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MUNICIPAL ACCOLNTING AND
BUDGETARY PRACTICES IN
CENTRAL MICHIGAN CITIES

Thesis for the Degree of M. A

MICHIGAN STATE COLLEC
H. Lee Busch
I937

 

 

 

Mzm/757

LIUIIICIPAL ACCOUIIZ‘II‘CG AND BUDGETARY PEAC'I‘ICES
IN CENTRAL “ELLE-310A}; CITIES

THESIS

 

EUKICIBAL ACCOUNTIEG AND BUDGETAEY PEACZICES
IN CELTRAL JICHIGAN CITIES

By
H. Lee figfish
A THESIS
PRESLLTED I3 1H5 FACULTY
OF

MICHIGAN STATE COLLEGE

AGRICJLTURJ ALB APPLIED SCIENCE
IN
PARIIAL FULFILLIEET OF EHE REQUIREJENTS
FOR THE

DEGREE OF HASTER OF AR‘S

East Lansing

1937

ACKN-RLEDGALKT
In acknowledgment of the assistance given
me in preparing this thesis, I wish to express
my gratitude to Dr. H. s. Patton and Pat. E. A.
Gee of the Michigan State College and Mr. R. E.

Sanderson, Comptroller of the City of Lansing.

Introcuction

Cheater I

Chaqter II

thaqter III

C“ E. J‘LEEI‘ IJ

Chapter V

Bibliograghy

IALLZ 3? CDLEENIS

Ltates O O O O O O O O O O O O O O O

(a) by Statute
(b) by Interested Lationa- Organizations

. g Princigles of the Estiorel Con ittee on
Uniform Accounting ttated ané nxglained . . . .

(T1,

I Lntries, 'I .
ctinr Iund Operation . . . . . . . . .
(a) General Fund

‘) Lorking Ca ital Band

Accountinfl and Budgetary Hractices in the Cities of
Lansing, Juccson, ‘xls‘cegon, Flint, and Saginaw: .
(a) Procedures Tolloned
(b) Extent of Standardization as Indicated

by a Criti‘al Congarison of Procedares
hit} the Lorkin: Princigles as Set forth

in Chagter II

I I _‘ . . . - (a 3 1 .
Leanne of tuggestions For tecuring gore stanaaroized

Bractices in the Cities of the Survey . . . .

H
C):

C"!
Cf!

60

1:0 0

Lo.

Lo.

Lo.

II

III

IV

VI

VII

ILLLX OF TABLES

 

State Sugervision of tunicigal Accounting and
budretary Bractices . . . . . . . .

Sgecimen of Questionnaire Used in the Survey
General Information of Cities in the Survey .
IDTH-)8I‘atiOI-l Of tlje B1ldf_et o o o o o o 0

Form of the Budget . . . . . . . . .
Execution of the Budget . . . . . . . .
General Ledger Fund Accounts . . . . . .
Pernanert Br0)erty . . . . . . . . .
Control of the Budget . . . . . . . .

Cost Accounting . . . . . . . . . .

TH
CE

47

49

C

c J

51

 

ITRODUCTION

The purgose of this study is to point out the need for standardization
in municipal accounting and budgetary practices, to describe the various
organizations that are working toward this goal, and to ascertain the extent
to which this need has been recognized in the several central Michigan cities
visited.

The logical develooment of the subject as stated calls for: (a) a review

I

of the grogress in the United States (with special emanasis on Michigan's
experience) of the movement to standardize municigal accounting and budgetary
procedures within each state by statutory measures; (b) an examination of the
various organizations prinarily engaged in promoting more uniform accounting
and budgetary practices throughout the United States by appealing directly to
the municipal governing bodies, officials, and voters; (c) a statement and
explanation of the working principles recoanended by the foremost advocates and
promoters of standardized accounting and budgetary procedure for municigalities;
(d) a review of accounting and budgetary oractices in the central dichigan
cities of Lansing, Jackson, duskegon, Flint, Saginaw, and bay City; and (e)

a resume of the writer's suggestions for securing more standardized accounting
and budgetary practices in these cities.

In order to secure data on the general accounting oractices and
budgetary policies of these cities, each was visited during the period from
June 17 to July 25, 1935; and by using a survey form and questionnaire prepared
previous to this geriod (see Table ho. II), an atteopt was made to get as much
"1..

information on the above subjects as oossible in the short tile available. the

comptrollers or chief finance officers of Lansing, Jackson, fiuskegon, and Flint

proved Willing to be of any assistance possible, the Comptroller of Saginaw

was entertaining visitors and could give but linited time, While the Auditor

of Bay City had no time for an interview. The data thus collected, supplemented
by data of a similar nature taken from the various publications of the cities
visited (Where such publications were available), are presented in table form;
the trend toward standardization is discussed; and suggestions gresented which,
in the opinion of the writer, will, if adooted, lead to a closer cooperation

between cities in respect to problems of financial control.

CHAPTER I

TREND TOhARD STANDAEDIZATION OF MUNICIPAL ACCOUNTING
AND BUDGETARY PRACTICES THROUGHOUT THE UNITED STATES

It has only been in relatively recent years that due attention has been
given to municipal accounting theory and practice. The condition of some of our
American cities bears mute evidence to the neglect and ignorance of this branch
of the science of economics. But there has been an awakening to the need of
budgetary and financial record keeping which will permit more accurate forecasts
of the city's receipts and expenditures.

In former years municipal accounting was looked upon as a device to
determine what had happened in the past, with little attempt to coordinate the
historical with the present trend as a basis for forecasting future revenues
and expenditures. Industry has not been so backward in grasping the significance
of past performance in determining future performance. Perhaps it will be argued
that industry has more incentive to formulate systems of accounting because of
enhanced profit as a result of budgeting, cost accounting, and forecasting, but
this is a weak argument. The taxpayer, as stockholder in the municipality, has
as much right to savings in taxes, assessments, and fees as the stockholder in
industry has to increased dividends through savings in costs. And in the last
analysis it is the taxpayer who has to be awakened.

Much has been done in this direction through municipal research bureaus,

professional institutes, universities and colleges, and governmental agenciesl.

 

The growing recognition of the importance of scientific training in municipal
administration is emphasized by Walter B. Pitkin in an article entitled "Young
Jan Go Manage a City" (condensed from The Rotarian in Readers Digest of October
1955), in which he states:

"A promising career for young men is city management. Today city managers run
the business of about 450 cities. This year, at least twelve more are campaigning
for the plan3many others will shortly follow the city-manager band wagon, sick
and tired of wasteful, obsolete, politics-ridden municipal government.

"Each of these cities will employ not only a trained city manager, but pro-
fessionally qualified experts in all subordinate municipal jobs. To qualify for
such jobs,young men must be college graduates,and engineering training is valuable.
Courses designed for prospective city managers are offered at the Universities of
California, Michigan, Stanford, Syracuse, and the Texas A. and d. College. The
International City Managers' Association, Chicago, offers extension courses
covering the entire field of municipal administration".

Most noteworthy in this connection are the accomplishments of the National
Committee on municipal Accounting, which will be discussed more fully in the
following pages.

Uniformity seems to be the keynote of the campaign for improved municipal
accounting. -— "Already some activities of government have well recognized
standards of accounts. Municipal utilities use the classification of the National
Association of Railway and Utility Commissioners. Schools have generally accepted
the classifications developed by the National Educational Association, and the
U. S. Office of Education. Colleges and universities are using the reports of
the National Committee on Standard Reports for Institutions of Higher Education.
The general activities of municipal government can be reported just as uniformly
if standards are provided".1

It would seem rather paradoxical that although the higher governments
promote or attempt to provide satisfactory accounting and reporting systems for
semi—public enterprise by statute, and have been reasonably successful along
this line in the case of banks, insurance companies, railroads, and public
utilities, yet very few successful attempts have been made by these same higher
governments to provide for the standardization in the financial administration
of municipalities. A conspicuous example of such failure may be found in our
own State. In 1951, the Legislature of the State of Michigan enacted Public
Act 515, which made it the duty of the chief financial officer of each munici-
pality to report annually, within thirty days after the close of the fiscal
year of that municipality, an operating statement for the last fiscal year and
a statement of the assets and liabilities as at the end of the fiscal year.
Statement forms were to be prescribed or approved by the State Treasurer, who
also was given power to require statements at any time during the current fiscal

year 0

 

l
"Toward More Uniform Reports for Municipalities", National Committee on Municipal
Accounting, February, 1954.

Section 5 of the Act required a Municipal Budget Authority to prepare
the budget upon forms and in such manner as set forth by the State Treasurer.

The appropriation ordinance was also to be framed and passed in a similarly
prescribed or approved manner, and a certified copy of the budget as passed
filed with the State Treasurer within ten days after enactment.

Section 5 gave the State Treasurer the power to classify municipalities
on a basis of population or type of municipality or both, with the provision
that all forms for reports were to be uniform for any one group or class.

Section 6 provided for a temporary committee of seven advisory to the
State Treasurer in recommending and devising the aforementioned form. This
committee was to consist of the chief accountant of the State Administrative
Board and six members, at least two of whom were to be municipal financial
officers, as defined in the Act, appointed by the governor to serve without salary.

