B-75212, JUN. 16, 1955

B-75212: Jun 16, 1955

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BOARD OF COMMISSIONERS OF THE DISTRICT OF COLUMBIA: REFERENCE IS MADE TO YOUR LETTER OF DECEMBER 7. OF A RESERVE ACCOUNT OUT OF NET PROFITS WITH WHICH TO PURCHASE NEW AND REPLACE OLD EQUIPMENT WAS NOT AUTHORIZED. ACCOUNTING UNDER WORKING CAPITAL ACCOUNTS IS GENERALLY ON AN ACCRUAL BASIS. A DISCUSSION OF THE ACCRUAL METHOD OF ACCOUNTING IS CONTAINED IN THE STATEMENT OF ACCOUNTING PRINCIPLES AND STANDARDS FOR GUIDANCE OF EXECUTIVE AGENCIES IN THE FEDERAL GOVERNMENT. WE FAVOR THE USE OF ACCRUAL ACCOUNTING FOR WORKING CAPITAL ACCOUNTS WHERE IT IS NOT PROHIBITED BY LAW. THE WORKING CAPITAL FUND HERE INVOLVED WAS ESTABLISHED AS A PERMANENT REVOLVING FUND BY THE DISTRICT OF COLUMBIA APPROPRIATION ACT.

B-75212, JUN. 16, 1955

TO THE HONORABLE SAMUEL SPENCER, PRESIDENT, BOARD OF COMMISSIONERS OF THE DISTRICT OF COLUMBIA:

REFERENCE IS MADE TO YOUR LETTER OF DECEMBER 7, 1954, REFERRING TO OFFICE DECISION OF MAY 27, 1948, B-75212, WHICH HELD THAT THE ESTABLISHMENT IN THE WORKING CAPITAL FUND AT THE WORKHOUSE AND REFORMATORY, D.C., OF A RESERVE ACCOUNT OUT OF NET PROFITS WITH WHICH TO PURCHASE NEW AND REPLACE OLD EQUIPMENT WAS NOT AUTHORIZED.

YOUR LETTER STATES THAT YOU DO NOT NOW INTEND TO SET UP A RESERVE OUT OF NET PROFITS, BUT PROPOSE TO ESTABLISH RESERVES FOR CONTINGENCIES AS AN ITEM OF EXPENSE PRIOR TO DETERMINATION OF THE NET PROFIT. IN ESSENCE, YOU PROPOSE TO ESTABLISH A SYSTEM OF ACCOUNTING ON AN ACCRUAL BASIS FOR THE FUND, PROVIDING ON SUCH BASIS FOR DEPRECIATION OF EQUIPMENT AND ANNUAL LEAVE EARNED BUT NOT TAKEN, AS WELL AS RESERVES FOR ANY CONTINGENCY, AND TO USE SUCH ACCRUAL BASIS TO DETERMINE THE NET PROFIT REQUIRED TO BE TRANSFERRED AT THE END OF EACH FISCAL YEAR TO THE GENERAL REVENUES OF THE DISTRICT OF COLUMBIA.

ACCOUNTING UNDER WORKING CAPITAL ACCOUNTS IS GENERALLY ON AN ACCRUAL BASIS. A DISCUSSION OF THE ACCRUAL METHOD OF ACCOUNTING IS CONTAINED IN THE STATEMENT OF ACCOUNTING PRINCIPLES AND STANDARDS FOR GUIDANCE OF EXECUTIVE AGENCIES IN THE FEDERAL GOVERNMENT, ISSUED BY THE GENERAL ACCOUNTING OFFICE IN NOVEMBER 1952. WE FAVOR THE USE OF ACCRUAL ACCOUNTING FOR WORKING CAPITAL ACCOUNTS WHERE IT IS NOT PROHIBITED BY LAW.

THE WORKING CAPITAL FUND HERE INVOLVED WAS ESTABLISHED AS A PERMANENT REVOLVING FUND BY THE DISTRICT OF COLUMBIA APPROPRIATION ACT, 1947, APPROVED JULY 9, 1946, 60 STAT. 514, WHICH PROVIDES AS FOLLOWS:

