The Encyclopedia Americana (1906)/Municipal Accounting

Municipal Accounting may be termed a by-product of increasing municipal activity. This began with what is commonly known as the industrial revolution. The establishment of the factory system, the abandoning of home production, or the "domestic system," the drift of population away from country estates and agricultural employment, the increased need for making provision for the health, comfort, convenience, and for the social order of crowded settlements and fast growing cities have forced on local government activities which have made its officers responsible agents for great business corporations. Within a few decades the small trading towns on the coast and inland lines of transportation in England and continental Europe had grown from mere villages, or a collection of villages, to the proportions of cities; and the proper administration of government came to involve expenditures of millions where before only hundreds or thousands of public revenues were required. In the borough or the town the officer had immediate contact with every detail of public expense and his own experience was sufficient guide to administrative control. Increase in municipal functions forced him to rely on employees and agents, and he soon came to be dependent on them for a knowledge of details; an understanding of the financial transactions of the larger community could be had only through a well devised system of accounts.

Accounting is a method of collecting, classifying and co-ordinating the financial data pertaining to an enterprise, public or private. As a method of collection, accountancy attempts to make a complete record of financial transactions; as a method of classification it aims to assign accurately each financial fact to an administrative department or category to which it properly belongs; as a means of final co-ordination its object is to finally bring all the data to a single subject of account into form for a complete understanding of related details. Thus by process of original record and restatement, not only does a system of accounts give a complete history of the business as a whole but also a chronological, as well as summarized, statement of transactions pertaining to each administrative interest; and, through final summaries, exact knowledge may be brought to the attention of the administrator of every relation that is important in the management of affairs. Judged, therefore, both from its methods and from its results, accountancy has come to be a true science of financial record—a science which is fundamental to controlling judgment, both with respect to past operation, and as pertaining to provisions to be made for the future, in enterprises that are too large for the personal contact of a single head.

In the development of methods which will properly record financial transactions and reduce these records to reliable statistical statements, accounting has followed all the transformations of business itself. With each advance in complexity, and with each widening of the scope of enterprise the adoption of an improved system of records which will insure authentic results has been imperative. Private concerns have been able to survive under such conditions only that those in control may have a complete mastery over details. When intelligent direction has become impossible the private institution has failed and its business has passed to its competitors, Scientific accounting methods were first worked out in private life as a matter of survival. The public corporation, however, has not been subject to this law. Peace and social order must be preserved at any cost; public health must be protected; public convenience has commanded service of the government as the only institution which could properly represent the public welfare. The government could not die and the corporation empowered with governing activities, has been allowed to pass on from generation to generation inheriting methods which were inaugurated under conditions that required little or no provision made for authentic record of official conduct.

Analogy with private business may still further illustrate present conditions of municipal account. From primitive to modern accounting there have been three steps, namely: A system of partial accounting and two systems of complete accounting. The two systems of complete accounting are commonly known as "Single Entry" and "Double Entry." Of these two last named, Single Entry is the more primitive. Single entry accounts attempt to make a complete record of transactions, but in classification the financial data are finally co-ordinated around proprietary interests only. Single entry accounts attempt to state proprietary assets and proprietary liabilities, but do not record anything with respect to current business operation. In these, under the single entry system, profits are arrived at through balancing off appraised valuation of assets against liabilities. No attempt is made to show current operations and no account is taken of earnings and expense. With the introduction of highly complicated and highly centralized industrial and commercial organization, under corporate control, most of the administrative problems came to be centred in operation—hence the necessity for the introduction of other accounts for the purposes of final classification. To provide such information the "Double Entry" system was devised. Under such an accounting plan not only may the cost of each article of product be determined, as a guide to estimating profit in price making on each particular sale, but the results in net earning of the gross business may be accurately determined from the books without inventory and valuation of assets and the closing of accounts representing proprietary assets and liabilities.