Section 7 imposed upon the State Treasurer the duty of devising "a system
of uniform accounts for each separate type and class of municipality and to offer
assistance and aid to any municipality requesting such in the installation and
Operation of such uniform system of accounts, the cost of which shall be defrayed
by such municipality".

The very purpose for which the law was constructed; namely, that of
providing uniformity in municipal accounting and reporting, brought about its
eventual abandonment. Uniformity was secured, it is true, but at the expense of
flexibility. .The resulting accounting systems and reports were too rigid to
meet specific conditions, so the entire law was repealed in 1955 by Public Act
No. 41.

At present the Michigan municipality has practically a free reign in the
field of accounting, subject, of course, to its charter provisions. The only
accounting practices and reports prescribed are those for the operation of

municipalitybowned public utilities, which must report to the Michigan Public

Utilities Commission, and for the municipal debt structure as reported to the
Public Debt Commission, Municipal Bond Division.

Upon looking farther into the matter of State supervision of munici-
palities, we find that throughout the remaining forty-seven states, twenty-two
require no examination of municipal accounting, twenty-one make no provision
for installation of accounting systems, eighteen require no financial reports,
and twenty do not require the use of a budget. Of those states which do
require one or more of the above, many qualifications are made in the requirements;
e.g., one state reported that it examined municipal accounting records occasionally,
three reported that they examined them partially, three by order of some state
administrative agency, six yearly, three biennially, and the remaining merely
reported "Yes". (See Table No. I)

It thus appears that State control by statute has not met with wide-
spread success, but perhaps that is not the point at which to attack the problem.
It seems that control by statute tends too much toward an unwanted rigidity of
practice which is detrimental in some cases, as well as impractical in all cases.
It appears that best results are being obtained through non—political institutions,
with the National Committee on Municipal Accounting taking the lead. Because
this paper is based primarily on the first constructive work of this Committee;
namely, its "Tentative Outline of The Principles of Municipal Accounting", the
organization and activity of the Committee and its constituency will be covered
somewhat in detail.

The National Committee on Municipal Accounting is a joint committee
representing associations of public officials, professional accountants, and
citizens groups founded to formulate principles of accounting, classification,
and terminology for the use of municipalities in maintaining their records and
preparing financial and statistical reports and to secure the recognition and use
of those principles. The Committee is composed of an outstanding representative

of each of the following groups: municipal Finance Officers' Association; American

Table No.

I

State Supervision of Municipal Accounting

and Budgetary Practices.

 

 

 

 

 

 

 

 

 

 

 

 

Examination of Installation of Financial Use of State Agency
Accounting Accounting Reports Budget Prescribes
Records System Required Required Budget Forms
10 20 50 4O 50
Yes 25 26 29 27 17
No 25 22 19 21 reported -
no or left
blank

 

 

Of those states answering in the affirmative, the following limitations or

reservations were made:

1.

Examination of Accounting Records was -— Annually, 6; Biennially, 5; Occasion—

ally, 1; Partially - e.g., Bonds and debts only, 5; By petition or request
of an interested agency - e.g., a city council, 6; By order of a state
administrative agency, 5.

2. Installation of Accounting System was -- Recommended, 5; On petition or
request, 5; At discretion of the state, 1; For certain municipal functions,
2; Dependent on type or population of municipality, 2.

5 Financial Reports Fequired —— Annually, 4; Biennially, 1; Every four years,

1; Occasionally, 1; On direction only, 1; For certain municipal functions
and activities only, 8; For publication, 15; For partial publication, 5.

Use of Budget Required -— Partial, 2; Optional, 1; By statute or charter, l;

Dependent on type or population of the municipality, 6; For tax funds, 1;
Only through accounting forms, 2.

U1
0

State Agency Prescribes Budget Forms --

State Tax Commission, 5; State Board

of Control, 1; State Board of Accounts, 1; State Budget Director, 1.

 

l . ,_ .
Compiled from charts prepared by Dr. Fylie

"State Supervision of Local Finance".
Municipal Finance Officers' Association, Chicago, Illinois.

The

Kilpatrick in a pamphlet entitled
pamphlet was obtained through the

.a

Municipal Association; National municipal League; International City Eanagers'
Association; Hational Association of State Auditors, Comptrollers, and Treasurers;
American Institute of Accountants; American Society of Certified Public
Accountants; National Association of Cost Accountants; American Accounting

Association; with the Bureau of the Census acting in liaison capaCity. Bach of
these representatives in turn is chairman of a sub-committee within his own
organization.

Eaca organization represented on the National Committee on Municipal
Accounting is an important contributor to the work of the Committee, and so
merits some discussion of its activities.1

The municipal Finance Officers' Association, sponsors of the National
Committee on fiunicipal Accounting, with a membership of 550 State, county, and
municipal financial officers and private accountants and auditors "serves as a
clearing house for financial information and a service bureau for municipal
finance authorities. It conducts research in administrative problems of municipal
comptrollers and accountants; frepares accounting forms and accounting manuals;
cooperates with the U.S. Bureau of the Census in compilation of financial
statistics of local government; conducts special long—term studies on municipal
revenues and functions, and municipal accounting and reporting; and issues
frequent reports on current financial problems."

The constituency of the American Municipal Association is composed of
"50 state municipal leagues and the Union of Canadian Junicipalities, which
includes all provincial unions. The membership of each league is the municipal
corporation (as distinguished from the individual municipal official), and the
conbined membership of constituent leagues is more than 5,000 cities". Its
activities revolve about the state leagues of cities, furnishing "informational

and other services designed to assist leagues to perform their functions more

effectively, conducting required research, and promoting organization of leagues

 

lug Directory of Organizations in the Field of Public Administration", Public
Administration Clearing HOUSE: 1954'

in states where none exist". It supports committees on training in public
service, state control of local finance, model ordinances, public utility
rates, new sources of municipal revenue, and distribution of gasoline tax to
cities.

Further reference to the American Municipal Association is desirable
at this point, due to the activities in the field of Municipal Accounting
of the Michigan Municipal League, a constituent of the American Municipal
Association. The Michigan League has for the past four years been active in
promoting more adequate accounting procedure for Michigan's smaller munici-
palities, with stress during the present period on adequacy rather than
uniformity, but recommending the adoption of uniform procedure and classi—
fication of accounts. Mr. A. J. Kirch of the Michigan League, in his letter
of February 14, 1956, to the writer,further points out that rigid uniformity
is not desirable. "Due t3 the varying sizes of our municipalities, their plan
of government and the many variations in the functions which they perform, an
accounting system designed for one municipality may be either too cumbersome or
far too inadequate for another. From our experience, it is necessary, we believe,
that an accounting system should be fitted to meet the needs and idiosyncrasies
of each city. Uniformity should go only so far as to provide a classification of
accounts for receipts and disbursements to which expenditures for identical
functions in different municipalities can be charged. Rigid uniformity, in
other words, to our way of thinking, is not feasible". He also refers to our
experience in Michigan with Public Act No. 515 of 1951, which has been discussed,
as an indication of the results of rigid uniformity.

The National Municipal League, with a membership of 2,500 persons
interested in the improvement of municipal governments, Working through
committees, prepares, recommends, and promotes improved principles of municipal
government, furnishing speakers, consultants, and data on pertinent problems at

the request of interested legislators and citizens. To this end it supports

lO

committees on new municipal programs, model administrative code, citizen
organization for municipal activity, citizen participation in government,
county government, model special assessment laws, model state constitutions,
selection of judiciary and citizens‘ councils for constructive economy.

The International City fianagers' Association has a membership of 191
city managers of at least three years' standing (active members); 99 city
managers of less than three years' standing (associate members); and 195
professional public administrators, students, and interested citizens. Its
purposes are to "aid in the improvement of local government administration;
to encourage city managers to administer the affairs of their cities in
accordance with best methods developed through research, practical application,
and actual experience; to offer limited consulting service; to maintain a
permanent research staff; and to ascertain and record the more significant
developments in public administrative and managerial practices." The committees
are on research training and professional conduct.

The membership of the National Association of State Auditors, Comp—
trollers, and Treasurers consists of 78 auditors, comptrollers, and treasurers
from 51 states, ex officio. Its purpose is to "promote the study of state
financial problems, and to aid in dissemination of information and interchange
of profitable ideas among its members".

The American Institute of Accountants' membership is composed of 2,245
practicing accountants who have passed an examination in accounting, and met
educational and experience requirements. Its chief activities are establishing
and enforcing a code of professional ethics, providing standard examinations for
State Certified Public Accounting Boards, and maintaining a reference and
circulating library, bureau of information, and placement service. It has
committees on arbitration, education, federal legislation, state legislation,

and special committees on technical problems.

11

The American Society of Certified Public Accountants with a membership
of 2,400 certified public accountants "carries on a program designed to improve
standards of the accounting profession to protect and foster the certificate of
the certified public accountant, and to assist government authorities in regu-
lating the public practice of accounting". Of its numerous committees, those
on Federal legislation, State legislation, accounting practice, and governmental
accounting are of chief interest here.

The National Association of Cost Accountants has a membership of 6,000,
including cost accountants, public accountants, auditors, controllers, accounting
executives, and municipal accounting officials. Its chief activities are
"developing an understanding of the nature and value of accounting, especially
cost accounting; studies to improve technical methods and to establish sound,
general principles; and maintaining a research and service department for use
of members".

