Questions from the Budget Committee Meeting Part II: Accounting Practices

    One important issue that emerged at the last Budget Committee meeting has to do with accounting systems and practices.  The Budget Committee asked the Electric Department how it was accounting for income and expenses.  The answers to these questions were not always clear or definitive.  However, my understanding is that the department reports most income as all revenues that it has billed for rather than revenues it has actually received, and reports expenses as the bills it has paid rather the bills it has received.  This can be a problem because the financial reports can show that there is more income than there actually is.
     How can this happen? Consider a simple hypothetical example.  The department buys electricity and sells it to another town.   If the department buys the electricity for $80,000 and sells it for $100,000, the income would be $20,000 (Income = Sale Price - Cost).
      Say, however, at the time of generating the financial report, the department had billed the town but had not paid its bill for the electricity.  The way the accounting is done now, the financial report would show the $100,000 as income, but it would not reflect the $80,000 that the department still owes for the electricity.   In other words, the report would show an income $100,000 when the actual income is only $20,000.
     Eventually, the income would be adjusted when the department pays for the electricity and enters it into the system. But, what if decisions were made based on the financial report before the adjustment was made? The department could easily spend more than it actually took in, or enter into long term projects that it would be unable to pay for.
     This is why standard practice involves making sure that entries accurately reflect the actual financial status.  If the $100,000 is entered as revenue, then the $80,000 must be entered as a cost so that the reports reflect the actual income of $20,000.
     According to the Electric Department, their accounting system was set up by their auditor, and this is the way things have always been done.  I suppose that would be fine if everyone who has to work with the reports understands what they mean and can adjust the figures to show the actual expenses and income.  But, the department should be following standard accounting practices so that their reports accurately reflect their finances.