Debits and credits are the building blocks of your farm accounting operation, keeping your farm’s financial records accurate and meaningful. Here’s how they work.
Debits and credits are the foundation of double-entry accounting, the system used by most farm accounting software and required for accurate financial statements.
The idea behind them is simple: every transaction on your farm or ranch affects at least two accounts, and debits and credits are how those changes are recorded. Understanding how they work makes it easier to read financial reports, spot errors, and make better management decisions. Here’s what you need to know.
What are debits and credits?
In double-entry bookkeeping, every transaction is recorded twice:
once as a debit
once as a credit
The total dollar amount of debits must always equal the total dollar amount of credits. This is what keeps your accounting system “in balance.”
A common misconception is that debits always mean “increase” and credits always mean “decrease.” In reality, whether a debit or credit increases or decreases an account depends on the type of account involved.
How debits and credits affect the five main account types
General ledgers for agricultural operatioins usually include five broad categories of accounts:
Assets – what the operation owns
Liabilities – what the operation owes
Equity – the owner’s interest in the business
Revenue – money earned from production
Expenses – costs of operating the farm
A simple rule of thumb is:
Debits increase assets and expenses
Credits increase liabilities, equity, and revenue
The opposite is also true:
Credits decrease assets and expenses
Debits decrease liabilities, equity, and revenue
Farm-relevant examples of debits and credits
Let’s look at common agricultural transactions to see how this works in practice.
Example 1: buying feed with cash
Your operation purchases $3,500 worth of hay and pays for it immediately.
Debit Feed Inventory (asset) $3,500
Credit Cash (asset) $3,500
Your feed inventory increases, while your cash decreases. Even though both accounts are assets, one goes up and one goes down, keeping the transaction balanced.
Example 2: buying feed on credit
If you buy the same hay but don’t pay for it yet:
Debit Feed Inventory (asset) $3,500
Credit Accounts Payable (liability) $3,500
You now have more feed, but you also owe money to a supplier.
Example 3: selling calves for cash
You sell weaned calves for $18,000 and receive payment immediately.
Debit Cash (asset) $18,000
Credit Livestock Sales (revenue) $18,000
Cash increases, and income is recorded. This revenue will later flow into your income statement.
Example 4: paying veterinary expenses
You pay a $1,200 vet bill related to herd health.
Debit Veterinary Expense (expense) $1,200
Credit Cash (asset) $1,200
Expenses increase, reducing profitability, while cash decreases.
Example 5: taking out an operating loan
You receive a $50,000 operating loan to cover seasonal expenses.
Debit Cash (asset) $50,000
Credit Notes Payable (liability) $50,000
The loan increases cash but also increases what you owe.
Why this matters in agriculture
Agricultural businesses are often more complex than other small businesses. Livestock grow and change value, feed inventories fluctuate, and expenses are frequently incurred months before revenue is earned. Many operations also run multiple enterprises — such as cow-calf, feedlot, dairy, and crops — within the same business.
Debits and credits provide a consistent structure that allows all of this activity to be tracked accurately in the general ledger. When used correctly, they support:
reliable financial statements
enterprise profitability analysis
accrual accounting adjustments
communication with lenders and advisors
They also act as an internal check. If total debits don’t equal total credits, something has been entered incorrectly.
A simple way to think about it
Instead of memorizing rules, it’s helpful to think of debits and credits as tracking where value is coming from and where it’s going. If value is coming into an account, it’s recorded one way; if it’s leaving, it’s recorded the opposite way. The accounting system forces you to show both sides of the story every time.
Debits and credits aren’t just accounting jargon — they’re the mechanics that keep your farm’s financial records accurate and meaningful. Once you understand how they apply to common agricultural transactions, the general ledger becomes a powerful tool for managing risk, measuring performance, and planning for the future.
Know your numbers with Ambrook
Ambrook‘s real-time, interactive reports and easy-to-use workflows help you build habits around bookkeeping and accounting, ensuring your financial data is always ready and reflects the current state of your business.
Plus, with time-saving bookkeeping automation features, streamlined bill pay and invoicing, and other powerful accounting and financial management tools, Ambrook doesn’t just make staying on top of your numbers easy: it takes the guesswork out of running your business. Curious to learn more? Schedule a demo.
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This resource is provided for general informational purposes only. It does not constitute professional legal advice and may not apply to your specific situation. Consult with professional legal counsel before making any decisions about your business.
