This page covers CPA questions covering proprietary funds and the three net potion categories: (1) net investment in capital assets; (2) restricted; and (3) unrestricted.

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All of the funds discussed in previous chapters (General, special revenue, capital projects, debt service, and permanent) are classified as governmental funds. They exist to raise revenue and other resources to provide services or acquire facilities to aid in the provision of public services. Funds discussed in previous chapters record only current financial resources and liabilities that will be settled with current financial resources. Capital assets and long-term debt are not reported in governmental funds, but are presented in government-wide statements. Governmental funds recognize encumbrances and expenditures, not expenses.

A second fund classification, proprietary funds, describes funds that are used to account for activities similar to those often engaged in by commercial businesses. That is, users of goods or services are charged amounts at least sufficient to cover the costs of providing the goods or services. Thus, in the pure case, proprietary funds are self-supporting.

 Proprietary funds use the economic resources measurement focus and the accrual basis of accounting. Because revenues and expenses (not expenditures) are recognized on the accrual basis, financial statements of proprietary funds are similar in many respects to those of business organizations. Capital assets used in fund operations and long-term debt serviced from fund revenues are recorded in the accounts of each proprietary fund.  Depreciation on capital assets is recognized as an expense, and accruals and deferrals common to business accounting are recorded in proprietary funds. Budgets may be prepared for proprietary funds to facilitate management of fund activities, but GASB standards do not require budget-actual reporting.

Two types of funds are classified as proprietary funds: internal service funds and enterprise funds. Internal service funds provide services to other government departments and charge those departments for the services received. Enterprise funds provide services to the public. Three financial statements are required for proprietary funds: a Statement of Net Position (or Balance Sheet); a Statement of Revenues, Expenses, and Changes in Fund Net Position; and a Statement of Cash Flows. As is true for governmental funds, enterprise funds are reported by major fund, with nonmajor funds presented in a separate column. However, internal service funds are combined and reported in a single column. These statements will be discussed in more detail and illustrated later in this chapter.

Because proprietary funds use the accrual basis of accounting, governments historically used FASB standards to provide guidance in accrual-based financial statements for items not specifically covered by GASB statements. Recently the GASB clarified this practice by incorporating specific FASB standards into the GASB codification. Among the more common topics incorporated from FASB standards are the following:

  • Error corrections and changes in accounting principles and estimates
  • Contingencies
  • Extraordinary items
  • Capital and operating leases
  • Current asset and liability classification
  • Capitalization of interest costs
  • The equity method for investments in common stock

    As governments become more complex, efficiency can be improved if services used by several departments or funds or even by several governmental units are combined in a single department. Purchasing, printing services, garages, janitorial services, and risk management activities are common examples. Activities that produce goods or services to be provided to other departments on a cost-reimbursement basis are accounted for by internal service funds.

    Internal service funds recognize revenues and expenses on the accrual basis. They report capital assets used in their operations and long-term debt to be serviced from revenues generated from their operations, as well as for all current assets and current liabilities. Net position (fund equity) is reported in three categories: (1) net investment in capital assets; (2) restricted; and (3) unrestricted.