"WORKING CAPITAL FUND: TO PROVIDE A WORKING CAPITAL FUND FOR SUCH INDUSTRIAL ENTERPRISES AT THE WORKHOUSE AND REFORMATORY AS MAY BE APPROVED BY THE COMMISSIONERS, $50,000: PROVIDED, THAT THE VARIOUS DEPARTMENTS AND INSTITUTIONS OF THE DISTRICT OF COLUMBIA AND THE FEDERAL GOVERNMENT MAY PURCHASE, AT FAIR MARKET PRICES AS DETERMINED BY THE COMMISSIONERS, PRODUCTS AND SERVICES OF SAID INDUSTRIAL ENTERPRISES, AND ORDERS FOR SUCH PRODUCTS AND SERVICES SHALL BE CONSIDERED AS OBLIGATIONS UPON APPROPRIATIONS IN THE SAME MANNER AS ORDERS FOR CONTRACTS PLACED WITH PRIVATE CONTRACTORS: PROVIDED FURTHER, THAT RECEIPTS FROM THE SALE OF PRODUCTS AND SERVICES SHALL BE DEPOSITED TO THE CREDIT OF SAID WORKING CAPITAL FUND, AND SAID FUND, INCLUDING ALL RECEIPTS CREDITED THERETO, SHALL BE USED AS A PERMANENT REVOLVING FUND FOR ALL NECESSARY EXPENSES OF SUCH ENTERPRISES, INCLUDING PERSONAL SERVICES; AND THE PAYMENT TO INMATES OR THEIR DEPENDENTS OF SUCH PECUNIARY EARNINGS AS THE COMMISSIONERS MAY DEEM PROPER: PROVIDED FURTHER, THAT AS SOON AS PRACTICABLE AFTER THE CLOSE FOR EACH FISCAL YEAR THE COMMISSIONERS SHALL TRANSFER ALL ACCUMULATED PROFITS ARISING FROM THE YEAR'S OPERATIONS UNDERSAID FUND TO THE GENERAL REVENUES OF THE DISTRICT OF COLUMBIA FOR SUCH FISCAL YEAR.'

THE WORKING CAPITAL OF THE FUND WAS INCREASED TO $100,000 BY THE DISTRICT OF COLUMBIA APPROPRIATION ACT, 1953, PUBLIC 453, APPROVED JULY 5, 1952, 66 STAT. 380. THE FOREGOING PROVISIONS OF LAW DO NOT SPECIFICALLY PROVIDE FOR THE CAPITALIZATION OF THE ASSETS OF THE FUND, INCLUDING MATERIALS, SUPPLIES, AND EQUIPMENT ON HAND AT THE TIME THE FUND WAS ESTABLISHED, AS HAS BEEN DONE IN MOST OF THE WORKING CAPITAL FUNDS ESTABLISHED IN MORE RECENT YEARS. YET, THERE IS NOTHING IN SUCH PROVISIONS OF LAW WHICH WOULD NECESSARILY PRECLUDE SUCH CAPITALIZATION OF ASSETS. IT IS NOTED THAT THE STATEMENT OF ASSETS AND LIABILITIES OF THE FUND AS OF JUNE 30, 1947, PREPARED BY YOUR AUDITORS AS OF THAT DATE, SHOWED A NET WORTH OF APPROXIMATELY $525,000 INCLUDING EQUIPMENT AT A DEPRECIATED VALUE OF $162,000.

THE PURCHASE OF EQUIPMENT IS NECESSARY TO PERFORM THE INDUSTRIAL ENTERPRISES AT THE WORKHOUSE AND REFORMATORY. IT WOULD APPEAR THAT THE BEST METHOD BY WHICH "FAIR MARKET PRICES" TO BE CHARGED THE VARIOUS DEPARTMENTS AND INSTITUTIONS OF THE DISTRICT OF COLUMBIA AND THE FEDERAL GOVERNMENT MAY BE DETERMINED IS TO PRORATE THE COST OF THE EQUIPMENT OVER THE PERIODS OF ITS USE. SUCH SPREADING OF THE COST IS CONSISTENT WITH THE GENERALLY ACCEPTED ACCRUAL METHODS OF ACCOUNTING. THEREFORE, AND SINCE THE FUND IS AVAILABLE "FOR ALL NECESSARY EXPENSES OF SUCH ENTERPRISES," WE SEE NO OBJECTION TO THE USE OF THE ACCRUAL METHOD OF ACCOUNTING AND THE ESTABLISHMENT OF RESERVE ACCOUNTS FOR EQUIPMENT AND FOR ANNUAL LEAVE EARNED BUT NOT TAKEN. HOWEVER, WE DO NOT APPROVE OF THE ESTABLISHMENT OF RESERVES FOR CONTINGENCIES. SUCH CONTINGENCIES APPARENTLY WOULD CONSIST OF ITEMS WHICH ARE INDEFINITE AND WHICH MAY OR MAY NOT MATERIALIZE IN THE FUTURE. ONLY ITEMS OF ACTUAL ACCRUED COST OR ACCRUED INCOME SHOULD BE INCLUDED IN DETERMINING THE ACCUMULATED PROFIT OR LOSS OF THE FUND.

THE ACCOUNTING SYSTEM WHICH YOU PREPARE FOR THIS FUND SHOULD BE SUBMITTED TO ACCOUNTING SYSTEMS DIVISION OF OUR OFFICE FOR APPROVAL PRIOR TO ITS INSTALLATION AND SHOULD YOU DESIRE THE ASSISTANCE OF THE OFFICE IN ITS FORMULATION, YOU MAY CONTACT MR. KARNEY A. BRASFIELD, DEPUTY ..END :