The American Accounting Association, the National organization of college
and university instructors in accounting, has a membership of 644 accounting
instructors, providing "an agency through which members can exchange ideas and
discuss common problems" and maintaining committees on governmental accounting,
research, and exchange of teaching material.

All of these organizations have publications adequately covering their
activities. In addition, three of the outstanding municipal associations; namely,
the American Municipal Association, Municipal Finance Officers' Association, and
the International City Managers' Association are affiliated with the Public
Administration Clearing House, which "serves as an exchange for information,
experiences, and ideas among organizations of public officials and others in
the United States and Canada which are engaged in the active work of planning
for improvements in the administrative technique of government". In so doing,

there is prevented needless overlapping of program and duplication of effort.

1"

12

"The Clearing House seeks particularly to bring together operating officials,
research agencies, and technical experts to reduce the gap between theory and
practice".1

As a result of the cooperation of these institutions, the views, ideas,
recommendations, and experierce of men close ta the vital problems of municipal
accountancy can be brought together, combined, improved, and disseminated so as
to bring about a much needed and desired unification of practice in this field.

The forces of theory, practice, and public sentiment combined are producing

results that could not have arisen out of past confusion and indecision.

1
"National Governmental Organizations", March, 1955, p. 5

17
K.

1H5 01 u EC BFILCI’LIS OF THE hh_IJ FL COX TEE
ON UIIFOEJ ACCJUIIIIG STATED AmL EXPLAILED

The following principles of municipal accountingl, as recommended by the
National Committee on hunicipal Accounting, were used as a ulre or yardstick
the study of the several Micdigan cities included in this study:
1. “The accounts should be centralized under the direction of one
officer the should be made resaons sible for keeping or supervising
the ceeiing of all financial records, and preparing all financial
reports". This is for the purpose of placing responsibility for
the accounting of the municipality's finances souarely upon one
capable person, thus avoiding needless duplication of reports
and records, and coordinating and centralizing the financial
activities of all municipal departnents in relation to the

municipality as a whole.

"The general accounting system should be on a double eifi y basis

PO
0

4—7

with a generrl leorer :naintai ned in accordance with tie following

(a) The accounts should be classified in balanced fund

groups.

(b) Asset accounts for permanent property not available
to met t eX)endi ures or obligations should be segre-
gated from other fund assets and the equity represented
by then not included in the current surplus of any

fund."

M

l 'j o o
"lentative Outline of tile PrinC1gles of Iiunici>al Accounting", hational Committee
on AuniCipal Accounting, Bulletin No. 1, Januarf’ one

JL.‘0

The double entry systea of accounting is one that portrays all
changes in assets, liaiilities, and surplus by analyzing each
financial transaction as to its debit and credit components, and
by so doing maintain a mathematical balance of the aggregate
accounts contained in its ledger. In the case of a municipality,

-s desirable to classiiv the ledger accounts into balanced

U

V—JI

it
grouqs of related accounts known as funds. A fund has been

definei as "a sun of money or other resources set aside for the
purpose f carrying on certain activities or attaining certain

objects in accordance uith special regulations, restrictions, or

limitations".1 The number and kind of funds depend upon the size

It is also necessary to segregate assets of a permanent nature,
those that cannot be converted into cash within a short time or be
,

used to meet current expenses, from other fund assets, and to omit

4.1 4"“
0119 e the

"N

:uity reoresented thereby, due to

fron current surplus
resulting distortion of the current condition of the municipality;
i.e., its ability to pay creditors and its ability to take on new
obligations. For example, suppose a city having a p100,000 city

hall containing equipment valued at 950,003 carried these assets in
the accounts of the general fund and included the equity in the
general fund surplus. Further, suppose the general fund Lad a

casn balance of «10,000, accounts receivable of y5,000, and accounts
payable of $12,000. At tdis point a balance sheet would show e165,000
assets, £12,000 liabilities, and p155,000 surplus. These figures
would indicate that the fund was in good condition but a closer

examination would show that there was only e5,000 excess of current

 

”Junicipal Funds and Their balance Sheets", ational Committee on Eunicipal

h
Accounting, Bulletin to. 5, June, 1955, p. 5.

5.

15

assets over current liabilities, which would indicate that the city
would not be able to take on new obligations and it might even
indicate that the present liabilities were impaired because the
operating expenses yet to be paid might consume more than the
$3,000 margin. Thus a false impression of the general fund's con-
dition could have been averted by segregating the assets, building
and equipment, from the general fund accounts and omitting the equity
from the surplus of the general fund.

The only exception to this statement is in the case of fixed
assets used in connection with the operation of a utility through a
utility fund or with activities carried on through the working capital
fund. In such cases, where cost of services rendered must be compa—
rable with similar private costs, the permanent assets must be included
in the fund and depreciation recognized as an operating cost; but here,
too, the equity of the city in these properties must be separated from
current fund surplus and be shown as a separate iten on the fund

balance Sheet.

"The following classification of funds is recommended:
(a) "General Fund" —- consisting of the proceeds from
general tax and miscellaneous revenues not allotted
by statute or charter which are used to finance the

current operation of the municipality.

(b) "Special Revenue Funds" -- usually provided for by
statute or charter to finance particular activities
through specific taxes or other special sources; e.g.,

parks and hospitals.

 

 

(C)

(e)

(f)

16

"Utility Funds" —— used to finance the construction,
operation, and maintenance of municipally owned

utilities; e.g., water, gas, and light utilities.

"Bond Funds" -- include the receipt and disbursement
of proceeds from all bond issues, except special

assessments and utility bonds.

"Special Assessment Funds" -— used to finance improve-
ments or services which are to be paid for wholly or
in part by assessment on benefited property; e.g.,

sidewalks and pavements.

"Trust and Agency Funds" —- consisting of money and
property received and held by the municipality as
trustee or custodian or in the capacity of an agent

for individual or governmental units.

"Sinking Funds" —- created to retire the principal of
term bonds, and built up by periodical installments

paid into the fund for that purpose.

In addition to the fund classification mentioned, the National Committee on

Municipal Accounting suggests more recently funds designated as:

01)

"working Capital or Revolving Funds"1 -- used to
finance activities of a service or manufacturing nature
when these activities become too large to be efficiently
operated through general funds; e.g., central purchase
and stores departments and municipal garage.

It should be noted that in each of the above classi—

fications, except the general fund, there may fall one

 

"fiunicipal Funds and Their Balance Sheets", National Committee on Municipal

Accounting,

Bulletin No. 5, June, 1955, p. 75.

17

or nore related funds; i.e., the municipality may
support a water works, street railway, and electric
light plant, all of which fall under the utility
classification, but each must have a separat: group
of balanced accounts to record accuratelv its
activities.
"The general accounting system should include budgetary control accounts
of revenues, expenditures, appropriations, and encumbrances". When the
budget is passed upon, the estimated revenues from taxes and miscel-
laneous sources should be charged to appropriate account and unappro-
priated surplus credited (See Page 24, entry ho. (l) ); then the
budget appropriations should be set up out of the unagproprieted
surplus created by estimated revenues (See Page 24, Entry No. (2) ).
As orders and contracts are awarded, the appropriation should be
encumbered by a charge to encumbrances and a credit to reserves for
encumbrances (See Page 25, Entry to. (3) ). These accounts, when
read together with appropriation accounts, prevent any accidental
impairing of the budget. As the liability in connection with the
orders and contracts is definitely assumed and brought on the
books through charges to appropriated expenditures and credits to
cash, or accounts payable, the encumbrance record is cleared of

the ame amount by reversing the above encumbrance entry (See Page

U)

25, Entries No. (?) and (10) ). Thus budget control is maintained
through careful scrutiny of the unencunbered balance of appropriations

as it appears on the periodical stateneits.

"Revenue should be accounted for through budgetary control accounts.

If revenue is accounted for on an accrual basis by taking into the

18

accounts each item when it becomes due or a bill is issued for it,
the reports should be prepared on that basis. In this case suitable
provision should be made for possible losses through inability to
collect. If revenue is accounted for on a cash basis, meaning that
an item is considered revenue only when it is collected in cash,

the reports should be prepared on that basis. In either case, all
items of non—revenue character should be excluded from reports of
revenue. Revenues should be classified by fund and by source in

accordance with standard classification."

6. "prenditures should be accounted for through the budgetary control
accounts and on such a basis as to take into the accounts all,
material used or services rendered during a given period. Suitable
provisions out of the appropriations of the current period should
be made for encumbrances for which material or services are not yet
received or rendered. Expenditures should be classified by fund,
by department, by activities, and by object, in accordance with
standard classifications".

In regard to the last two principles the connittee in its revised
principles of municipal accountingl went a step farther and recommended
the use of the accrual basis in accounting for revenues and eXpendi-
tures so far as practical. The accrual method is that of taking on
to the books all revenues as earned, regardless of the time of cash
receipt, and recognizing all expenditures at the time the liability
is incurred, regardless of the time of cash payment.

A non-revenue receipt is one which increases a liability or
reserve, or represents the recovering of an expenditure; i.e.,

borrowings. Revenue and non—revenue receipts must not be confused.

 

1
"Municipal Funds and Their Balance Sheets", National Committee on dunicipal
Accounting Bulletin No. 5, June, 1955.

