TABLE II-General classification of current assets and current liabilities of municipalities. TABLE III-General classification of capital assets and capital liabilities of municipalities. Liabilities incurred for permanent uses and invested reserves. I. Capital liabilities outstanding. 1. For general government. (a) Municipal buildings (city hall and general offices). (b) Municipal prisons, armories, and hospitals. (c) Public highways and sewers. (d) Etc., etc., etc. 2. For public education and recreation. (a) Public school buildings. (b) Public libraries and art muse ums. (c) Public parks and boulevards, playgrounds, and gymnasia. 3. Public industries. (a) Public waterworks. (b) Public gas works, etc., etc. II. Capital reserves and surplus. (a) Sinking fund reserves. Total capital reserves. 2. Invested capital surplus. (a) Bonds canceled out of surplus. (b) Revenue appropriations for permanent improvements and investments less capital depreciation and loss. Net capital surplus. Table III of Dr. Cleveland's paper shows a balance sheet in which current assets are offset by current liabilities in the first section, and permanent properties and equipment are contrasted with capital liabilities and reserves in the second section, the difference between the two sides being the net capital surplus in the second section, and the net current surplus in the first section. Mr. Duncan MacInnes, representing the New York City Comptroller's office, agreed as to the contents of the first section, but in the second section he would omit the permanent properties and equipment of the city, and in place exhibit the debt contracting power, or debt limit of the city. In New York City this is 10% of the taxable value of the real estate within the city. As an offset to this he would show as a liability the funded debt, less the amount held by the sinking fund, and the authorized bond issues as well, the net difference between the two sides being the borrowing capacity of the city. In Mr. MacInnes' own words "let us follow the simple action of the accounts," and we will see why he was led to prefer such a form of balance sheet: 66 The bonds issued for waterworks construction should be charged to Principal of the City Debt and credited to Water Bonds in the full amount of the loan. The cash proceeds of said bonds would be credited to Water Construction Fund, creating a letter of credit against which drafts would be drawn for construction, and which fund would liquidate upon the completion of the work. When the loan or parts thereof matured Water Bonds would be charged and Principal of the City Debt credited, and the cash payment therefor would be charged to Appropriation for Redemption of Debt or to Sinking Fund, as the case might be." By this "simple action " all the accounts close out and nothing remains on the books to show that the City owns the waterworks at all. Presumably his accounts follow the same "simple action" when the City buys a city hall, new fire apparatus, schools, libraries, art galleries, museums, parks, jails, hospitals, asylums, docks, markets, cemeteries, etc. The accounts of the City of New York have always been kept in this incorrect way, and for this reason the installation of a new system would necessitate an inventory and valuation of the City's assets, or an estimated inventory and valuation, in order to make a balance sheet. In either case, the labor involved would be stupendous, and the Comptroller's accountants apparently have hit on this expedient as an easy way out. No one will dispute the necessity of keeping the debt limit in sight. But why not figure it on the top of a ledger page when desired, just as one figures a customer's credit limit? Exhibiting it in the balance sheet will involve carrying two decidedly new accounts on the ledger "Ten per cent. of Assessed Valuations" and "Bonds Authorized but not Issued," and changing these accounts from time to time as necessary. The accounts in every double entry system since the time of Lucas Di Burgo have fallen into four groups: Assets and Liabilities. Revenues and Expenses. Into which of the four groups shall we place these two? What accounts will be debited and credited when these two are opened, and when changes are made in them? Someone says there are over 2,500 accounts on the City's ledger which the accountants cannot tell whether to class as assets or liabilities. Principal of the City Debt" above mentioned is one of these, and Mr. MacInnes would promote the uniformity of municipal accounts by adding two more. To justify his form of balance sheet, Mr. MacInnes stated to the second Conference Any attempt to recognize in the general statement of the condition of a city the values of common properties, as if the same were assets available for conversion into funds to liquidate liabilities, or to measure a wealth that could be mortgaged by, or partitioned among the inhabitants, as if they were so many stockholders, in the same manner as the fixed assets of a private corporation, is seeking to express a condition that does not exist and forcing a construction that is fictitious, arbitrary, meaningless, and withal misleading. The necessity of showing the cost of permanent properties and equipment in the municipal balance sheet is not so much to show values "available to liquidate liabilities," or to "measure a wealth that can be mortgaged by or partitioned among the inhabitants "-although these are possible but not contemplated uses-as to meet the demands of stewardship. The citizen's demand for information includes that required by the creditor, but it goes further. What resources has the city to represent bonds outstanding? What properties has the city to account for them; or if not properties, then in how far have the current expenses been reduced by allowing properties acquired to become impaired, or by suffering them to depreciate? Has there been a reduction in taxation equal to the depreciation, or have reserves been created for replacement? These are some of the questions a newspaper asks. The man in the street wants to know how much came into your hands, from what sources and what you did with it, not as a matter of statistics picked out from the accounts, but as exhibited by the accounts themselves. In an address to the Savings Bank Association last year, Mr. Frank A. Vanderlip said: We need only a better understanding of the true strength of New York City's obligations. When we have that the market quotation of a New York City bond will be one of the City's worthiest monuments. The principal unknown factor in the true strength of these bonds is the book value of the City's permanent property and equipment, especially that part which is salable, such as waterworks, docks and parks. It is evident that the small cities have little to learn from New York City, and in the next conference to promote uniform municipal accounting, New York City, because of its size, and because its accounting system is an anachronism, should take a less conspicuous part. The Importance of Scientific Accounting.* BY HON. JAMES Logan, Mayor of Worcester, Mass. An intelligent accounting system is just as real an invention, and marks an advance in industry as great, as important, as many mechanical inventions. I am of the opinion that a cost analysis in some lines of industry has done as much to reduce the costs of production during the past five years as have the mechanical inventions during the same period. Yet manufacturers who will spend money lavishly, whose scrap heap for old machinery represents not one, but several fortunes, are conducting their accounting by as crude methods as those which were in vogue when the stage coach represented rapid transit, and, following their present methods or lack of methods, will at some future day not far distant, come to their downfall. Accounting is not simply making a record of what has been done. It is a tabulation and classification of all the details of the business so that the management can intelligently decide what it is best to do for the future. The record of what was done last year will not produce increased dividends next year if it is only a record and no further use is made of it. By scientific accounting the manufacturer will scan the record of the details of his business with a vision multiplied many times, looking through the accounts as a mariner looks through his binocular, thus bringing into view the rocks hidden to the naked eye. An accounting system to be of any value whatever must be such that at the close of each period there can be made up a statement of the business in all its detail. It is not enough that the costs shall go into a few general accounts. There must be an intelligent sub-division of every item of cost, whether of material or labor, and no accounting system is entitled to confidence which does not classify and properly locate every dollar which has passed through the books. Then if costs are increasing the com From the Commencement Address delivered to the graduates of Worcester Polytechnic Institute, June 11, 1908. |