What Is Proprietary Fund?

A comprehensive guide to understanding proprietary funds, including their types, uses, and significance in governmental accounting.

A proprietary fund is a term used in governmental accounting to categorize a broader range of funds that function similarly to private sector businesses. These funds include enterprise funds and internal service funds. The primary purpose of proprietary funds is to account for operations that are financed and operated similarly to those found in the private sector, where the costs of providing goods or services are primarily recovered through user charges.

Historical Context

Proprietary funds emerged as governmental entities began adopting accounting principles and practices from the private sector to improve transparency and efficiency. The adoption of proprietary funds allowed governmental units to better track and manage resources allocated for specific services, ensuring that these services could sustain themselves financially through user fees rather than relying solely on tax revenue.

Types of Proprietary Funds

Enterprise Funds

Enterprise funds are used to account for activities that provide goods or services to the general public on a continuing basis, and the costs of these services are intended to be financed primarily through user charges. Examples include water and sewer services, public transportation systems, and electric utilities.

Internal Service Funds

Internal service funds account for operations that provide goods or services to other departments or agencies within the same government on a cost-reimbursement basis. Examples include information technology services, fleet management, and centralized purchasing.

Key Events

• Implementation of GASB 34: The Governmental Accounting Standards Board (GASB) Statement No. 34, issued in 1999, emphasized the use of proprietary funds for certain governmental activities to improve financial reporting and accountability.
• Expansion of Public Utilities: As cities expanded and modernized, many adopted enterprise funds to manage utilities and other public services, ensuring they could maintain financial independence and sustainability.

Detailed Explanations

Mathematical Models and Formulas

In proprietary fund accounting, cost recovery and fee setting are critical aspects. The basic model can be represented by:

$$ \text{Total Revenue} = \sum_{i=1}^{n} (\text{Price per unit}_i \times \text{Quantity sold}_i) $$

$$ \text{Net Position} = \text{Assets} - \text{Liabilities} $$

Mermaid Chart Example:

    graph TD;
	    A[Governmental Entity] -->|Provides Services| B(Enterprise Fund)
	    A -->|Provides Services| C(Internal Service Fund)
	    B -->|Charges Fees| D[Public/Customers]
	    C -->|Charges Fees| E[Other Departments/Agencies]

Importance and Applicability

Proprietary funds are crucial for ensuring that certain governmental activities are self-sustaining. They help:

• Enhance Accountability: By clearly tracking revenues and expenses, proprietary funds enable better financial management.
• Improve Efficiency: They often lead to better cost control and more efficient service delivery.
• Promote Self-Sufficiency: Enterprise funds, in particular, help services remain financially viable without relying heavily on general fund taxes.

Examples

• A Public Water Utility: Managed as an enterprise fund where residents pay water bills that fund the operation and maintenance of water treatment and delivery systems.
• Municipal Garage: Operates as an internal service fund, providing vehicle maintenance services to various city departments and charging them for the service.

Considerations

When managing proprietary funds, consider the following:

• Accurate Cost Allocation: Ensure costs are accurately allocated to provide a true picture of financial performance.
• Fee Structures: Set fees at levels that cover costs and ensure long-term sustainability.
• Regulatory Compliance: Ensure compliance with relevant GASB standards and other regulatory requirements.

Related Terms

• Governmental Fund: Funds used to account for typical governmental activities, such as the general fund and special revenue funds.
• Fiduciary Fund: Funds used to account for assets held in trust by the government for the benefit of individuals or other entities.

Comparisons

• Proprietary Funds vs. Governmental Funds: Proprietary funds are used for operations that are similar to private businesses, while governmental funds are used for traditional government activities.
• Enterprise Funds vs. Internal Service Funds: Enterprise funds serve the general public and aim for self-sufficiency through user fees, whereas internal service funds provide services within the government.

Interesting Facts

• Adoption of Business Practices: The use of proprietary funds signifies a shift towards adopting business-like practices within government operations.
• Self-Financing Mechanism: Enterprise funds often contribute to infrastructure development without burdening taxpayers.

Inspirational Stories

Case Study: Successful Municipal Utility: A city managed its water utility through an enterprise fund, enabling it to upgrade infrastructure, improve water quality, and maintain financial stability without increasing taxes.

Famous Quotes

• “Efficiency is doing better what is already being done.” – Peter Drucker

Proverbs and Clichés

• “You can’t manage what you can’t measure.” – Emphasizes the importance of tracking financial performance.

Expressions, Jargon, and Slang

• Full-Cost Recovery: Ensuring that fees charged cover the entire cost of providing a service.
• Net Position: The difference between assets and liabilities in a fund.

FAQs

What is the primary difference between enterprise funds and internal service funds?

Enterprise funds provide services to the general public and are typically self-sustaining through user fees, while internal service funds provide services within the government and operate on a cost-reimbursement basis.

Why are proprietary funds important in governmental accounting?

They improve financial transparency, accountability, and efficiency by ensuring that certain services can operate similarly to private sector businesses.

References

• Governmental Accounting Standards Board (GASB) Statement No. 34
• “Governmental and Nonprofit Accounting” by Robert J. Freeman and Craig D. Shoulders
• “Understanding Municipal Financial Statements: A Primer” by David J. DeLong

Summary

Proprietary funds, encompassing enterprise and internal service funds, play a critical role in governmental accounting by promoting efficiency, accountability, and self-sufficiency. They allow for better financial management of services that generate their own revenues, akin to private sector operations, thereby reducing the dependency on general tax revenues.

By understanding and effectively managing proprietary funds, governmental entities can ensure the sustainability and efficiency of various public services, ultimately benefiting the community as a whole.