1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
101
102
103
104
105
106
107
108
109
110
111
112
113
114
115
116
117
118
119
120
121
122
123
124
125
126
127
128
129
130
131
132
133
134
135
136
137
138
139
140
141
142
143
144
145
146
147
148
149
150
151
152 
Why Municipal Accounts are Confusing
Page 115
If you've noticed an error in this article please click here to report it so we can fix it.
Inconsistent and Ambiguous Terminology Makes It Difficult to Compare Financial Results By R.A. Ryves, M.I.Const.E.
COMPARATIVE studies of the finances of municipal passengertransport undertakings are made somewhat difficult by the laCk of a common and precise terminology. Words are not wanting to express the facts as presented by the accounts, or to describe the character of thd 'resulting financial provisions, but the student of municipal finance is confused by the liaploymerit ofterms, often inapproPriate, or used with •different meanings in otherwise comparable cases.
Light may be thrown upon the sabject .from three different directions,as proceeding f rum a consideration of logic, -of-language as expressing facts, and • of accountancy and its terminology. The following discussion relates to the first and second aspects. with such consideration of the third as may he given in the light of well-known principles of finance;—
Consistency First Requirement. •
In respect of the financial results of .a year's operation of a passenger-transport undertaking, the first requirement, if words are to be used consistently and properly, is to find such terms as express working expenses, traffic takings and the difference between those sums. The word " expenses " seems to be more appropriate than "costs," because repairs and renewals—in respect of which there is usually a provision not included in the sum designated as the costs of operation—are, in fact, a part of such costs, Further, " traffic " is the preferable adjectival word, because it may be used to qualify " receipts " as well as " expenses." It is desirable that the same adjective be employed with both nouns and with the word used -to express the difference between them. That difference cannot then be confused with any other sum.
If it be considered that " traffic is inappropriate as relating to the running costs, and presuming that the costs of repairs and•renewals are not included, the term "working expenses" may be employed or, more explicitly, " running expenses."
Meaning of "Earnings."
To employ " earnings " as equivalent to traffic receipts seems to be undesirable, as introducing the word too early in the sequence of figures in the presentment of the financial position. The word is, however, one for which, as expressing something less than receipts, but more than profits, there may be a place. If it is to be employed, practice should be uniform and the term should he defined as in the accountancy view.
If suitable terms be employed to define traffic receipts and traffic expenses, no qualifying adjective is required with the word expressing the difference between them. There cannot he a ' qualified difference between two unqualified sums, nor a distinctively qualified difference between two simi!ady qualified sums. • Therefore, as regards receipts, such a term as " gross " or " net" has either a wrong meaning or no meaning at all. The word "gross," as applied to a profit, simply implies that it is not a profit, whilst " net " is redundant.
The difference between traffic receipts and traffic expenses is sometimes called a "'surplus," or a "deficit." The former term is inappropriate, because it properly applies not to what is merely a difference, on the right side, between two sums, but to an excess in the magnitude of an amount. Surplus earnings, for example, exceed what is necessary or expected.
On the other hand, " deficit " may properly be employed, even at this stage of comparison between :traffic receipts and traffic expenses, because it implies that the former sum is less than a defined figure, the traffic expenses.
When "Net " May be Used.
It is not inconsistent to accept "net traffic earnings" as a suitable term, provided that the word "earnings," as employed in this connection, receives accountancy approval. Whereas the sum defined as " receipts " is fully so defined, earnings are sometimes regarded as sums received and, in other cases, are such sums less expenses. " Net" may precede "traffic,' because "earnings " is an ambiguous word. In the writer's view, it is here inappropriate, unless traffic expenses have included the cost of repairs and renewals.
It may he left to accountants to give a ruling as to what is the precise meaning of the word "revenue. ' In the interest of consistency, however, it might be reserved to designate the total of sums placed to the credit side of the account, unless—again as accountants may decide—there are some items not to he included in revenue, properly so-called.
Ile word may, perhaps, be suitably used in expressions such as "the revenue from . ," but, as there are more explicit terms expressing separate items, such as "traffic receipts, ' whilst there is no single word expressing the wider meaning so well as does " revenue," it seems undesirable to employ the term in the narrower sense. In any case, it is a defined sum which cannot he " gross " or "net."
In respect of the allotment of the sum for disposal, resulting from a year's operation, confusion is caused by the use of the word "profit at too early a stage in the arithmetic. Taking,
as an imaginary example, two towns of about the same size, each reporting bus profits of 212,000, in one case 26,000 goes to the relief of rates and 26,000 to paying off a debt, on abandoned tramways.
Assumingthat any: advantage derived frOm the use of the tramways buildings or plant hasseparately been allowed for, . the real profit was, as stated, £12,000. In the other.case, the £12,000 was allotted in the 'proportion of 24,000 to the relief of rates, £5,000 to the repairs and renewals fund,and £3,000 to the reserve fund. The undertaking did not, the writer considers, show a" profit of £12,000, but one of either £7,000 or 24;000, depending, it would seem, on the character and purpose of the reserve fund, and upon whether the sum paid into it -should be regarded as the corporation's own tax on its bus system, or as. a part of the profits devoted to a useful purpose.
Ambiguity in Profit.
It may, therefore, be maintained that the profit did not exceed £7,000, and that it is improper to 'regard the sum paid into the repairs and renewals fund as a part of the profit. Actuarial equity might be satisfied if the costing system provided for future drafts on the fund being placed to the debit side of the account before arriving at the sum for disposal.
It seems more logical, however, to treat payments into the fund as expenses of operation and drafts upon it as in the same chtegory as materials, bought and paid for, kept in the shops for running repairs. Practice with regard to individual vehicles is to debit the account, every year, with a portion of the sum required to replace the vehicle at the end of its " life."
In any case, the relation of the £12,000 to the profit of 27,000 or 24,000 is improperly stated by calling the former a " gross " and the latter a " net " profit.
Capital Charges.
Capital charges in respect of provisions made for the establishment and equipment of the undertaking are costs incurred, and the word " profit " is not applicable to a sum, only a part of which is left after those charges have been met.
Reference has already been made to the impropriety of employing the words " gross" and " net" as qualifying "profit." The only case in which, in this connection, the use of the term "net profit may he regarded as justified-is when a portion of the profit, as such, is paid as a sum due to a person or concern other than the municipality. The claim is then one in respect only of the profit, and is not such as might result in a deficit.
It is regrettable that sound finance should be made to seem unsound by the employment of inconsistent and unsuitable terms, loosely used, in default of consistent and precise terminology.