Town, Parish & Community Councils are at the heart of local communities, making decisions that directly impact residents' lives. However, the world of local councils is often accompanied by a unique vocabulary that can be overwhelming, especially for Clerks & RFO's new to the role.
This blog aims to demystify the terminology specific to local councils to help you navigate the intricacies of your finances confidently.
Let's start with the basics:
Precept: The precept refers to the portion of the council tax collected by the local authority on behalf of the town or parish council. It is an essential source of income, and sometimes the only source of income, for the council.
Reserves: Reserves are funds set aside by the council for specific purposes or as a contingency. It is important to understand different types of reserves:
- Earmarked reserves (EMR): These are funds set aside for specific projects, initiatives, or expenditures. These reserves allow councils to allocate resources based on their priorities, such as improving infrastructure, investing in community projects, or purchasing new equipment.
- Capital reserves: Generally being funds kept separately for a specific purpose of capital purposes only (e.g. purchase/enhancement of fixed assets, repayment of loan, proceeds of disposals of fixed assets (over £10k only)).
- General fund: This is the remaining fund held by the council that is not earmarked or capital. You may have a general fund held for cashflow/contingency in case of unexpected events, and it should be equivalent to between 3 - 12 months expenditure (closer to 12 months for smaller councils and to 3 months for larger councils).
Top tip: There is no upper limit for earmarked or capital reserves, but amounts held must be clearly defined, and explained as part of the year end process if Box 7 (funds carried forward) is more than double Box 2 (precept).
Forecasting: This is the process of predicting future income and expenditure to predict the likely end of year position for your Council. This will assist with not only making informed decisions regarding the remainder of the current financial year but will also help when setting future budgets.
Accounting approach: This refers to the approach used by the council for it's accounting records and end of year accounts. For councils under the £6.5million threshold there are two approaches that can be taken:
- Receipts & Payments (R&P): This is a simple form of accounting, sometimes known as cash accounting, which records receipts and payments at the point they are received or paid. This is regardless of when they relate to.
- Income & Expenditure (I&E): This is sometimes known as accruals accounting and records transactions on the date to which they relate, rather than when they were received/paid. Councils are required to work on an Income & Expenditure basis when their gross income, or gross expenditure, exceeds £200,000 for 3 consecutive years. However, councils can also voluntarily opt to complete Year End in Income & Expenditure if under this threshold.
There are two distinct differences between R&P & I&E when it comes to completing the end of year accounts - you can read more on this here.
Now, let's take a look at the Year End terminology:
Year End: This refers to the financial year end for a local council, which is 31st March.
AGAR: Stands for Annual Governance and Accountability Return. The AGAR is a set of documents and financial statements that local councils are required to prepare and submit each year.
Annual Return / Accounting Statement: These terms are used interchangeably, and refer to Section 2 of the AGAR: The Accounting Statements.
Adjustments: These are entries made to take account of timings, so transactions are recorded on the date to which they relate. Adjustment values should always be entered net of VAT. Here are some examples of adjustments that may be used for a council working in I&E:
- Creditors: Where an invoice has been received from a supplier but not yet paid.
- Accruals: Where goods or services have been received by a supplier, but an invoice hasn't.
- Prepayments: Where a payment is made by the Council, but the cost relates to the next period, for example, insurance premiums or maintenance contracts.
- Debtors: Where a payment is due to the Council in a specific period but has not been received, for example, if an invoice has been issued by the Council and not yet paid by the customer.
- Receipts in advance: Where you have already collected a receipt which relates to the next period, for example, advance bookings or fees.
- Stocks/stores: Used to record information about the value of stock held when this is substantial (i.e. over £1000) and which therefore needs to be treated as available for subsequent years.
- Doubtful debts: Is very rarely used, but if any can be identified they should be added in order to be flagged up in the Balance Sheet.
Exercise of Public Rights: This refers to a 30 working-day period in which Year End accounting records must be made available for inspection to any interested person.
Read more on Publication Requirements and the Exercise of Public Rights here.