WATER WORKS ACCOUNTING
There are three interests involved in every water plant, (1) the proprietors (2) the public (3) the managers. It is a function of accounting to present a history of a plant in such form that it may be used as a guide by each of them in their future conduct toward the plant. The history should be presented in a periodical report issued at least once a year. The writer had the opportunity of investigating the reports of a large number of water plants, both municipally and privately owned. The report of a certain municipally owned plant of a city with a population of about 20,000 is taken as typical of the reports issued by all of them. For the purposes of this discussion we may call the city, Urban. Although this was a municipal plant, the questions involved are applicable to both private and municipal plants. The only difference between the two being that in a municipal plant the public assumes the interest of proprietor as well as consumer. The report investigated contained the figures for the two years 1012 and 1013. The first question concerned the investment. How much was the public’s investment in the plant? A thorough investigation of the report brought forth the following information: From the Annual Report of the Urban Water Department for 1912:
1. Taken from page 3 of the report:
•Old water works plant . 15,000.00
Lake Michigan Pumping Station… 219,410.00 Water Main Extension to date …. 512,975.72
Water department supplies on hand. $22,375.99 2. Taken from page 10 of the report:
Water works bonds, series of 1890,
5 per cent.$140,000.00-
Water works bonds, series of 1911,
4 1/2 per cent . 145,000.00
Lake Michigan water works ref.
bonds, 5 per cent . 20,000.00
Lake Michigan water works ref.
bonds, 4 per cent. 25,000.00
Water main extension bonds, 4 1/2 per cent. 300,000.00
This is all the information that it was possible to obtain from the report and it is all that the state required the cities to keep. An investigation was made into all the city records and another one of the physical property to determine its present value. It was found that the old water works plant had been abandoned 20 years before and was worthless and that the plant in use had depreciated by $30,000. The unpaid water accounts were $7,550. There was a sinking fund of $15,000 accumulated to retire the bonds. The cash balance for the water department was $23,576.25. The amount due to creditors for purchases was $13,875. With these facts it was possible to determine the public’s interest in the business, because the total assets of the plant were known and the total liabilities were known. Deducting the liabilities from the assets, gave the net investment of the public. In a private plant the same figure would be the net investment of the stock-
*Instmctor of Accounting, State University of Iowa, Paper read on second annual Field Day, Nov. 20, 1914. holders. The same information was obtained for the year 1913 and the net investment determined. The information lor the two years was set down in a comparative balance sheet as follows:
Comparative balance sheet, 1913, 1912. Urban Water Department. Reconstructed from
Water Department Reports:
This statement shows the net investment to be $147,012.96 for 1912 and $155,595.63 in 1913, plus the sinking fund reserve of $15,000 in 1912 and $30,000 in 1913. The sinking fund created through a reserve is simply a means of purchasing the plant from the bondholders. If the plant is maintained and a sinking fund reserve created besides, the reserve becomes part of the net investment of the proprietors when the bonds are retired. It is sometimes argued that the net investment figure for a municipal plant is of no significance. That figure represents the financial advantage to the present water consumers of owning the plant assuming that it could be managed just as efficiently under either form of management. The plant of the city of Urban is valued at approximately $805,000 (after deducting the depreciation from the cost figure); the indebtedness amounts to $658,000, leaving a net surplus of approximately $147,000. The consumers of water must pay in rates enough to cover all expenses and the interest on the interets bearing liabilities, while if the plant were owned by a private corporation, the consumer would have to pay enough in rates to cover all expenses and a return on the whole value of the plant, $805,000. Therefore, the surplus or net investment in a municipal plant is a measure of’ the financial advantage to the present consumers from the public owership of the plant. What further information may be gathered from this balance sheet? The net investment (surplus) has increased $8,583.67, besides the $15,000 added to the sinking fund revenue during the year. $100,000 has been expended on the distribution system, that amount having been raised through the issuing of $100,000, 4 1/2 per cent, bonds. The plant has also depreciated $10,000 during the year as shown by the depreciation reserve. This comparative balance sheet then is sufficient for showing the condition of the plant. It gives an analysis of financial changes in the business. The balance sheet should be the corner stone of any accounting system. While the balance sheet gives a comparison of net results, it does not show any of the causes for the increase or decrease in surplus. What were the causes for the increase of $8,582.67 in the surplus item in the balance sheet? It is the function of the income statement to analyse that increase. An examination of the water department report of Urban showed that the nearest approach to an income statement was an extract from the city treasurer’s report for 1913, referring to the finances of the water plant. That report follows:
From tlie Treasurer’s Report of the City of Urban for the year 1913:
Receipts and disbursements of the water department.
