Some income may come from the sale of property only partially produced on your farm. An example is feeder cattle (or feeder pigs) that you buy, feed out and sell at a later date. IRS does not allow a deduction for the cost of the feeder livestock until the animals are actually sold. The sales of the purchased livestock is reported on Schedule F, line 1, "sales of livestock and other items bought for resale." The cost of the livestock sold is reported on line 2, "cost or other basis of items reported on line 1." The difference between the sales amount and the cost is reported on line 3. Special accounting is required to keep track of the cost of livestock purchased, especially if the cattle or hogs are purchased in one year and sold in another year.
As livestock are purchased, the cost is added to an asset account (resale inventory) that increases the amount in the resale account and reduces the amount in the checking account. At the time of sale, the resale account is reduced by the cost of the purchased livestock sold and that amount becomes a deductible expense.