Establishing a Farm Filing System

By: Erlin Weness and James Christensen, University of Minnesota Extension Educators
August 2001

How is your filing system? Can you retrieve any receipt in a few seconds? If not, maybe these suggestions will help.

Reasons for Filing System:

A filing system has a dual role: 1) easy retrieval of any income or expense items for your personal reference or proof of payment and 2) verification of income and expense items if the Internal Revenue Service (IRS) audits you.

Setting Up A Filing System:

The place to start is to set up an individual file for each of your income and expense items. The labels on your files should be the same as your account codes in your farm accounting system. For example: If you have an account “Corn Sales”, set up a file folder with the same words “ Corn Sales” and put all corn sale receipts into that file. If you are later audited or need to find out specific information on corn sales, you simply pull that file. Your next folder may be “Soybean Sales”, then “Coop Patronage Dividends”, and “Miscellaneous Income” etc. Then also set up a set of folders for all of your expenses. “Seed Bought”, “Fertilizer Bought”, “Interest Paid” and “Repairs” would be a few of the expense labels. Set-up an expense file for each expense account.

You will need a separate file for “Government Transactions” in which all papers relating to the government program, LDP’s, market gains, and forfeiting are placed. Next add a file for “Machinery, Buildings and Equipment Purchased”. It may be wise to have a separate file for each capital item purchased, especially if it is a large building project or an item that has some personal and some business use to it.

Set up files for money borrowed and loans repaid. You may want to separate these by lender or loan. If installment payments are made on machinery, auto’s or land, set up a file with the amortization or payment schedule so you can determine amount of principal and interest paid for tax purposes each year.

Next, add files for personal non-farm wages (paycheck stubs) or other non-farm income and family living expenses. Finally, add a file for 1099’s received and 1099’s sent and an “Income Tax” file and your job should be nearly finished. Files can be alphabetized or put in account book order, whatever you prefer. You can modify or add to your files at any time.

Filing Checks and Deposit Statements:

If you receive your checks and deposit tickets from your bank on a monthly basis, you may wish to put them into a file marked January checks, February checks, etc. Or you may opt to just mark each envelope as to the month they cover and keep them in one file. If you get image statements or photocopies of your checks, just add them monthly to a check/deposit file or keep them in a three-ringed notebook for easy access.

Starting A New Year:

At the end of the year, you have two choices. You can start over with a new set of file folders for the year, or you can empty the old files and label all file contents for future reference. If you take the receipts out of the file at year-end, they can become disorganized in a hurry. It may be best to leave them in the files for about 5 years. I suggest that you have about 5 sets of files. On the 6^th year (2006), empty and discard the receipts from the earliest year (2001) and reuse the files.

Year End Filing:

At the end of a year, put all pertinent information together for the year. A complete file would include all income, expense, loan and capital purchase records from your files assembled during the year. It should include your account books, 1099’s and related information. File it all in a box with the date/year clearly marked on it.

When to File:

It may be best to put all currently received statements and receipts into a drawer or current file until such time as they are used to verify or confirm check entries made into the record system. The most efficient way to do farm records is to enter all income (from deposit slips) and expenses (from checks) when the monthly bank statement is received. Once all income and expenses are entered, those entries are checked against the bank statement for accuracy. Beginning balance plus deposits less checks paid should equal ending checking balance. If the reported ending balance on the record system corresponds with the ending balance on the bank statement, the monthly records should be correct. When making account book entries, one might occasionally refer to the statements or receipts from the current drawer or file in making entries. Often details like number of head, weight or type of feed are not listed on the check. The receipts, statements or bills in the current file can be useful in entering this information on the record system. Once the checks and deposits corresponding to the receipts and statements are entered into the account book (at month’s end), they can all be filed into your standard filing system.

How Long To Keep Records:

The IRS says that checks and receipts can be discarded after about 4 years, but holding them longer is a good idea. You need to keep them for at least 4 years to prove your tax deductions. Prudent managers almost always keep their records longer than 4 years. Many times they need to go back more than 4 years to find a specific check or receipt. If storage is not an issue, keep all records as long as possible before discarding them. Keep your account books and income tax returns forever or at least until you retire or die. When storage becomes a big burden, discard all but the account books and tax returns. It is a good idea to keep all receipts, checks and information pertaining to any items you still own. Occasionally, being able to put your hands on a particular document can save you a lot of time, trouble and sometimes money.

Good farm records backed up by an organized filing system can increase the efficiency and profitability of the farm business.

August, 2001

Return to the Farm Management Page
Return to the SWROC Home Page