19

Revenues should be classified by the funds to which they are
applicable; i.e., collections for issuance of a building permit
would be classified as General Fund, and by the source from which
they arise; i.e., fees. In a like manner, expenditures should be
classified as to fund, degartnent, activity, character, and object;
e.g., the salary of a master mechanic in the fire department night
be classified as follows: Fund -— general fund; department —— fire
department; character - expense; activity -- fire fighting;

object -- salaryl.

7. "There should be a system of unit cost accounting in which costs are
allocated to the various activities in the respective departments.
This system should be coordinated with the general accounting
system". This principle stated in the tentative outline was
omitted in the revised statement of the principles of municipal
accounting. It is recognized that utilities operated by the city
must have a systen that will develop costs comparable to those of
private concerns and it also seems that any department of the
municipality performing services for any other department, or the
public, should be able to allocate the cost to the sane even though
it may not be advisable to coordinate the cost system with the
general accounting system; e.g., the city engineering department

may rent equipment and operators to a taxpayer.

8. "There should be inventory records of both consumable and permanent
property and the records of property should be subsidiary to and con-
trolled by accounts in the general accounting system. The asset
accounts of preperty should be maintained on the basis of original

cost, or estimated cost (if the original cost is not available), or,

 

l
hbaunple taken from the City of Lansing.

 

20

in the case of gifts, the appraised value at the time received. _If
current valuations are desired for insurance or statistical purposes,
they should be computed independently from the books and not carried
into the accounts. It is not necessary to account for depreciation
on general municipal property except for unit cost purposes unless
cash can legally be set aside for replacements". Where possible, it
is the best procedure to centralize the city's stock of consumable
supplies at as few points as practical in order to control their
usage more efficiently. In any case, there should be kept individual
stores records to which all incoming stores are charged and all
requisitioned stores are credited. These records should be subsidiary
to a control account or accounts in the general accounting system.
The control account would be charged with all stores purchased,
summarized from the vendors' invoices, and credited with all stores
removed, the totals being taken from the requisition summary.
Permanent property would be accounted for in much the same manner

by having a separate record of each item of property to which would
be charged the original cost, estimated cost, or appraised value,
depending on the manner in which the city acquired it, and any
additional amounts to be capitalized. These records would show
charges only until such time as the prOperty is disposed of when

the record would be credited with the entire amount of the charge,
corresponding charges made to asset accounts for the value received
and the difference to capital surplus. It has been pointed out
before that depreciation of permanent assets is necessary only for
cost purposes, consequently general municipal property should not

be written down, or up, on the books to current value.

9.

10.

ll.

21'

"The accounting for public utilities or other business enterprises
operated by the city should follow the standard procedure employed
by similar enterprises under private ownership. The accounting for
public institutions, such as colleges, hospitals, and libraries
should follow the standard procedure employed by each class of
institution." This statement needs no comment other than that all
municipally-operated utilities in Michigan are answerable to the
Public Utilities Commission just as any privately-operated utility.
About one year after the publishing of the tentative outline of
the principles of municipal accounting, the National Committee of
municipal Accoun ing published a revised statement of these princi-
ples in Bulletin No. 5, entitled "municipal Funds and Their Balance
Sheets", June, 1955, which contained, in addition to the above

principles, with exceptions noted, the following:

"A common terminology and classification Should be used consistently
through the budget, the accounts, and the financial reports". The
necessity of this principle is obvious in coordinating budgets,

accounts, and reports.

"There should be general uniformity in the financial reports of all

municipalities of similar size and type". Note that the phrase "general
iformity" is used. This practice would tend toward comparable reports

from which all concerned would profit. Uniformity, not only in

terminology, but in periods covered and dates available is desired.

Also, in this connection, the availability of reports is important,

for there can be no cooperation where there is a lack of cooperative

spirit.

22

12. "Financial reports should be prepared monthly or oftener, to show the
current conditions of the budgetary accounts and other essential
information. At least once,each year a general financial report
should be published or otherwise made available for public exami-
nation".

The financial reports should embody information regarding the
financial conditions of funds and appropriations, information
regarding current operations of the budget, comparative statements
of income, cash receipts and expenditures, detail of the public debt,
information for cost accounting, expenditures, stores accounting,
and depreciation, and miscellaneous information on the results of
internal checks, and on other operative conditions that may not have
been foreseen.l All of which should be available to whomsoever may
require it, whether it be the operating or departmental executive,

the council, the creditors, or the public.

15. Finally, "a periodic audit by independent accountants is desirable".
In planning for such an audit, the council, citizens, or municipal
officials calling for the audit should, in the first place, "outline
the scope of the examination in writing so they thoroughly under-
stand it thenselves. Secondly, they should ask the interested
accountants for a record of their experience and qualifications to
make the proposed audit. Tlird, before making any appointment, they
should examine the qualifications of all. Fourth, appoint the best
qualified man, after weighing his previous experience. Fifth, those
interested should insist upon an annual audit as an assurance that the

information will be continuous and the results comparable".2

 

 

lArthur N. Lori, "Present conditions of Municipal Accounting" - The Journal
of Accounting, May 1, 1956.

Zhilliam H. helcher, "Essentials of a Municipal Audit" - hpnicipal_£inhnge,

25

The highly specialized nature of a municipal audit and the
varying ranges from a general to a detailed audit make competitive
bidding undesirable; but if the city is required by law to call for
bids, there should be an absolute understanding as to the scope of

the audit before the bids are placed.

CHAPTER III

JOURNAL ENTRIES, 'T' ACCOUNTS,

AND BALANCE SHEETS DEPICTING FUND OPERATION

24

In order to set forth more clearly the technique used in operating the

various funds, simple journal entries, 'T' accounts, and balance sheets have

been employed illustrating a few of the transactions that might be found in the

operation of the general and working capital fund. The general fund was used

as an illustration because it makes use of budgetary accounts and is fairly

representative (with few exceptions) of all the funds except the working

capital fUnd and the utility fund.

The working capital fund was also used

as an illustration, because it makes use of cost accounts with an absence of

budgetary accounts.

accounts.

ENERAL FUND

JOURNAL ENTRIES

(1)

(2)

(5)

(4)

(5)

Estimated Revenue
Unappropriated Surplus
To set up estimated revenues from
taxes, and miscellaneous sources
per budget.

Unappropriated Surplus
Appropriation Accounts
To set up budget appropriations on
passage of budget for fiscal year.

Tax Rolls - Current
Tax Revenues
Reserve for Uncollectible Taxes
To set up taxes as levied for current
year and set up reserve for estimated
uncollectible taxes.

Cash
Tax Rolls - Current
To record cash payment of taxes.

Cash
Accounts Receivable
Miscellaneous Revenues
Reserve for Doubtful Accounts
To record the receipt of cash and open
account from sale of miscellaneous
services.

$500,000

450,000

475,000

500,000

55,000
10,000

The utility fund makes use of bOth budgetary and cost

$500,000

450,000

400,000
75,000

500,000

42,000
5,000

 

 

 

(6)

(7)

(8)

(9)

(10)

(ll)

(12)

(15)

Advances to Working Capital Fund
Cash
Unappropriated Surplus
Reserve for Advance to Working Capital Fund
To record advance of cash to working capital
fund and to set up reserves for same out of
surplus.

Due from Other Funds
Cash
To record temporary loan of cash to
other funds.

Encumbrances
Reserve for Encunbrances
To charge encumbrances with the value of
orders placed and contracts awarded.
(Encumbrance record for each appropriation
account)

Appropriation Expenditures
Cash
Accounts Payable
Contracts Payable

Reserve for Encumbrances
Encumbrances
To record partial payment of orders and
contracts by cash and open accounts and
to liquidate encumbrances.

Appropriation Expenditures
Cash
To record payment of items not previously
encuubered.

Tax Revenues
miscellaneous Revenues
Unappropriated Surplus
Estimated Revenues
To close revenue accounts and transfer
the excess of estimated over actual to
unappropriated surplus.

Appropriations

Appropriation Expenditures

Encumbrances

Unappropriated Surplus
To close appropriation, appropriation
expenditure, and encumbrance accounts
and transfer the unencumbered balance of
appropriations to unappropriated surplus.

