Prepaid Inputs and Grain Inventory, Done Right

Two items account for most of the distance between a cash-basis tax return and a balance sheet a lender can use: inputs you paid for before you used them, and grain you grew before you sold it. Handle both correctly and your statements stop swinging for reasons that have nothing to do with how the year went.

Prepaid inputs: paid this year, used next year

You buy $180,000 of seed, fertilizer, and chemical in November for next spring. On the tax return, cash basis, that's a deduction this year. On the balance sheet, it is not an expense — it's a current asset called prepaid inputs, and it becomes an expense when the product goes in the ground.

• At purchase: increase prepaid inputs, decrease cash (or increase accounts payable).
• At application: decrease prepaid inputs, increase the seed / fertilizer / chemical expense account for the crop year that used it.
• Never both. Expensing at purchase and again at application double-counts the cost.

Why it matters to the ratio

Expensing the prepay at purchase removes $180,000 from current assets on December 31. On a farm with $600,000 of current assets and $400,000 of current liabilities, that drops the current ratio from 1.50 to 1.05 — a material change in how the file reads, caused entirely by an entry, not by the operation.

Grain inventory: grown this year, sold next year

Bushels in the bin on the balance sheet date are a current asset. Three things have to be recorded, and a lender will look for all three: quantity, valuation basis, and valuation date.

• Quantity — bushels by commodity, from bin measurement or scale tickets, not an estimate.
• Value — local cash bid on the statement date, less estimated drying, storage, and hauling to get it to the elevator.
• Contracted vs. open — grain already priced under contract is valued at the contract price, not the market.

Deferred payment contracts and grain bank

Grain delivered but not yet paid for is a receivable, not inventory — it's already sold. Grain sitting in commercial storage under your name is still inventory. Mixing the two either double-counts bushels or loses them, and both show up as an unexplained swing in current assets.

Growing crop: the third one nobody records

Fall-applied fertilizer, tillage, and seeded wheat represent cost already in the ground for a crop not yet harvested. That's a current asset too — a deferred crop expense. Skipping it understates what the operation is actually worth on December 31.

Doing it once, not twice

The reason these entries get skipped isn't ignorance, it's that maintaining them by hand alongside a cash-basis return is real work. A system that starts from the tax return and layers the accrual adjustments on top gives you both statements from one set of transactions.