Assessed rates .$33,967.36
Metered water . 29,722.48
Mason work . 836.04
Metered rentals . 172.44
Miscellaneous . 71.75
Total receipts .— $64,770.07
2. Disbursements. Operation.
Lumping station expense. $8,402.54
Fuel . 5,061.46
Office and distribution
expenses . 10,678.64 Maintenance.
Repairs t o distribution system . 607.35
Repairs to pumping station . 644.19
Repairs to meters . 581.50
Interest on bonds and sinking fund . 45,000.00
New extension . 8,000.00
Insurance . 414.88
Deficit . 12,820.49
On the basis of these figures, the city treasurer reported that the water plant had been operated at a loss of $12,620.49, and recommended that the rates be raised. Can we base a judgment as to the reasonableness of rates from the above statement? It is true that the treasurer paid out $12,620.49 more of water department funds that lie took in. What were the payments for? Were they all expenses? An income account is necessary to answer those questions. The income statement should first show the total revenue for the year, whether actually collected in cash of still owed by the consumer. The above report shows only the amounts actually collected in cash. What constitutes revenue to the plant? A certain amount of water is pumped into the mains at the pumping plant and is all consumed for different purposes and by different parties. A benefit is conferred to each party for all the water consumed. The return for those benefits constitutes the revenue. The revenue should be classified as to source somewhat as follows:
- Private Service.
- Municipal Service.
- Fire Protection.
- Public Buildings, etc.
- Miscellaneous Service.
- Meter Rentals.
It may seem like taking money from one pocket and putting it into another to call municipally consumed water a revenue to a municipally owned plant. There is no necessity for the transfer of money by the treasurer to treat that service as revenue, and in order to determine the reasonableness of rates, it is necessary to so treat it, and to charge it to the department of the city which receives the benefit. It is the poliev of cities to use the property tax receipts for the cost of protecting property and special taxes for parks and public buildings. If no charge is made against the funds created for these purposes and credited to the revenue of the water department for water consumed for the city use, the water users are paying part of the expenses for the protection qf property, the beautifying of parks and the maintenance of public buildings which should be apportioned to the citizens on some other tax basis. The revenues of the Urban water plant should be shown as follows:
1. Private Service: There was $29,722.68 received in cash for metered service as shown by the treasurer’s report. There was $8,740 more of water used during the year and still due from consumers which also constitutes revenue. The unmetered was $33,967.36. The total private service, therefore, was $72,429.84.
2. Municipal Service: An investigation of the water used by the city showed that the water for fire protection if charged on the meter rates would amount to $10,000, for parks $5,000 and for public buildings $9,500, making the total municipal revenue $24,500.
3. Miscellaneous revenue amounted to $1,080.23.
The total revenue then amounts to $98,010.07 although the receipts as shown by the treasurer’s report were only $64,770,07.
The expenses should next be deducted from the revenue to find the net revenue. The total disbursements of cash are not always all expenses. Some cash may be paid out for new property or improvements, etc. On the other hand, there may be some expenses which are not represented in cash disbursements, such as depreciation. The expenses must represent the actual cost of bringing in the revenue represented in the revenue section. They may be classified as follows:
- General Expenses.
- Insurance, etc.
- Operating Expenses.
- Operating Management.
- Collection System.
- Distribution System.
- Maintenance Expenses.
- Collection System Repairs.
- Distribution System Repairs.
- Depreciation on Plant.
The item of depreciation on plant must be included in expenses to obtain the correct cost of operation. In spite of all repairs, the plant is gradually wearing out and at some time will have to be replaced. The cost of the plant throughout its life is just as much a cost of operation as materials furnished which are used up within the year. If we were to make out an income account to cover the whole life of a plant, one of the expense items would be Cost of Plant. Since we are making our income accounts several times during the life of the plant, we must apportion to each year the value of the plant used up during the year. If this were not done, at the end of the life of the plant, the expenses of one year would be burdened with the whole cost of the plant. The expenses should be restated as follows:
1. General Expenses. These had been lumped in with the operating expenses so that insurance was the only item under this head which could be found—$414.88.