5 50,000

50,000

5,000

275,000

200,000

200,000

100,000

400,000
42,000
58,000

450,000

25

$ 50,000

50,000

5,000

275,000

125,000
50,000
25,000

200,000

100,000

500,000

500,000
75,000
75,000

 

 

26

 

 

 

 

 

 

 

 

 

 

 

 

 

'T' ACCOUNTS
ASSET ACCOUNTS
Tax Rolls,— Current
(5) $475,000 , (4) $500,000
Reserve for Uncollectible Taxes
(5) 5 75,000
Cash
(4) 5500,000 (9) $125,000
(5) 55,000 (11) 100,000
(7) 5,000
(6) 50,000
Accounts Receivable
(5) 9 10,000
Reserve for Doubtful Accounts
(5) 5,000
Due from Oiher Funds
(7) 5 5,000
Advances to torking Capital Fund
(5) 5 50,000
LIABILITY ACCOUNTS
Accounts Payable
(a) 5 50,000
Contracts _anable
(9) $ 25,000

FQHII} 93p BUDGETARY ACCOUNTS

Estimated_ ngenues

 

 

 

 

 

(1) 2500,000 (12) $500,000
Tax Revenues
(10) 5400,090 (5) $400,000

 

 

Kiscellaneops Revenues
': I:
1,. 4?. , 000 (L')

Appropriations

 

 

3 42,000

 

 

 

 

 

 

 

 

 

 

 

(15) $450,000 (2) L450,000
Appropriation ExpgppijpgfigL_~flgv~‘~,
(9) $200,000 (15) #500,000
(11) 100,000
_ Encunbrances
(a) p275,000 (10) $200,000
(15) 75,000
...ll1 Regerye for Encppbrances
(10) $200,000 (5) $275,000
Reserve for Advpnces to Lorkipg_Capital Fund
(6) € 50,000
1 Unappropriated Surplus
(2) 5450,000 (1) 5500,000
(12) 55,090 (15) 75,000
(6) 50,000

27

28

BALANCE SHEET

GENERAL FUND

BALANCE SHEET

CLOSE OF FISCAL PERIOD

 

 

ASSETS
Cash 3 55,000
Accounts Receivable 5 10,000
Less Reserve for Doubtful Accounts 5,000 7,000
Tax Rolls — Current 175,000
Less Reserve for Uncollectible Taxes 75,000 100,000
Due from Other Funds 5,000
Advances to Working Capital Fund 50,000
Total Assets $217,000
LIABILITIES
Accounts Payable 5 50,000
Contracts Payable 25,000
Total Liabilities 75,000

 

RESERVES AED SURPLUS

Reserves:

Reserve for Encumbrances 5 75,000

Reserve for Advances to Working Capital Fund 50,000 $125,000
Unappropriated Surplus 17,000

Total Reserves and Surplus , $142,000

 

29

The foregoing simplified journal entries, 'T' accounts, and balance
sheet show the relationship of the budgetary accounts to the general accounts
in the general fund. At any time the unencumbered appropriation balance of any
account can be ascertained by combining the balance of the appropriation,
appropriation expenditures, and encumbrance accounts. At the close of the
fiscal period, the unencumbered appropriation balances are transferred to
unappropriated surplus, thus eliminating any carry-over into the next period,
while the encumbered portion remains as a reserve indicating a liability
contingent on the fulfillment of the contracts for which the encumbrance reserve
was set up. Also, the difference between actual and estimated revenues is
charged or credited, whichever the case may be, to unappropriated surplus.
"Advances to working capital fund" is in the nature of a long-term loan and
will not be available currently. For this reason, a reserve is set up out
of unappropriated surplus, while "due from other funds" is merely a temporary
transfer of cash which will be regained as soon as the cash condition of the

borrowing fund will permit.

WORKING CAPITAL FUND

Account Balances at Beginninggof Period:

 

 

DEBIT CRELIT
Cash 5 7,000
Inventory — Raw Material 10,000
Inventory - Fork in Process 5,000
Inventory - Finished goods 5,000
Buildings and Equipment 50,000
Land 4,000
Reserve for Depreciation - Buildings and Equipment $ 2,500
Accounts Payable 6,000
Capital Advances from General Fund 15,000
Surplus, Fixed 54,000
Surplus from Operation 1,500

 

Total $59,000 $59,000

 

 

 

[:11 ll I‘ll {I All

JOUREAL EFTRIES

(l)

(4)

(6)

(7)

(8)

(10)

Cash
Capital Advances from General Fund
To record the receipt of advance from
general fund.

Purchases
Accounts Payable
Cash
To record purchase of materials.

Direct Labor
Aanufacturing Expense
General Expense
Cash ,
To record payment of expenses.

Accounts Receivable
Due from Other Funds
Cash
Sales
To record sales to other departments
and to the public.

Depreciation - Buildings and Equipment
Reserve for Depreciation - Buildings and
Equipment

To record depreciation for the period.

Bad Debts
Reserve for Doubtful Accounts
To set up reserve for estimated uncollectible
accounts.

Inventory — Raw Materials (closing inventory)
York in Process
Inventory — Raw Jaterials (Opening inventory)
Purchases
Direct Labor
Hanufacturing EXpense
Depreciation - Buildings and Equipment
To transfer the cost of Operations to work
in process.

Inventory - Finished Goods (closing inventory)
Inventory - Work in Process (closing inventory)
Cost of Goods Sold
Lork in Process
Inventory - Finished Goods (opening inventory)
Inventory - Work in Process (opening inventory)
To determine cost of goods sold.

Sales
Cost of Goods Sold
General Expense
Bad Debts
Operating Profit
To determine the results of operation.
Operating Profit
Surplus from Operations
To transfer profit to surplus.

10,000

5,500
900

7,000
12,000
2,000

900

210

5,000

19,900

5,000
4,000
18,900

21,000

990

50

$50,000

2,000
8,000

5,900

21,000

210

10,000
10,000
5,500
1,500
900

19,900
5,000
5,000

18,900
900
210
990

990

'T' ACCOUNTS

ASSET ACCOUNTS

 

 

 

 

 

 

Cash
Dal S 7,000 (2) £ 8,000
(1) 50,000 (5) 5,900
Accounts Eeceivable
(4) g 7,000
Reserve for Doubtful Accounts
I (6) , 210
Due from Other Funds
(4) 412,000
Inventory - Finished Goods
Bal 2 5,000 (8) 7,000
8) 5‘5:000‘

Inventory — Lork in Process
5,000 I (e)
'———————-"‘—"‘—"_‘“ I
W 3
g 4,000 ‘

Inventory - Ear Taterial

S 5,000

 

 

 

 

 

 

 

 

 

 

 

Pal 310,000 (7) 210,000
(7) n 6,000
Buildings and Eouionent
Bal :50,000 '
Reserve for DeureciatiO' - Buildings and Bguignent
bal ; 2,500
(5) 900
Land
Bal $.4,000
LIABILITY ACCOUHTS
Accounts Payable
Bel ; 6,000
(2) 2,000
Cavitsl Advances from General Fund
4 Bal 215,000
(1) 50,000

ECUIUY ALE OPERATITG ACCDUNTS

 

 

 

Iirect Labor

 

a 5,500 (7)

“a.

 

 

Purchases

' (7)

419,090

 

Generrl,£xaense
; 930 (3)

fianufacturing Exoense
; 1,590 (7)

 

{13,000

 

 

Degreciation - Buildings and bquignert

210

 

M-.- 0-». .0

, 990 (7)

 

York in Process

$19,900 (3)

 

Cost of_goods Sold

218,900 (9)

Qgeruting_grofi.
m
Surplus from Doerations

Bal
(10)

Surglus, Fixed

900

:19,900

Q18,900

930

g 1,500
990

 

Dal

 

554,000

BALAI CE SITJE ‘

 

¥.Oh I G CAPIJAL

BALAECE SHEd

CLOSE OF FISCAL PE

1(‘V JTS

Cash
Accounts Receivable
Less Reserve for DOUbell Accounts

Due from Other Funds

Inventories:

Raw material
Kork in Process
Finished Goods

Buildings and Equionent
Less Reserve for Ie Jrecie tion - Buildings
and EU uig fient

Land

Total Assets

Accounts Pa yable
Capital Advances from General Fund

Total Liabilities

surgtus

C .
eurolus, Fixed
Surplus from 099T3ti°ns

Total Surulus

FUhD

SIOD

7,000
210

6,090
4,000

30,000
5,400

{45,100

6,790
12,000

15,000

26,600

4,000

8,000

1

65,000

,34,000

2,400

('N
(N

$109,490

5 75,000

4 36,490

m
,{s

The foregoing journal entries, 'T' accounts, and balance sheet illustrate
the essential differences between the Operation Of the general fund and the
working capital fund. The purpose of the working capital fund is to centralize
the financing of certain activities which are beneficial to all departients of
the municipality, and which by this centralization are performed more efficiently

‘1

and at less expense. As a result, the worting capital fund is usually established
as a fixed capital sun, derived from a bond issue or advances from the general
fund, and in the course Of its operation there is an endeavor to recover the
cost of services or materials furnished the various departments. TO this end,
cost accounting practices are observed; e.g., depreciation is taken on
buildings and equipment. Because the working capital fund serves the
municipality as a whole and operates on a non—profit basis, its accounts

are not tied in directly with the budget appropriation accounts. To
illustrate, the municipal garage is Operated through a working capital

fund; the health departnent has an appropriation of $1,000 for maintenance

of motor equipment; the municipal garage services the equipment and renders

a bill at cost to the health department for services; the health department
pays the bill and charges it to appropriation expenditures; the municipal

garage recovers the cost of the service, and the budget appropriation system

is not upset in the least.

55

CHAPTER IV
ACCOUNTING AND BUDGETABY PRACTICES IN THE CITIES OF
LANSING, JACKSON, dUSKEGON, FLIKT, AND SAGIHAW

In general, it was found that the work Of the institutions fostering
improved municipal accounting systems had touched those cities in which
interviewswere Obtained. In fact, Flint showed itself to be interested to
such an extent that it was using a system in its Public Works Department
designed to improve the public works records, cost accounting, and adminis-
trative procedures in that department. This system was installed at the
request of city officials under the auspices of the Michigan Municipal
League by the Consulting and Research Division of the Public Administration
Service, with the assistance of the Municipal Finance Officers Association.
In addition, the Municipal Finance Officers Association published in 1954 a
manual, entitled "A flunicipal General Ledger and Principal Supporting
Records", which presented the accounting forms and procedures of this same
city in conjunction with another michigan city, not "as a model system but
rather as a usable and practical plan"l. The remaining cities, all Of which
are smaller than Flint, showed evidence of the influence of the movement
toward improvement and standardization of municipal accounting practices.

