Proprietary Funds

Definition

Proprietary funds are a type of fund used in governmental accounting that operates like a business, providing services to the public for a fee. These funds are designed to measure the cost of providing those services and include financial activities that are similar to those of private sector businesses. They help ensure that the costs associated with providing services are covered by the revenues generated, allowing for better fiscal management within the government.

5 Must Know Facts For Your Next Test

1. Proprietary funds operate on a full accrual basis, meaning they recognize revenue and expenses when they are incurred, which differs from governmental funds that use modified accrual accounting.
2. The two main types of proprietary funds are enterprise funds and internal service funds, each serving different purposes within the governmental accounting framework.
3. These funds are crucial for assessing the financial health of governmental services that resemble private sector operations, allowing governments to evaluate profitability and efficiency.
4. Proprietary funds must maintain self-sustaining operations, meaning they need to generate enough revenue to cover their costs without relying on taxes.
5. The financial statements for proprietary funds include a statement of net position, statement of revenues, expenses, and changes in net position, and statement of cash flows.

Review Questions

• How do proprietary funds differ from governmental funds in terms of accounting methods and operational goals?
  • Proprietary funds differ from governmental funds primarily in their accounting methods and operational goals. Proprietary funds use full accrual accounting, which means revenues and expenses are recognized when incurred, while governmental funds use modified accrual accounting. The operational goal of proprietary funds is to operate like a business, generating sufficient revenues through user fees to cover costs, whereas governmental funds focus on the overall financial activities related to governmental functions.
• Discuss the importance of enterprise funds within proprietary funds and provide examples of services they may cover.
  • Enterprise funds are vital within proprietary funds as they account for activities that charge users for specific services. Examples include public utilities such as water supply, sewer systems, and public transportation systems. By operating through enterprise funds, these services can be evaluated based on their financial performance and sustainability, ensuring they can cover their operational costs while serving the community effectively.
• Evaluate the role of internal service funds in promoting efficiency within government agencies and how they relate to proprietary fund principles.
  • Internal service funds play a crucial role in promoting efficiency within government agencies by providing goods or services to various departments at cost. This aligns with the principles of proprietary funds by ensuring that interdepartmental services are charged at rates that reflect true costs, fostering accountability and encouraging departments to utilize resources efficiently. By tracking these transactions separately, governments can assess the effectiveness of internal services and make informed decisions about resource allocation.

Related terms

Enterprise Funds: A type of proprietary fund that accounts for activities where the intent is to charge users for goods or services, such as water and sewer services.

Internal Service Funds: A type of proprietary fund used by governments to provide goods or services to other departments or agencies within the same government, often on a cost-reimbursement basis.

Full Accrual Accounting: An accounting method that recognizes revenue when earned and expenses when incurred, which is used in proprietary funds to provide a more accurate picture of financial position.