The public corporation and enterprises conducted by the government have been less fortunate in the development of methods which would show expenses (or cost of administration), revenue (or current income), transactions with respect to corporate properties. and liabilities outstanding. Municipal accounting has developed not as a condition necessary to survival but in response to a public demand for municipal reform. This movement first began in Europe and has reAChed its highest development in Great Britain where scientific accountancy had become first established as a necessary means of administrative control over large private undertakings. For public protection, the established methods of accounting were first applied to joint stock companies. Among the first Acts directed toward this end were those following railway speculation in the fourth and fifth decades of the century just closed. The abuses which had grown out of this character of promotion and the failures which had followed the absence of a strict financial control were the reasons for the enactment of the Companies Clauses Consolidation Act (8 Vict., c. 16). Under the provisions of this Act, auditors were to be appointed by the stockholders of corporations at their regular meeting, and these auditors were empowered to employ accountants to assist them in making special reports or in confirming the reports prepared by the officers themselves for the information of stockholders. The reports of auditors so appointed were to include a certificate as to the correctness of the balance sheet, in which was to be set forth the capital stock and credit liabilities, the accounts due to the company and the properties of every description. They were also to give a "distinct view of the profit and loss which shall have arisen in the transactions of the Company in the course of the preceding half year.: It was further provided that no dividends should be declared except out of profits and that dividends should never be apportioned to stockholders when this would result in the impairment of capital resources. Gradually statutory provisions requiring appointment of auditors either by the stockholders of companies at their regular meetings or by the Board of Trade were extended to include public gasworks, public waterworks, commercial banking companies, savings banks, university and college estates, judicial trustees, county officers, etc. In the movement toward political reform a Local Government Board was finally created (1871) which would force upon all of the County Councils, Municipal Corporations, and Town Councils (except those of the larger cities) a uniform system of accounts, complete audits of account, and reports to the government of the financial operation as well as financial condition of local governing bodies. The same spirit of reform and the same necessity for providing a system which would furnish exact knowledge of details and summaries of results as a means of better administrative direction and control, induced the larger municipalities to employ professional accountants to instal improved systems of financial record and to audit their accounts periodically.

As it was in Great Britain that modern industry first found its highest development, so it was there that accountancy was first raised to the plane and dignity of a profession. The "Companies' Acts" and supplementary legislation requiring the appointment of independent auditors contributed much to the development of the science by making its requirements general in the management of large affairs. Instead of leaving the science to be slowly evolved by a process of natural selection of methods, the several Acts of Parliament, making audits and reports compulsory, immediately brought the talents of thousands to the task of specialization in this field. When the Local Government Board was organized, in 1871, the London Institute of Chartered Accountants (a chartered body of professional accountants) had already been in existence nearly twenty years and similar professional bodies had been organized among the accountants of Scotland and Ireland. The application of accounting methods to English municipal governments, therefore, was a comparatively easy task. The public corporation had grown too large for the effective use of partial and primitive systems of financial record; these had long since failed to serve the public administrative need. When English accountants were asked to turn their talent to municipal work they had simply to apply the principles and methods of scientific accounting to which they had long been accustomed (in the classification of financial data of gas companies, water companies, railways, and the large industrial and commercial corporations, making such changes only as were made necessary by the public character of the enterprise.

Theretofore municipal accounts had been little more than cash book entries and treasury statements; the efforts of local communities had been directed toward holding the officers of government to strict account in the handling of public funds. The first efforts toward reform were for the protection of the taxpayer against fraud and misappropriation. To this end a strict account of receipts and disbursements had been required and the accounts and reports of municipalities were little more than detailed or classified statements of the public treasury. When, however, municipal functions had become multiplied and municipal activities had grown too complex to allow of an intelligent grasp of details by those in control, the futility of the cash book system became apparent. From the best records that might be made and the best summaries deducible from records of the flow of cash no notion might be had of the real problems of administration. What the officer would know and what the taxpayer was primarily interested in as a matter of strict economy was the current cost of government and the current revenue provisions to meet this cost. It was also necessary to have a complete accounting for the various properties belonging to the city (other than cash) and a complete statement of credit obligations. None of these results could be obtained from a record of receipts and disbursements. The municipalities had been using a system of partial account only, and the larger problems of financial administration which confronted them demanded not only a system of complete financial account but also one which would~show both municipal operative results and transactions pertaining to municipal assets and liabilities—that is, a complete double entry system.

