A proprietary fund is used in governmental accounting to account for activities that involve business-like interactions, either within the government or outside of it. The two types of proprietary funds are enterprise funds and internal service funds. An enterprise fund is used to account for any activity for which external users are charged a fee for goods and services. An activity must be reported in an enterprise fund under any of the following circumstances:
- The activity is funded with debt that is only secured by a pledge of the net proceeds from the activity.
- The activity’s service provision costs must be recovered with fees, as stipulated by laws and regulations.
- The activity’s pricing policy is designed to recover its costs.
An internal service fund is used to account for activities that provide goods or services to other funds, as well as departments or agencies of the primary government, or to other government entities on a cost-reimbursement basis. This fund should only be used when the reporting government is the primary participant in the activity. When this is not the case, an enterprise fund should be used instead.
The required financial statements for a proprietary fund are as follows:
- Statement of net position
- Statement of revenues, expenses, and changes in fund net position