Proprietary fund definition

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What is a Proprietary Fund?

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. These activities are similar to what would be found in the private sector, so the reporting resembles what would be used by a private business.

Types of Proprietary Funds

There are two types of proprietary funds, which are as follows:

  • Enterprise fund. An enterprise fund is used by government entities to account for operations that provide goods or services to the public for a fee, similar to private businesses. Examples include utilities like water, electricity, or public transportation systems. Revenues are primarily generated through user charges rather than taxes, promoting self-sufficiency. The financial reporting for enterprise funds closely mirrors that of commercial businesses, with a focus on measuring profitability and cost recovery.

  • Internal service fund. An internal service fund is established to account for goods or services provided by one department of a government to other departments on a cost-reimbursement basis. Common examples include centralized services like printing, fleet maintenance, or IT support. These funds are designed to promote efficiency and better control over internal service costs by tracking usage and expenses separately. Financial reporting emphasizes break-even operations, ensuring that charges to user departments are reasonable and cover actual costs.

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Proprietary Fund Reporting

Proprietary funds are required to use the accrual basis of accounting, which means revenues are recorded when earned and expenses are recorded when incurred, regardless of when cash is received or paid. Financial reporting for proprietary funds must include a statement of net position, a statement of revenues, expenses, and changes in net position, and a statement of cash flows. These statements are prepared similarly to those of private-sector businesses, focusing on the flow of economic resources rather than budgetary compliance. Additionally, proprietary fund financial information must be included both separately within the fund financial statements and combined within the government-wide financial statements, ensuring consistency and transparency for users of the reports.

Proprietary Fund Accounting Issues

A few accounting issues related to proprietary funds are noted in the following bullet points:

  • Capital contributions. A proprietary fund may receive capital contributions. These contributions appear on the statement of revenues, expenses, and changes in net position, after operating revenues and expenses.

  • Debt. When debt is issued by a proprietary fund or is issued by the general government for the purposes of the proprietary fund, and the debt will be repaid by the fund, the associated long-term liability is also recorded within the fund.

  • Deposits. Customers of an enterprise fund may be required to pay a deposit when they first sign up for service. These deposits are to be classified as a current liability of the fund.

  • Duplicate transactions. An internal services fund records revenue when it charges other funds for its services, while the receiving funds record an expenditure or expense. This means that additional revenue and expense (or expenditure) is being recorded internally by a government. When the accountant creates government-wide financial statements, these duplicate transactions must be removed.