Applying the principles and the methods to which they were accustomed in the analysis of financial data and final summarization of accounts for the railway and other large private corporations accountants found that the categories necessary to show costs of administration were almost identical with what they had been accustomed to set up as the expense account of private undertakings; and in lieu of earnings in private accounts a statement must be made of current revenues accruing to meet expense incurred. The net result of these two classes of accounts would show revenue surplus and revenue deficit of the municipality for the year, or other period stated, instead of net earnings. In other words, these two classes of accounts exhibit the true financial results of municipal operation for the year, but none of the data collected in either class had any reference to cash receipts or cash disbursements. Under the double entry system, when an expense was incurred it was at once set up in its proper classification both as an expense and as a current liability of the city. The cash payment when finally made had no reference to the expense but simply operated to reduce amount of current liabilities and to correspondingly decrease the cash assets of the treasurer. On the other hand, revenues were spread upon the books as soon as they accrued and became payable; of these a double entry was made, first in a proper revenue account, and second as a current asset. Payment of revenue into the treasury or cash received did not in wny manner affect the revenue account but operated to reduce an assets receivable account and to increase the amount of cash in the treasury.

While modern systems of accounting take no notice of the flow of cash as a means of showing the results of operation in net earnings or in revenue surplus or revenue deficit, receipts and disbursements become an important exhibit in those accounts intended to portray financial condition. These accounts are those ultimately collected in the balance sheet and are sometimes referred to as proprietary accounts to distinguish them from those designed to show results from operation. Municipal properties and municipal liabilities can be affected in only four ways: (1) They may be increased or decreased by cash transactions; (2) they may be increased or decreased by credit transactions; (3) assets may be decreased by depreciation and liabilities may be increased by reserves set up to cover depreciation; and (4) assets may be decreased by loss of property or the liabilities may be increased by reserves set up to cover loss. To give a true picture, therefore, of transactions pertaining to proprietary assets and liabilities and as a means of holding officers to strict account, summaries must be shown representing present financial condition, and exhibits must be made which will properly set out the transactions of cash and credit, as well as the reserves or provision made to cover depreciation or loss, through which the changes in proprietary accounts have been affected. It is as a means of illuminating the cash assets account and of giving assurance as to the correctness of cash balances represented, only, that exhibits of receipts and disbursements are important.

Under the English system of municipal accounting the assets and liabilities or the accounts which are finally stated and summarized in the balance sheet are again divided into two classes, viz.: (1) Those showing current and contingent assets and liabilities and (2) those which show transactions and the final result of transactions pertaining to the permanent properties and the funded debt of municipalities. The latter of these two classes is set up in their reports as capital accounts. A statement of cash receipts and disbursements (or of transactions of the municipal treasury) with respect to these two classes of properties and liabilities is also distinguished. Cash receipts and disbursements which pertain to or affect current assets and liabilities are called ordinary, while those which pertain to or affect capital accounts are denominated extraordinary. These terms, however, pertain to no other class of accounts than cash and have no real significance in exhibits other than detailed or classified statements elf receipts and disbursements.

In America, accounting ideals long languished and financial records were retained in innocent simplicity and primitive confusion long after the science had become well established in England and Scotland. During the period that accountancy was being erected on the high plane of a profession in Europe, commerce and industry were on the Western Continent first beginning to feel the need for a method which would insure integrity of summaries of financial results. Till the middle of the 19th century America was a highly individualistic agricultural community. The American farmer needed no accounts other than a simple statement of cash receipts and payment and a memorandum of credit obligations. Before 1830 the bank was about the only enterprise of large capital and its transactions were treated as cash. In 1820 the city population of the United States was only 4.93 per cent and there were only 13 cities having a population over 8,000. The census of 1850 showed an urban population of 12.49 per cent; at this time the American Transportation Company was about the only concern whose volume of business and breadth of organization demanded a modern method of account. And it has been in the railway service that most of the American accountants have received their training.

