Last Weeks Budget Committee Meeting

Jack Harding, the auditor for the electric Department, explained the department's accounting practices at last week's Budget Committee meeting. The budget committee had questions concerning the reporting of revenues and expenses, as well as questions about depreciation. Jack Harding explained that the Electric Department does not use the same type of accounting as the town because it operates like a business, a point that the Electric Department has made before. For this reason, the Electric Department uses Enterprise Fund accounting while the town uses Government Fund accounting. The differences between the two types of accounting help to explain some of the department's accounting practices.

Government fund accounting is used when revenues come from taxes (non-exchange funds), and Enterprise Fund accounting is used for business-type activities such as those conducted by a utility. The main differences between the the two funds has to do with (1) what the funds are designed to measure, and (2) when assets and liabilities are recognized and recorded on the financial reports. Government Fund Accounting measures current financial resources while Enterprise Fund Accounting measures both current and long-term assets and liabilities.

Governmental Funds use modified accrual accounting which recognizes revenues when they become available and measurable and recognizes expenditures when liabilities are incurred. Enterprise Funds use the accrual accounting which measures economic events regardless of when cash transactions occur. This method gives a better picture of the utility's current financial condition because it combines the current cash and future inflows and outflows. For example, the Electric Department bills its customers each month. Bills may be paid in cash or by credit card. In a cash system, revenues would only be recorded when the the cash and credit payments are received. In an accrual system, the entire amount billed would be considered revenue even though some bills are paid in cash and some by credit card. The amount of cash yet to be received would be reflected in Accounts Receivable.

The Budget Committee was also concerned about depreciation. Depreciation reflects the decline in value of assets over time. For example, a truck decreases in value over time. The amount depreciated reflects the cost of replacement. The committee is concerned that the Electric Department does not have enough capital in reserve. The committee asked Jack Harding whether it was good practice to put aside funds to cover the depreciation assets. Mr. Harding agreed that it is good practice.