In order to become acquainted with the general accounting practices
and budgetary policies of the cities visited, a preliminary guide or questionnaire
was prepared to be used for the interview with the Comptroller of the City Of
Lansing. Using the results and suggestions gained from this interview as a
basis, the questionnaire was revised so as to be usable for the remaining
interviews (see Table No. II). The revised questionnaire was directed at
four main lines of inquiry; namely: (1) Type of Government, (2) Organization

of Finance Department, (5) Budgetary Practices, and (4) Accounting Procedure.

 

halter 0. Harris, C.P.A., "A Municipal General Ledger and Principal Supporting
Records", municipal Finance Officers Association, 1954.

Table No. II Specimen of Questionnaire Used in the Survey

Name

 

Population

 

Tyse of Government City Manager-Council
Mayor—Council

)
)
) Commission
)

Organization of Finance Department
(1) Bureaus or Divisions (8) Treasurer - Treasury
(b) Controller - Control a Accounts
(c) Assessor - Taxation
(6) Purchasing Agent - Purchasing
(e)

(2) Centralization of Accounts and Financial Reports

 

 

(E) Directing Officer
(a) Term of Office
(b) Eethod of Selection

(c) Charter Qualifications and Experience

 

 

Fiscal Year

 

Late of Publication of Fiscal Report

 

Budgetary Practices

Executive

()
(*) Board
()
()

(1) Budget Making Authority

Legislative

(a) Date of presentation to Council

 

(b) Council's power of revi81on

 

 

(0) Presentation at Public Hearing

 

(d) Publication, Date

 

Form

 

Table ho. II (Cont'd)

Name

 

(2) Form of Budget - Period covered Previous years included

 

(a) Summary with schedules
(1) Income classification

(a) Source, i.e., Revenue (Taxes, Rights & Privileges, etc.),
Borrowings, and Sale of Capital Assets

 

(b) Fund

(C)

(2) Expenditure Classification

 

(a) Character, i.e., Current exp., Fixed Chgs.,Cap. outlay & debt
redemption

 

(b) Object, i.e., Personal Services, Cont. Services, etc.
(0) Fund

(d) Functional

(e)

(b) Detailed estimates by Depts. by Div. by Bureaus Supported
by cost data?

 

(c) Hiscellaneous Statenents required

(1) Bonded Indebtedness with debt redemption requirements
(2) Authorized and unissued debt
(5) Condition of sinking funds
(4) Borrowing capacity of city
(5)
(6)
(d) Budget Bills

(1) App'n Bill - Lump sum for Iept. Detailed App'n

Other Methods

 

(2) General PrOperty Tax Levy Bill included?
(5) Misc. Revenue and Borrowing Bills Included?

(3) Execution
(a) Inclusiveness
(1) Treatment of fiunicioally owned P.U.

 

 

(2) Capital Expenditures Included?

 

 

Table to. II (Cont'd)

Name

 

f

 

(a) Physical and Financial Long Tine City Planning?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3) Are all city institutions and activities (as well as 9.0.)
included?
(b) york Programs and Allotments
(1) Period covered
(2) Use of_cost data
(c) Possibility of additional agp'n
(6) Reports to budget authority
(1) Balance between periodic incone and outgo
Incole reports
Allotment reports
(4) Results of budget % variation from year to year.
Accounting_Procedure
(1) General ledger with balanced fund accounts
(a) Analysis of fund accounts
(1) General Fund torking Calital or Revolving Fund
(2) Special aev. Funds (i.e.,Special Tax Levy) Number
(5) Utility Fund
(4) Bond Fund
(5) Special Assessment Fund
(6) Trust and Pension Fund (endowments)
(7) Agency Fund Conbination of (6) d (7)

(8) Sinking Fund

A

3)
(10)
(b) Recording of Fund Surplus - Separation of CaJital or Fixed and Current

or eXpendable fund surplus?

 

(c) Current Balance Sheets for each fund or Consolidated B.S.?

 

m
0

Table No. II (Cont'd)

Name

(2) Separate asset accounts for permanent property in G.L.?
(a) Valuation of permanent assets - Basis of original cost or estimated cost

at time of acquisition
Current appraised value

Other methods of valuation

(b) Any recognition of depreciation as expense?

 

Recognition of depreciation for cost purposes?

 

(o) Are permanent assets included on Balance Sheet?

 

If so, is surplus or equity represented, segregated from eXpendable
fund surplus?
(5) Accounts securing budgetary control.
(a) Revenue, Expense, appropriation, and encumbrance control accounts in C.L.
(b) Do accounting classificationsof revenue and expenditures coincide with

budgetary classifications?

 

(0) Inventory records of consumable goods controlled through G.L.?

(1) Central stores and receiving system?

 

' (2) Central Purchasing Department?

(4) Cost accounting for government functions
(a) Extent
(b) Coordination with general accounting system

(5) Audit Provisions

40

The Type of Government and Organization of Finance Department sections were
constructed so as to bring out general information regardilg these phases of
municipal structure, and the data gathered from these two groups mere coabined
in Table No.III, entitled "Gererul Information of Cities in the Survey". The
Budgetary practices section was divided into sub-groups constructed so as to
bring out information as to the authority, form, execution, and results of the
gathered free these sub—groups were displayed in Tables

budget. The data

ctively, "Preparation of the Bunget",

(D
r J
\_,I
(D

numbered IV, V, and VI, entitled, r
Form of the Budget", and "Execution of the Budget". The final section,

3 ‘I

Accounting Procedure, was also divider into sub-groups; nauely, general ledger

‘

funds, pernanent property, budgetary control in the general ledger, cost
aCCOlLting, and audit provisions, the data from nhich were prepared in Tables
numbered VII, VIII, IX, and X, entitled, respectively, "General Ledger Fund

Accounts", "Pernanent Progerty", "Control of tee Budget", and "Cost Accounting".

In analyzing these tables, an attempt has been made to point out the trend

toward stendardizat7on and to make suggestions which it is felt would be
beneficial in furthering this aim and pocs°bly improving the Operation of the
systems in use at present.

General Infornation of Cities in the Survey
A sisnificant fact in Table No. III is the variation in the dates of
C
the municipal fiscal year. The preference of Jackson, Flint, and Saginaw is
the "July 1 to June 50" year; of Huskegon, the calendar year; and of Lansing,
the"£a l to Auril SO" vear. It is the opinion of the triter that retardless
. .1 . ) to

of the present fiscal year in use, no municipality's financial probleas in

relation to the fiscal year are of such a nature as to interfere with the

5

establishment of a uniform fiscal year which would greatly assist in making

r‘

the fiscal reports of municipalities more comparable. On further ex mination

it will be noted that Lansing and duskegon have no regularly published financial

41

reoort. tithout published reqorts there are no means of comparisons. Conse—
quently, there should be a financial report published as soon after the close
of the fiscal year as possible. All of the municipalities cited had a
centralization of accounts and reports in a department or division created
solely for that purpose, and under the direction of an officer responsible to
the source of his appointment - e.g., the city connission in Huskegon, Flint,
and Saginaw; neyor in Lansins; and city clerk in Jackson. The terns of these
officers varied, as did the experience of each. Although the writer found no
specific qualifications set up in the various charters for these officers, it
was found that in each case there was a background of experience that perhaps
was sufficient to permit each t; carry out his office satisfactorily, but it
is the writer's opinion that in keeping with the deVelOpment of private finance
it would be well for municipalities to set up in their charters the qualifications
which the chief financial officer must meet in order to hold his office. In
addition, the municipality should reconpense the officer in keeping with the
qualifications set up. If there is to be a betterment in the financial
managenent of the American municipality, the municipality must demand and
encourage this.
Preparati)n, Form, and Execution of_the Bndret

Tables numbered IV, V, and VI indicate the trend toward unifornity of
budgetary practices. Represented in the five municipalities cited in Table to.
IV are the three commonly accepted authorities for preparing governmental
budgets; nanely, the legislative, as used in Lansing; executive, as used in
Jackson, huskegon, and Flint; and the budget board, as used in Saginaw. The
budget-asking autho‘ity in use is presumably the one best fitted for the
municipality's needs and as long as it acts efficiently and satisfactorily in

preparing the budget, it need not be altered. In all cases the city charter

requires that the budget for the succeeding year be presented to the

legislative body for adogtion before the close of the current year, but in

the case of Flint the legislative body had not adopted it at the time of the
interview, which was one month after the beginning of the fiscal year. This is

a bad oractice to fall into, inasmuch as the municipality is operating for a time
without an authorized financial olan, which might disrupt the operation of the
current budget when it is finally passed. In all cases the legislative body

1
I

had gower of revision within the estimated totals. Jacason, Muskegon, Flint,
and Saginaw had either public hearings on the budget or open meetinis of the
budget authority, but little interest was shown by the public. Lansing files
the budget in the comptroller's office for public inspection one week before
ins passage by the legis ative body. Only in Lansing and fiuskegon was the
budget available to the public in printed form. It seems that the budget
should be available to any interested taxpayer, because he is, in truth, a
stockholder of the municigality and, as such, it should also be his duty

to take an interest in the budget before it is authorized. In all cases, in
Table ho. V, the budget period conformed to the fiscal period; and, in all
cases excegt Lansing, performances of previous years' budgets were used in
comgiling the budget for the next fiscal year. It would seem that past
performance would be essential in compiling the budget in detail form, but if
satisfactory results are obtained without its use, the municipality is justified
in omitting it.