After the Civil War, industrial and commercial enterprises came to take so prominent a place in our national life that the current of population set strongly toward the city and a process of centralization was begun similar to that felt by Great Britain about a century before. In 1900, about one half of our population was found by the census takers in large cities, and, in the most highly industrial portion, namely, the North Atlantic Division, only 31.8 per cent remained in rural employment. The sudden development of the municipalities, the hopeless chaos in municipal administration, the known mal-practice in public office, and the abortive attempts on the part of honest officials to locate responsibilities as well as protect themselves against the suspicion of corruption which the public had come to entertain toward all those connected with local government (as a result of the peculations of the few and of the organized political plunder to which the public treasury was subject) have within the last two decades raised up a universal demand for municipal reform which has brought the combined intelligence of honest citizenship to the solution of the means necessary to its accomplishment. In America, as in England and in continental Europe, attention was first called to attacks on the public treasury and to the subversion of public funds to private use. As a means of protecting the taxpayer against the misapplication of cash received, the first step toward reform was the creation and election of independent treasury officials and the publication of detailed treasury reports. These have served as a protection against fraudulent inroads on the treasury, but have done much to confuse ideals of municipal accounting with statements of receipts and disbursements.

The need for a system of complete accounting in American municipalities as a first premise to municipal reform has in recent years been enlarged on by many, but by none has it been more forcefully expressed than by Nathan Matthews, Jr., of Boston, who was elected mayor of that city in 1891. Boston at that time was better equipped, perhaps, than any other American city for furnishing the kind of data needed for an intelligent administration, yet Mr. Matthews in his first report calls the attention of the people to their helplessness in the following language:

Called to the chief magistracy of the city without previous service in the government and believing that the first duty of a public officer charged with the disbursement of millions of dollars of public moneys was to search the printed reports of the city government for accounts that would show the cost from year to year, of equipping and of maintaining the various departments of municipal service, I was amazed to discover that practically there was none. I have in consequence been obliged to devote an inordinate amount of time to the work of securing this information and of arranging it n convenient form for use, the time thus spent amounting to several hours per day for weeks at a stretch.

In this statement Mayor Matthews brought into strong contrast the cash account system and the needs of the administration for authentic statements and summaries of accounts which will show "the costs from year to year of equipping and of maintaining the various departments of municipal service" as well as the revenue provisions made by government for meeting this expense.

In many departments of our large cities even memoranda of account were found to be almost entirely lacking. The Comptroller of Chicago in his report (1897) points to the confusion in the Special Assessment Bureau as follows,

Too severe criticism cannot be made upon the lack of system prevalent and the absolute neglect to post the books of accounts in the Special Assessment Bureau of the Department of Public Works in past administrations. It was discovered by this administration soon after it came into office that the books of account of that Bureau were more than five years unposted.

As late as 1901 the Fassett Commission investigating the accounting methods of the cities of the State of New York reported

That the system of accounting in the several cities is more unintelligible and chaotic even than the laws under which the cities themselves are administered. . . . We believe that there can be no wise legislation with reference to the government of cities unless it be possible for the officers of the State, and especially for the Legislature and the Governor, to be able at all times to know with definiteness and certainty the facts relative to the general condition of municipal administration in each of the cities, and more particularly the exact financial situation in each and all of them.

The general awakening in America has not been without results. The city of Boston under the revised ordinance of 1898 empowered the City Auditor with the approval of the Mayor to designate expert accountants to examine the books and departments periodically. In a number of the States a movement has been inaugurated to create a board, or officer, of central control over municipalities and local governing bodies with powers similar to those enjoyed by the Local Government Board of Great Britain. The State of Ohio has recently enacted a complete Municipal Code which applies to the principal cities and towns of the State, giving them uniformity of administrative organization and which provides for a system of accounts that will show revenue and expense. The same law enacted a State Auditor or Comptroller of Municipal Accounts, with power to prescribe forms and to require reports which will insure accounting results. Other States have introduced uniformity in accounts for county and town organizations. Generally speaking, however, American municipalities and local governing bodies are still attempting to work out their administrative problems from the cash book and even in States where the law requires a statement of revenue and expenses, attempts are made to reach such a result through supplementary schedules, still making the treasury statement of receipts and disbursements the principal feature of their system. American municipal accounting officers have not yet risen to the dignity of professional accountants; few of them have such a knowledge of the principles and methods of accounting that they appreciate the futility of the cash book system. Even in cities like New York and Boston the cash book system is still retained. Their reports show little else than the flow of cash as exhibited in summaries of receipts and disbursements. Neither the officers of American cities in responsible positions, nor the taxpayers have any means of determining from such a system current expenses or annual cost of administration; no accurate statement may be made of revenue accruing to cover costs; there is no intelligent guide in making appropriations and no means of ascertaining revenue surplus or revenue deficit; budgetary estimates as a basis for taxation, and statements of revenue and expenses as a guide to administration, are rendered impossible except through such process of rough approximation as that described by Mr. Matthews in his report to the citizens of Boston.

