Editor's note: This is the first in a five-part series on why and how horse farms and stables should inventory as your year starts. Whether you are a one-person horse farm or a large multi-trainer boarding facility, this annual review of your belongings is important for many reasons, not the least of which is if you have a loss from theft, fire or natural disaster. There also is the need to inventory for accounting if you sell or consume products, such as feed or hay.
“Inventory” can be a complex topic, but it is an important one. The word inventory is often used to describe a listing of “assets” such as tack, equipment or other items that a farm or stable owns. Maintaining an updated listing of these items is required for insurance, long-term asset calculations and for simply making sure the items are in good working order.
From an accountant’s point of view, inventory tracking is focused on supplies used or sold within a specific period of time. This definition excludes things such as saddles, tools and equipment and instead tracks consumable items such as hay, grain and medications.
“From an accounting standpoint, anything with a useful life of more than one year is equipment and not inventory,” said Oklahoma State University Regents Professor Phil Kenkel, PhD.
“A business needs to track inventory to accurately track the costs of the items they sold in a given period and the amount of expendable supplies used up in a given period of time,” he added.
Depending on whether your stable uses the accrual accounting or cash accounting system determines exactly how the levels of purchased and sold inventories are accounted for on your taxes. Regardless of the system you use, inventory should be perpetually updated.
“Anytime something is purchased, it should be added to inventory. Anytime it is sold, the inventory should be adjusted downward,” he said.
A physical inventory of items that are continually tracked should be performed periodically, at least once a year. If the physical inventory differs from what is tracked on the books, then an adjustment is made and a note is entered explaining the difference. For example, a broken or damaged bale of hay that cannot be fed is shrink and is noted as such.
For advice that best fits your business, talk with an accountant. And make sure to back up any inventories—whether equipment or consumables—at a location away from your farm or stable.