure for the balance sheet. This article provides a concise and practical presentation of the balance sheet in compliance with the FFSC guidance.

Balance Sheet Structure

The balance sheet is divided into two columns: assets on the left side and liabilities on the right side. The net worth will appear on the bottom-right side. The value of the assets will balance or equal the sum of the liabilities and net worth (owner’s equity).

Balance Sheet	As of Date (xx/xx/xxxx)
Assets Current Assets: Cash, prepaid expenses, supplies, market livestock, grain, feed, livestock inventory. Non-Current Assets: Breeding livestock, machinery and equipment, vehicles, buildings and improvements, land. Also include investments in finance leases, cooperatives, and other entities.	Liabilities Current Liabilities: Accrued interest, accounts payable (bills), credit card balances, short-term operating, principal due within 1 year on non-current loans. Non-Current Liabilities: Notes payable such as livestock, equipment, facility, real estate (building or land) loans. Net Worth (Owner’s Equity)

Summary

The first financial management report often created for the farm business is the balance sheet. The balance sheet is one of the most commonly used financial reports and displays what the farm business owns and what is owed. The difference represents the owner’s claim to assets or equity in the farm business. A well-prepared balance sheet can describe the farm business’s financial position, measured by solvency and liquidity ratios and measurements. To understand the farm’s financial performance, the balance sheet and the income statement must be evaluated together to calculate profitability ratios and measurements.

Test your knowledge of the balance sheet

True or False: The balance sheet will specify a point in time.

A balance sheet includes which of the following?

References:
Farm Financial Standards Council. (2021, January). Financial guidelines for agriculture.

This material is based upon work supported by USDA/NIFA under Award Number 2018-70027-28586. Preparing the Balance Sheet (2021), drafted by Katie Wantoch, UW–Madison Division of Extension; reviewed by Kevin Bernhardt, UW Center for Dairy Profitability/UW-Platteville, and Jenny Vanderlin, UW Center for Dairy Profitability; based on material from Understanding the Farm Balance Sheet, Part I Factsheet (2018), by Sandy Stuttgen, UW–Madison Division of Extension.

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