Chicago was the first large American city to adopt a system of accounts adequate to meet administrative needs. As shown in a paper recently read before the Detroit Conference of the National Municipal League (April 1903),

Within fifty years Chicago had grown from a village to a municipality of two millions; it had begun with a small town organization, as its population and territorial jurisdiction had spread over the surrounding prairies and swamps, primitive local governments had been incorporated by consolidation rather than by process of readjustment and reorganization. . . . The City of Chicago had finally come to include more than twenty separate taxing jurisdictions, over which it had little control and between which there was no well defined method of co-operation for common ends; the financial side of the administration had become unmanageable and the government in all its activities was crippled. Recognition of this situation on the part both of citizens and of officers of administration was the first step towards reform. Citizen activity and discontent were in evidence on every side.

The Mayor and Council were alive both to the public demand and to the probable results of public censure in case their own incumbency was not relieved from suspicions which were sure to follow. As a result, Haskins and Sells, public accountants, were employed to devise and instal a complete system of accounts which would meet the administrative needs of the city. The general features of the new system adopted as a result of this employment closely follow that in use by the English municipalities. In each department and office is kept a complete record (or original entries) of all financial transactions pertaining thereto. These are finally collected in the Comptroller's office, and co-ordinated in final summaries of revenues and expense (or operative results) and assets and liabilities (or statements of financial condition). The important administrative features of this system are represented in detail in the report of the Comptroller for the year 1902, as follows: (1) Uniformity of accounting methods in all departments; (2) Concentration of accounting in the Comptroller's office; (3) Collection of all revenue by the City Collector; (4) Daily remittances;. (5) Monthly reports to the Comptroller and monthly balances between the Comptroller and all departments; (6) Financial reports published monthly by the Comptroller; (7) The organization of an Audit Bureau and a methodical plan of auditing by officers and employes retained especially for that purpose independent of all departments; (8) Accrument of all revenues on the general books of the city where they stand as evidence of obligations due to the city 'until paid; (9) Approval of all contracts and requisitions for supplies by the Comptroller to prevent departments from incurring liabilities in excess of appropriations; (10) The issuance of all fiscal stationery, forms, and receipts, consecutively numbered by the Comptroller and holding the departments responsible for their use or cancellation; (11) The use of graduated stubs or coupon receipts for the collection of money; (12) The establishment of a complete chain of accounting from the inception of revenue and expense throughout the various branches of the city to the Comptroller's office, where all of the auditing is finally concentrated.

The administrative results of such a system are also set out in the same report. The installation was so managed so as not to interfere with the current business of the city; the work was simplified in such a manner that clerks of ordinary ability might perform the duties required; instead of making necessary an increased clerical force the annual administrative expense was reduced over $72,000; beside, the new system had "improved the efficiency of individual employees and promoted an intelligent and interested direction of their efforts by departmental heads." Another result of bringing revenues accrued prominently before the administration. There was an increase in cash collections of nearly $500,000 in miscellaneous revenues alone. It may be further noticed that in the report above referred to only a brief summary is made of cash receipts and disbursements, the books of the treasury and the audited voucher system of account being considered an adequate protection against official infidelity. The body of the Comptroller's report is devoted (1) to classified summaries and detailed exhibits of revenue and expense; and (2) to classified balance sheet summaries and detailed exhibits of municipal assets and liabilities.