In all cases, incone was classified (a) by fund and (b) by source. In
the case of Muskegon, a third classification, (0) by degartnent, was added.
Exgenditures were classified by fund, department, character, activity, and
object by Lansing only. Of the remaining three, Jackson classified expenditures
as to fund, department, character, and object; huskegon as to fund, department,
and object; and Flint as to fund, activity, and object. It would seem tLat the
additional time necessary to make a complete classification of the budget in

those cases not having such would be justified by the simplification and clarity

effected.

45

Estimates for the budget items were prepared in detail in all cases,
but appropriations were made in the same manner in only four of the five cases,
the fifth, Flint, appropriating in a lump sum for each department. The latter
method seems to the writer to be the better method, in that it gives a degree
of flexibility which enables the department head to deal with emergencies with
maximum diSpatch.

In Jackson, muskegon, and Saginaw (see Table No. VI) the budget was
all inclusive; e.g., public utilities, city institutions, and capital outlays
were included, in addition to the general operation of the municipality. Flint

and Lansin omitted public utilities from the general city budget. This

g
practice may be practical and justified where the public utility, though city
owned, is operated under a separate set—up, e.g., a board, having a separate
budget, but the estimated revenue or loss from operations should be shown in

the general municipal budget.

Only two of the larger municipalit'es, Lansing and Flint, had monthly
work programs and allotment systems. The adogtion of such a system is dependent
largely upon the size of the municipality, although it would be desirable
regardless of the size of the municipality to have allotments worked out for
those departments in which the work is of a seasonal nature. In all cases
monthly reports were made to the budget authority on the operation of the
budget, and results were surprisingly efficient in all cases. Only Lansing
had a long-time physical and financial plan in operation at the time of the
study. A municipality which is considering an extensive capital outlay for
physical improvements, extending over a long period, should prepare a
financial, as well as a physical, plan for these improvements.

General Ledger Fund Accounts

Table No. VII indicates that the five muniCipalities represented therein

have, consciously or unconsciously, taken a step in the right direction, in that

44

classifications of funds are comparable. Since the nature of each of the
various funds has been discussed in a previous chapter, no additional space
will be taken here on that subject. The number of funds, as evidenced by this
Table, may vary, depending on the activities of the city, but care must be
exercised in creating a sufficient classification of funds to account properly
for the various activities. For exan>le, the general fund may become the "catch
all" for activities, the operation of which should be reflected in a separate
fund, as in the case of (1) a water department being Operated through the
general fund when this activity should be segregated and classified under
utility funds, and (2) taxes collected by the municipality for the county being
accounted for through the general fund when this activity should be segregated
and classified under trust and agency funds.

.‘ Fund surplus, in all cases, was accounted for separately and balance
sheets were struck off for each fund in all cases except Jackson, in which a
consolidated balance sheet was compiled. It may be said here that a consolidated
balance sheet is of little comparative value, in that it combines a group of
several divergent accounts into one picture, which gives the observer a false
impression of the municipality's financial condition. For example, in a
consolidated balance sheet, the surplus shown may not have any significance
as far as the current condition of the municipality is concerned. Perhaps a
large portion of that surplus is represented by permanent assets or assets which
will not mature until some future date, thus limiting the ability to meet
current liabilities.

Permanent Property Records
In handling permanent property records, all the municipalities involved
were comparable, as indicated by Table No. VIII. Each reported the maintenance

of separate accounts in the general ledger in which the properties were set

up at cost at acquisition and were not depreciated in order to show a current
value, a practice which is prohibited in most instances by law. The justi-
fication for such a law being that the reserve or surplus built up for
replacement of permanent property by one administration might be a source

of graft for another later administration. Only in the cases of Lansing

and Muskegon were permanent assets depreciated, depreciation being taken on
equipment only in order to arrive at costs comparable to those for the same
type of civil undertaking.3 In all cases, the surplus or equity arising from
the ownership of permanent assets was shown as a separate item of surplus

on the balance sheet in order to designate it as a fixed surplus not

available for current operations.

Budget Control Through the General Ledger

Budget control seems to be firmly rooted in the municipalities under
question, all reporting a coordination of accounting and budgetary classification,
with encumbrance records in the general ledger. All reported maintenance of
inventory records of consumable goods, and central purchasing departments, while
only Muskegon and Flint reported central stores systems. A central stores system
would be advisable only in those cases where the volume of stores handled
and the proximity of the various departments having a large stores turnover
would permit.

Cost Accounting

 

Cost accounting is not practiced extensively in any of the four
municipalities under question. Three of these, Lansing, Muskegon, and Flint,
limit it to the public works department, and the fourth, Jackson, to the
water departnent, while not any of the cost accounting systems in use are
coordinated with the general accounting system. The chief purpose of the

cost accounting system is to build up costs that will be conparable to

46

costs encountered in a non—governmental venture of the same type, in order that
a fair sales price may be placed upon the service or commodity. If cost systems
now in use are accomplishing this, there is no need to expand them or coordinate

them with the general accounting system.

Audit Provisions
In all cases, provisions were made for a yearly audit by an outside
firm; and in the case of Flint, additional quarterly inspections were provided
for. In the cases of fiuskegon and Lansing,the audit was let on a competitive
bid basis. In the remaining three cases of Flint, Jackson, and Saginaw,no
information as to the manner in which the auditing firm was selected was

procured.

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49

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51

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Table No. VIII

Permanent Property

 

 

 

 

 

 

 

Separate
Account In
General Method Of Depreciation Equity Shown
City Ledger Valuation As Expense In Balance Sheet
Lansing Yes Cost at Depreciation as Shovn in capital fund
acquisition expense on motor
equipment only
Jackson Ies Cost at None Shown on Balance Sheet
acquisition as Capital Surplus
muskegon Ies Cost at On equipment Separate
acquisition only
Flint Yes Cost at hone Separate Balance Sheet

 

acquisition

 

 

 

 

 

Table No. IX

Control of the Budget

 

In General

 

 

 

 

 

 

Ledger Lo Budget and Inventory
Through Accounting Record of Central
Encumbrance Classification Consumable Purchasing Central
City Records Coincide? Goods Department Stores
Lansing Yes Yes Yes Yes,for to
departments
not under
supervision
of Boards
Jackson Yes Yes Yes Yes No
Muskegon Yes Yes Yes Yes Yes
Flint Yes Yes Yes Yes Yes

 

 

 

 

 

 

 

Table No. X Cost Accounting

 

—-~—_

Coordination
Lith General

 

 

 

 

 

 

 

 

City Extent Accounting System
LanSing Public Works hone
Jackson Rater Department None
Muskegon Public Works hone
Flint Public Works Kone

 

 

 

 

54

55
CHAPTER V
..-/-. . / .- ‘~ ~ ‘..—. r .. 1 q ~..—q ‘— . \ r..." . - r ,
RnSUdE OF SUGGnSTIOnS FOh EnCannG SlAnDAhBIAbD ACCOUNLIRG
AND bUIGnTAPY PRACTICES IN Thn CITIES OF THs SURVEY

In conclusion, it may be stated that while this paper does not represent
an exhaustive study of the accounting and budgetary practices of the munici—
palities visfted, it does indicate a number of those which the writer feels are
most important. The following suggestions are presented as a contribution
toward the develOpment of a degree of standardization which will permit more
satisfactory financial comparisons between municipalities and at the same

time allow flexibility in dealing with special local circumstances:

1. A uniform fiscal year. This would give an opportunity for the

 

officials of a municipality to compare the results of operations during a
given fiscal year with those of a group of similar municipalities for the
same period. This comparison could be made as soon as the reports became
available, thus permitting these officials to benefit during the fiscal year
in progress by any changes in policy suggested through a study of their

neighbors' perfornances in the past fiscal year.

2. Comparable financial reuorts published as soon as possible after
the close of the fiscal year. The previous suggestion hinges on the
availability and comparability of fiscal reports. These reports should be
published and made available to any interested persons. It might be advisable
to include all municipalities of the same class on a mailing list whereby the
:reports might be exchanged. A standard municipal accountirg terminology

should be used throughout the reports.

5. Charter qualifications for the chief financ-al officersJ also
a salarv in keeping with the training and performance of these officers. There

41

is a need for financial officers who have a systematic knowledge of the functions

56

K1

and technique of their office before they enter it. The financial Operation of
a municipality has emerged into the field of big business, the administration
of which is tending to become divorced from mere political considerations.
Consequently, if a municipality is striving for efficiency and economy of
operation, it must insist upon men trained in the field of municipal finance

to hold its key financial offices, and it must becone reconciled to the fact
that if trained men are to be obtained, a satisfactory recompense must be

provided.

