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

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.

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Proprietary Fund Reporting

The required financial statements for a proprietary fund are the statement of net position and the statement of revenues, expenses, and changes in fund net position.

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.