Chapter seven

Proprietary fund
• Proprietary Funds used when government acts like a business
• If government provides goods & services to private parties
– Enterprise Fund
• If government provides goods & services to other governmental entities
– Internal Service Fund
proprietary Funds:
– Use accrual method
• Very similar to businesses
– Record expenses not normally recorded by governmental fund
funds
E.g., depreciation
• Proprietary funds are accounted for in the same manner to investor owned Business Enterprise.
• Accordingly such funds recognize revenues and expenses (not Expenditures on the accrual
basis).
• They account for all fixed assets used in their operations and for long term debt to be serviced
from revenues generated from their operations as well as for all current assets and current
liabilities.
• The equity account of proprietary funds are composed of
 Contributed equity
 Retained Earnings
• Proprietary funds differ from Governmental funds in that they are not required by GASB
standard to record the budget in their accounting system, which is treated as a managerial control
device rather than a legislative control tool.
• Internal Service Fund (ISF) and Enterprise Fund (EF) are both classified by the GASB
as Proprietary funds.
 INTERNAL SERVICE FUNDS
• Internal service funds are used to account for services provided by one department
or Agency of a governmental unit to the other department/agencies or to other
governmental units on a cost reimbursement basis.
• Various departments of a governmental unit usually require common services.
• Each department may hire people to perform these services or it may control with
outside vendors.
• It is usually cheaper however for the governmental unit to establish one or more
separate operations to provide the services to its various departments.
• ISF account for each of these separate operations in a manner that changes the
total cost of an operation to the various user departments.
• ISF sometimes called;
Intergovernmental Service Funds
Working Capital Funds and
Revolving Funds
• It establish to meet the need to offer services within the entity in a more reliable
and less expensive manner than obtaining the same service outside.
• ISF provide services on cost reimbursement basis.
cost- reimbursement basis
• User charges need not cover the full cost of providing the goods or services
transfers from other funds or units to subsidize in part the operations of an ISF do
not negate the use of this fund type.
• Being a proprietary fund, ISF is accounted for in the same manner like an investor
owned business enterprise/accrual basis.
 Examples include computer services, print services, and etc.
• ISF is established;
 To meet the need to offer services within the entity
To provide service in a more reliable and less expensive manner than obtaining the same
service outside
Generally the cost of an ISF should be less than the cost of purchasing the same service
from an external provider
Financial statements
 Statement of balance sheet
 Statement of operation(statement of revenue and expense and change in retained earning or contributed
equity)
 Statement of cash flow
Illustrative Case
1. The town’s General Fund transferred to the new Supplies Fund a cash of 25,000 and its Inventory of supplies of 61,500 to be
used for working capital and which are not to be repaid.
Cash 25,000
Inventory of Supplies 61,500
Equity Transfer In 86,500
2. Town of X Water Utility Fund advances cash of 100,000 so as to be used for acquisition of building and equipment by the
Supplies Fund. The advances are to be paid in 20 equal annual instalments.
Cash 100,000
Advances from wate Utility Fund 100,000
3. A Warehouse building is purchased for 70,000; 10,000 of the purchase price is considered the cost of the land. Warehouse
machinery and equipment is purchased for 20,000. Delivery equipment is purchased for 10,000 (all for cash).
Land 10,000
Building 60,000
Machinery & Equipment- warehouse 20,000
Equipment- Delivery 10,000
Cash 100,000
4. Supplies are acquired at cost of 179,800 and the invoices are approved for payment.
Inventory of Supples 179,800
Vouchers Payable 179,800
5. The Supplies fund issued supplies that cost 170,000 to the GF. (A mark up of 35% on
the cost of the supplies that it purchases will be sufficient to cover its after cost. assume
Perpetual Inventory system)
Cost of Supplies Issued 170,000
Inventory of Supplies 170,000
=> (170,000 x 135% = 229500);
