Understanding Town Finances: What “Cash-Based Accounting” Really Means (And Why It Works for Elmore)

What “Cash-Based Accounting” Really Means for Elmore

At our last Selectboard meeting, a great question came up about the way the Town keeps its books. Someone in the audience mentioned that Elmore uses a “cash-based accounting” system—and they were right.

But what does that actually mean? And how does it compare to other systems, like “accrual-based accounting”? More importantly, is one better than the other?

Unless you have an accounting background, you probably haven’t thought about this much. But it’s worth understanding, because this choice affects how we manage Elmore’s finances every day.

What is Cash-Based Accounting?

In a cash-based system, transactions are recorded when money changes hands:

• Revenue is recorded when we receive it (like property taxes).
• Expenses are recorded when we pay them (like for winter road sand).

This method is simple, intuitive, and easy to track, much like balancing a checkbook at home. It tells us exactly what we have on hand, and what we’ve spent or received.

What is Accrual-Based Accounting?

An accrual-based system records income and expenses when they are earned or incurred, regardless of when the cash actually moves:

• If we sign a contract in June but don’t receive payment until October, it still shows as income in June.
• If we receive an invoice in December but pay it in January, it’s still recorded as an expense in December.

This system provides a more complete financial picture over time, but it requires more complex bookkeeping and oversight.

So Why Does Elmore Use Cash-Based Accounting?

Elmore is a small town, about 850 residents with a total municipal budget under $1.5 million. For towns like ours, cash-based accounting is not only acceptable, it’s often the preferred approach.

Here’s why:

• It’s simpler to administer, especially with a part-time treasurer and a volunteer Selectboard.
• It’s cost-effective, avoiding the expense of additional staff or professional accounting services.
• It’s transparent, giving a clear picture of the town’s financial position at any moment.

Importantly, the Vermont League of Cities and Towns (VLCT) recognizes that small towns often use cash-based systems and includes guidance on this approach in its Handbook for Elected Auditors¹ and model financial policies². The State of Vermont does not require small municipalities to use an accrual-based system unless they adopt specific funding programs that require it.

Addressing Misunderstandings About “Accuracy”

Sometimes we hear the claim that our financial reports aren’t “accurate” or don’t fully reflect the Town’s financial reality. It’s important to clarify: our accounting is accurate within the framework we use—a cash-based system. This means we report what money has actually been received or spent, not what may be coming or going in the future.

What some people are interpreting as a flaw is actually a difference in accounting method, not an error. Accrual accounting paints a more forward-looking picture, while cash-based accounting, like ours, shows actual inflows and outflows. Both are valid, and for a town of Elmore’s size and complexity, cash-based accounting is both practical and entirely appropriate.

The Role of NEMRC

Our Treasurer, Sharon Draper, uses a well-documented, responsible process that ensures clarity and accountability. The Town also relies on NEMRC (short for New England Municipal Resource Center), a software system built for Vermont towns. NEMRC is widely used across the state, with over 200 municipalities using at least one of its modules, from tax billing to payroll.

This gives us professional-level tools, while keeping costs and complexity low.

Oversight and Alignment

It’s also important to note that Elmore’s finances don’t operate in a vacuum. Our Town Auditors review the books monthly, ensuring transparency and internal accountability. In addition, to secure funding for the new Town Garage, the Town underwent a professional, third-party audit, and passed with no issues. These layers of oversight confirm that Elmore’s financial practices are not only lawful and appropriate, but aligned with both community expectations and external standards.

What’s the Bottom Line?

We use a cash-based system because it fits Elmore’s scale, capacity, and needs. It’s transparent, affordable, and easy for residents and town officials to understand. If Elmore ever grows significantly or takes on more complex projects, we can always revisit our approach. But for now, our system works—and it works well.

Got questions about how your tax dollars are tracked? Want to learn more about town finances? We welcome the conversation. It’s your town, your budget, and your right to know how it’s managed.