2. Operating Expenses. These were correctly stated at $22,142.64.
3. Maintenance. The repair items were correctly stated in the report. Depreciation on the plant for the year was estimated by engineers at $10,000, making the total maintenance $11,869.88.
The total expenses amounted to $34,427.40, although the total disbursements were $77,390.56. Deducting the expenses from the revenue gives the net revenue $63,582.67. All expenses having been met, the next thing is to meet the capital charges, that is the payments made for the use of capital. In this case it is interest on bonds and amounts to $30,000, included in the item interest on bonds and sinking fund in the treasurer’s report. The other $15,000 is an allowance for sinking fund and is not a deduction from revenue. It is not a cost of the capital, it is simply a saving of a part of the profits with which to buy out the bondholder’s interests. It is estimated however, that $2,000 of the unpaid accounts will prove worthless and these must be charged against the net revenue. The total charges of $32,000, deducted from the net revenue, gives $31,582.67, the net profit on the plant, instead of a deficit of $12,620.49, which is the excess of expenditure over receipts. Of the $31,582.67 net profit, $8,000 was used to extend the plant and $15,000 was put into the sinking fund to retire the bonds. The remainder, $8,582.67, was carried to surplus and explains the increase in the surplus as shown by the comparative balance sheet for the two years. The reconstructed income statement is as follows:
Reconstructed Income Account of the City of Urban for the year 1913:
- Private Service.
- Metered (cash) $29,722.48, plus charged $8,740 .$38,462.48
- (b) Unmetered . 33,967.36
- Municipal Service.
- Fire protection.. 10,000.00
- Parks . 5,000.00
- Public buildings, etc. 9,500.00
- Miscellaneous Revenue.
- Special work .. 836.04
- Meter rentals .. 172.44
- Sundry accounts. 71.75
Total revenue . $98,010.07
- General Expenses.
- Insurance, etc… 414.88
- Operating Expenses.
- Operating management.
- Collection system .$11,464.00
- Distribution system . 10,678.64
- Maintenance Expenses.
- Collection system repairs . 644.19
- Distribution system repairs . 1,225.69
- Depreciation o n plant . 10,000.00
Total expenses . … $34,427.40
Net revenue . $63,582.67
Deductions from Net revenue:
- Interest on bonds.$30,000.00
- Bad debts charged off.. 2,000.00
Net profit … ., $31,582.67
Distribution of profit:
- New construction. $8,000.00
- Sinking fund . 15,000.00
Net amount carried to
Surplus . $8,582.67
If the public were to base its judgment on the treasurer’s report, the rates would have to be raised, whereas the plant is actually operating at a profit and in a condition to reduce the rates. The reports then in which the proprietors and public are interested are the balance sheet and income statement. With these two statements which give a concise history of the business, they are both able to form an accurate judgment as to the condition of the plant and as to the reasonableness of rates. Having formed a judgment, they can exercise their power of control to the best interests of the public and the plant. The special problems of the manager are: (1) the determining of causes behind the expense account; (2) the determining of unit costs of distribution; (3) unit costs for laying pipe, installing meters and services; (4) the location of wasfe from the loss of water and other sources; the results obtained from the installation of meters or from the installation of any new device. The manager demands statistics which will serve as an aid in the direct management of the plant. In order to give the needed information to the managers it is necessary to develop a set of statistics which will keep a record of each class of information desired. These statistics may be entirely separate from the financial accounts. An account should be opened for laying of pipe to get the unit costs of laying pipe. The same should be done for installing meters. There would have to be kept statistics showing the amount of water pumped and then the amount recorded by the consumers’ meters to locate lost water, etc. What should a water plant which has no adequate accounting system do to install one? There are just four steps to be taken:
1. Take a complete inventory of all the assets and liabilities to construct a balance sheet as a starting point.
2. Employ a bookkeeper o look after all the accounts of the department, including the manager’s statistics.
3. Study the plant with the view of having the necessary forms ruled to fit the needs of the plant. The forms to be used are of the utmost importance. They should be ruled so that the information may be readily entered on them and readily collected from them. Too many forms will make a person feel that the information is not worth the bother or that this is too much “red tape.”
4. After the system is installed, keep it working—give it a chance.