4. Adoption of the budget before the opening of the fiscalyyear. This
is important as a suggestion not merely for standardization of budgetary
practices, but also for the benefit of he individual municipality. When a
municipality begins a fiscal year with the budget unapproved, the departnent
heads, legally, have no funds. Of course, business is carried on as usual,
but the department head has only his own judgment and the last year's

performance to guide him in the outlay of funds until the budget is passed.

to
H)
H
:3
m
H
f4
‘4
5
m
a
(D
CL
C

This practice easily may have impaired the budget when it i

5. Stimulation of public interest in the budget.
that should provoke the ingenuity and inijiative of every municipality, since
few have been successful in arousing interest in public budget hearings. The

public pays in the form of taxes, fees, assessments, etc. practically all the

cipal activities. If it could be

H-

funds that are eXpended for the various mun
aroused to a point where it would show enough interest in tle Spending of its
:noney t1 participate in a public discussion of the budget before it is passed,
a great deal of the criticism of nunicipal spending might be averted. The
ways and means of accomplishing this end is a task for those versed in group

psychology.

57

6. A conglete classification of exuenditures in the budget. This
grovides a means of minutely congaring the budgets of various municigalities,
thus giving an insight into the manner in nhico the anticipated expenditures
for a certain activity of one municipality compares with the anticipated exoendi-
tures for a similar activity of another municipality. It also serves as a
check on the inclusiveness of the budget. If a complete classification is

followed, there is less possibility of overlooking potential expenditures or

allowing undue latitude.

7. Budget aooroorirtiors nade on a'lump sun to devartnent" basis.
Mhile there should be a conglete classificrtion of exoenéitures in the budget,
it is the writer's opinion that the appropriation should be made in a lung
sun to the degartnent rather than in detail. The conglete classification
of eXgenditures gives the deiartoeot head a working guide; the lump sum
aoorogriation gives him authority to act quickly in emergencies witbout

agoealing to tbe legislative body for a revision of an appropriation (as

in the case of a detailed approgriation).

,<;rcctical.

70
W?
\D
.3
U]
‘3.
5’
CD
”‘5
'T)

8. Adoption of work ororran and allo.nent

LU)

eneficial in ioing separtnent beads

OI
Lb

A work program and allotment system is
to keep vithin their budgets. If tbe exgenéitures of the department are
comgaratively regular throughout tbe year and there is little trouble in

ceeJing within the buflget, sort orogran and allotment system 19y not be

03

gractical. In fleoartients where expenditures are of a seasonal nature; e.g.,
a park department in which the heaviest expenditures are usually in the sunner
nont‘s, there may be a tendenc; toward a deficiency in tbe heaviest exgendi—
ture months. A work prog an and allotnent system in a case of this {ind is an

invaluable aid in keeping within the bucget.

(n
so

9. Lon'—tern gh“sical e-d _ina Nlel ml -ing for caoital i1irox w3.s.
In planning for a new sewer progrcn it is not enoi_h to lay out the plan on
blue grints and ceciCe a yezrly congletior schedule. A plan must be laid as
bod of financin; the construction and O; daring off the obliéation

after it has been incurred.

lO. I§1er, to;:j§;§]“.f‘ffu“ands,Tn%L)eEct.finrnsurolus

‘

Se)ET8te, and Wreoore fund balance sheets_§§_le all as consolidated valsrce

 

,

sieet. This is necessrr; if comparisons are to be mace *.iti“ other nunici—

Hli ies or oeriods. In addition, an exanirrtion of the segarate funds will

'72)

bring out those v;ea{ esses in administration thCh can be strengthened. A
balance sheet for each fund, showiuv se)aretelv tie available and germanent

\ ‘ L —U

portions of its surglus, is essential in order to determine the fir malcial

condition of th-t fund at a given time. A consolidated balance sheet merely
shows the financial COIN (‘it i m of tree fil‘lthlf) lit7 a nhole without reference

to any particular fund. A consolidatei balance sheet night reflect a favorable
financial candition, but ugon xaeination of each of t e comionent fund be lance
sheets, it might be found teat one furd or group of funds, due to inefficient
Jena unent, was in very )oor C3fl( Ltion. Because the remaining funds were in

I.

excell:1t condition, the consolifiation of all funds so conoletely subwergec

the mismanaged fund that its Condition was not detectable until each fund

balance sheet had been analyzed.

11. A.certrelc stOIes cvste.u \heze )ractical. A central stores system
is oractical only when the Volume of stores to be handled is large enough to
justifr the organization re uired for such a system. Of course, if the
reduction in losses due to waste, theft, breakage, and other causes is great

enough to overcome the additional expense of a central stores system, the

system is gractical in any case.

01
10

12. Check t3c cost sisten in use to ascertain v“

 

 

filfilling the puroqge ion which it was installed. Ihe cost systen as used
in the municipality, as has been discussed earlier, is grinarily set u; for

the )ur ose of building ug costs that are conparable to similar costs developed

by grivate entergrise.

of the municiialitxjs firan ial ouerations by

4v.—. “

 

 

 

u disinterestedi reliable, and efficient firn. The euoit Should be continued

 

rear by the sane fire, grovided the audit is satisfactory, in order

to get continuing, congereble results.

I Books

1.

'7
do

BIBLIOGRAPHY

_1

Buck, A. E., Public Budgeting, (Harper & -rothers, New Yorc, 1929
ak,y, Francis, Pr ci l§§_9f Q oyernmcnt Accounting and Pe>ortin
(B. Ageleton and Co., lie at Yo rk, l9£l)
The fiunicioal Year Book, Inte r1 Etional City Lanagers Association,
(Chicago, 1955)

II Pamoblets and Bulletins

 

l.

10.

11.

"A Directory of Org arizations in the Field of Public Administration",
Public Administration Clearing House, (Chicago, 1954)

"A duniciual General Ledger and Principal Supporting Records", h. 0.
Harris, C.P.A., fiunicipal Finance Officers Association of the
United States and Canada, (Chicago, 1954)

"Budgeting for Small Cities", A. E. Buck, fiunicigal Administration
Service, Publication No. 25, (Chicago, 1951)

"Manual of Public Works Records and Administration, Flint, Michigan",
Public Administration Service, Publication No. 55, (Chicago, 1955)

"Municipal Funds and their Balance Sheets", National Conmittee on
Municipal Accounting, Bulletin No. 5, (Chicago, June, 1955)

"National Governmental Organizations", (Chicago, 1955)

"Purchasing for Small Cities", Russell Forbes, Municipal Administration
Service, Publication No. 25, (Chicago, 1952 )

"State Suoervision of Local Finance", Dr. Wylie Kilpatrick, Municioal
Finance Officers Association, (Chicago, 1955)

"Tentative Outline of Principles of fiunicipal Accounting", National
Committee on Municigal Accountinc, Bulletin No. 1, (Chicago,
January, 1954)

"The Public Works Degartment in American Cities", Clarence E. Pic dley,
Hunicipal Administration Service, Publication No. ,(Chicag so, 1929)

"Toward More Uniform Reports for Municipalities", Nat ionel Committee
on Municipal Accounting, (Chicago, February, 1954)

61

III Periodica1§

 

1.

4.

8.

Dickerson, Thomas M., "Hunicipal Accounting", Rational Association
of Cost Accountants Bulletin, Vol. XVII, No. 12, Feb. 12, 1956.

 

"‘1

Frisbee, Ira N., "Accounting for 'Income' Municipalities", roe
Accounting Review, Vol. XI, No. 2, June, 1956.

Hoffman, 1. F., "The nodernization of municipal Accounting", Batione1
Association of Cost Accountants Bulletin, Vol. lVI, No. 15, April,
1955.

 

Kimpel, H. M., "fiunicioal Financial Control Through Modern Accounting"
National Association of Cost Accountants Bulletin, Vol. XVII, No.
12, Feb. 15, 1956.

Lori, Arthur N., "Cost Accounting and the Classification of Municipal
Eigenditures", The Accounting1Review, Vol. XI, No. 5, Segtember,
1956.

 

_ LoYQQ Arthur N., "Present Conditions of Municipal Accounting", The

Journal of Accounting, May 1, 1956

O'Shea, Arthur A., "dunicipal Cost Accounting", National Association
of Cost Accountznts Bulletin, Vol. XIV, No. 17, May 1, 1955.

Petkin, Walter B., "Young Man Go Manage a City", The Rotarian
digested in The Readers Digest, October, 1955.

Kelcher, William B., "Essentials of a Municipal Audit", Municioal
Finance, Bay, 1956.

IV . Regorts,Documents1 and Miscellaneous

 

1.

4.
5.
6.

8.
9.
10.

"Annual Budget-for the City of Jackson, Eichigan", July 1, 1954 to
June 50, 1955.

"Annual Report of the City of Jackson, Michigan", for the fiscal year
ending June 50, 1955.

"Budget for the City of Lansing, Michigan", Fiscal year ending
Agril 50, 1955.

"Budget for the City of Muskegon, Michigan", for the year 1955.

"Charter, City of Jackson, Michigan", Revised edition July 1, 1952.

"City of Flint, Michigan, monthly Financial Statements of the
Director of Finance", for the period July 1, 1954 to May 51, 1955.

"City of Flint, Michigan, Report of the Division of Finance", for
the year July 1, 1955 to June 50, 1954.

Public Acts of Michigan, 1951, Public Act No. 515
Public Acts of Michigan, 1955, Public Act No. 41

Letter of Arnold J. Kirch of the Michigan Municipal League, dated
February, 14, 1956, addressed to H. L. Busch.

«4M? ,

Dec26 §g

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