Prominent among the many American societies which have taken a serious interest in municipal accounting reform, is the National Municipal League. This society was organized in 1894, and is composed of members and representatives of local reform organizations. In 1899 the League appointed a special committee to further the interest of uniform municipal accounting and statistics. The first task to which the committee put itself was to work out a classification of administrative interests and purposes which might serve as a basis for accounts and statistics. This classification was published in 1900, and formed a part of the "Municipal Program" of the League. The main interest of the committee being one of bringing the present accounts and reports of municipalities into such uniformity as would form a common basis for comparison, the classification and schedules adopted were applied by the committee to treasury accounts—or cash receipts and disbursements—only. As these schedules have been recognized and adopted by a large number of American municipalities and have been made the basis for the statement of treasury accounts a general outline is here set up.


I. General Government.

1. Mayor — Office.
(a) Salary of Mayor.
(b) Other expenses of city executive.
2. Legislative.
(a) City Council.
(b) City Clerk.
3. Law Department.
4. Finance Department.
5. Bureau of Elections.
6. Public Printing.
7. Buildings not in other departments.
8. Registration.
9. Other general.

II. Protection of Life, Health and Property.

1. Police.
2. Fire Department.
3. Courts.
4. Jails, prisons and reformatories.
5. Health Department.
6. Cemeteries.
7. Building Department.
8. Militia and armories.
9. Miscellaneous.

III Public Charity.

1. Hospitals.
2. Insane.
3. Houses for aged, deaf, dumb, blind, etc.
4. Almshouses and workhouses.
5. Lodging-houses.
6. Outdoor relief.
7. Miscellaneous.

IV. Public Works.

1. Administrative expenses.
2. Opening and grading streets.
3. Street paving.
4. Sidewalks.
5. Street cleaning.
6. Street sprinkling.
7. Street lighting.
8. Garbage collection and disposal.
9. Snow removal. .
10. Sewers and sewage disposal.
11. Bridges.
12. Miscellaneous.

V. Public Industriues.

1. Waterworks.
2. Gasworks.
3. Electric light plants.
4. City real estate,
5. Markets.
6. Docks and wharves.
7. Transit subways.
8. Subways for pipes and wires.
9. Miscellaneous.

VI. Public Education, Recreation and Art.

1. Schools.
2. Libraries.
3. Museums and art galleries.
4. Parks (a)
(b) Playgrounds.
(c) Gymnasia.
5. Baths.
6. Celebrations.
7. Miscellaneous.

VII. Trust Funds.
VIII. Miscellaneous.
IX. Taxation.

1. Real property.
(a) Lands.
(b) Buildings.
2. Personal property.
3. Poll taxes.
4. Liquor licenses.
5. Franchise tax.
6. Receipts from franchise rights.
7. Special assessments.
(a) Street opening.
(b) Street paving.
(c) Sidewalks.
(d) Sewers.
(e) Other purposes.
8. Miscellaneous.

X. Public Debt.

1. Interest.
2. Sinking fund.

XI. Totals of Receipts and Expenditures (to this Point).
XII. Cash Balances at Beginning and End of Fiscal Year, Respectively.
XIII Grand Totals of Both Sides of the Account (Balanced).

Having worked out a general classification of subjects of administrative interests, and having successfully applied these to the treasury accounts of American municipalities, the committee, under instructions from the National Municipal League, undertook to apply its schedules to the other controlling accounts and to report on a complete system of municipal accounting and statistics. For this purpose the double entry system was adopted and the detailed accounts were divided into two general classes, namely, (1) Operative Accounts, showing cost of municipal administration and municipal revenues accrued to meet the current expenses incurred, and (2) Proprietary Accounts, showing assets and liabilities. Thus, in general, they follow the plan adopted by the English municipalities and applied to this such a classification as a basis for co-ordination of financial items and details as are suited to American conditions. Recognizing the separate and independent organization of the office of Comptroller and the office of Treasurer under American municipal charters, separate outlines for reports by these two officers are planned, the report of the Comptroller to show all of the controlling accounts arranged in such manner as to exhibit a complete resumé of operations and financial conditions, the report of the Treasurer to exhibit the flow of cash and balances of cash on hand.

The awakened deep interest in municipal accounting is one of the most hopeful promises of permanent reform in municipal administration.

E. Allen Frost,
Formerly Deputy City Comptroller, Chicago.