Due from GF 229,500
Billings to Departments 229,500
6. Collections from General fund during the year totalled 213,000.
Cash 213,000
Due from General fund 213,000
7. Payrolls and fringe benefits during the year were all paid in cash and were distributed as
follows in a functional Expense account:
Administration = 10,000 Purchasing = 18,000
Warehouse = 11,000 Delivery = 12,000
• Administrative Expenses 10,000
• Warehousing Expenses 11,000
• Purchasing Expenses 18,000
• Delivery Expenses 12,000
• Cash 51,000
8. Payments on vouchers during the year totalled 157,000.
Vouchers Payable 157,000
Cash 157,000
9. The Advance from the Water Utility Fund, first repayment has been made
Advance from Water Utility Fund 5,000
Cash 5,000
10. Depreciation has been recorded based on the following information;
- Building used as a warehouse was estimated at the time of purchase to have a
remaining useful life of 20 years;
- The warehouse machinery and Equipment was estimated to have a useful life of
10 years;
- The Delivery Equipment to have a useful life of 5 years;
- Warehouse building space occupied:
10% => The administrative and clerical office
10% => Purchasing Office
80% => Warehousing
- Warehouse Machine and Equipment is devoted to Warehousing
-- 10% = 300
• => 60,000 = 3,000 -- 10% = 300
• 20 yrs -- 80% = 2,400
•
• 20,000 = 2,000
• 10 yrs
•
• 10,000 = 2,000
• 5 yrs
Administrative Expense 300
Purchase Expense 300
Warehouse Expense 4,400
Delivery Expenses 2,000
Accumulated Depreciation- Building 3,000
Accumulated Depreciation- W.h Mach.& Equip 2,000
Accumulated Depreciation- Equipment delivery 2,000
ENTERPRISE FUNDS (EF)
• Enterprise Funds are used to account for services provided to the general public on a
user charge basis.
• Enterprise Funds may also be used to account for any operations “where the governing
body has decided that periodic determination of;
 revenues earned
 expenses incurred
 net income is appropriate for capital maintenance,
 public policy
 Management Control
 Accountability or other purposes.
• The fundamental difference between the two funds is that while ISF provide service within the
governmental entity, enterprise funds provide services to the General Public.
• EF provide service on a user- pays basis.
• The difference between EFs and Governmental Funds is that, Governmental funds
typically provide service to the citizens as needed (eg. the police) regardless of the
citizens ability to pay, while EFs provide services on the basis that the user of the service
pay at least part of the cost
• The most common example of EF are:
• public utilities notably;
 Water and Sewer Utilities.
Electric and Gas Utilities,
Transportation system,
 Airports, Ports,
Hospitals, Toll Bridges,
 Produce Markets,
 Parking Lots,
 Parking Garages,
 Liquor Stores and Public Housing projects
 Enterprise fund Must be established when one of following is true
 Debt is backed solely by fees and charges
 Legal requirement costs be covered through fees and charges
 When the government has a policy to establish fees and charges to cover the cost of providing
services
Illustrative Case
• The town of X has permitted the establishment of water Utility Enterprise Fund to
operate without legal formal approval of their budget and the following transactions
have taken place as of January 1, Year 1.
1. On January 1, year 1, billings from the town of X water Utility fund from sales
of water Utility services of the previous fiscal year amounting to 14,800 that
accrued has been recorded.
customer account receivable 14,800
sales of water revenues 14,800
2. During Year 1, the total bills to non-governmental customers amounted to 696,000.
Bills to the Town of X General Fund amounted to 30,000 and all Revenue was from sales
of water
Customer Accounts Receivable 696,000
Due from General fund 30,000
Sales of Water 726,000
3. Collections from Nongovernmental customers for Water Billings totalled 680,000.
Cash 680,000
Customer Account Receivable 680,000
4. Materials and supplies in the amount of 138,000 were purchased during the year by
the Water Utility fund.
Materials and Supplies 138,000
Accounts Payable 138,000
5. Materials and supplies Chargeable to the accounts itemized below were issued during
the year.
- Source of Supply 18,000 - Transmission & distribution 13,000
- Pumping 21,000 - Construction work in progress 66,000
- Water Treatment 24,000
Source of supply Expenses 18,000
Pumping Expenses 21,000
Water Treatment Expenses 24,000
Transmission and Distribution Expenses 13,000
Construction work in progress 66,000
Materials and Supplies 142,000
Thank you for
all