Chapter 6
Proprietary Funds
Internal Service and Enterprise Funds
Proprietary-type funds are used when a governmental unit is involved in activities that are similar to those conducted by a business. Internal Service funds and Enterprise funds are both proprietary-type funds.
A. Internal Service fund - provides goods or services to other gov’t
depts or units
Users should be charged on a cost-reimbursed basis (capital
maintenance focus)
Each activity (supplies, data-processing, motor pool) should
have its own fund
· Summary of fund activities
Motor pool - acquires capital from General fund
Buys trucks and other assets
As vehicles are used, bill them out
Revenue used to pay costs and replace assets
· Control of fund activities
Usually does not record budget in accts, nor use
encumbrance acct.
Economic resources measurement (capital maintenance)
focus results in including fixed assets on balance sheet and
depreciation of fixed assets
Full accrual accounting means revenues are recorded when
earned and expenses when incurred
· Equity transfer to fund
Cash 750,000
Transfer In-Capital Contribution 700,000
Advance from Airport Fund 50,000
(To record equity transfer from General Fund and a long-
term loan from the Airport Fund.)
The advance from the airport fund is to be used for capital
acquisitions, and is to be paid off equally over two years.
All equity transfers to proprietary funds made for the
purpose of providing start-up capital are classified as
Transfer In-Capital Contributions and must be reported in
the Statement of Revenues, Expenses and Changes in Fund
Net Assets, as shown in income statement in Il 6-4.
Normal, recurring Transfers In (Out) are to be shown on
the Statement of Revenue, Expenses and Changes in Fund Net Assets right below Capital Contributions.
· Investment of excess funds
Investments 75,000
Cash 75,000
(To record investment of excess cash.)
· Purchase of needed assets (autos, etc)
Automobile 200,000
Trucks 100,000
Cash 300,000
(To record the purchase of autos and trucks.)
· Billings of other gov’t depts and units for use of vehicles, and
receipt of cash from the other gov’t units
Due from Departments 62,000
Revenue-Vehicle Charges 62,000
(To record charges to department for vehicle use.)
Cash 60,000
Revenue-Vehicle Charges 4,000
Due from Departments 56,000
(To record receipt of cash for rentals.)
· Recording of maintenance expense, salary expense, rent expense,
and depreciation of fixed assets
Gas & Oil Expense 7,000
Maintenance Expense 5,000
Cash 9,000
Accounts payable 3,000
(To record gas and maintenance expense for the period.)
Salaries Expense 6,000
Rent Expense 1,500
Cash 7,500
(To record salary and rent expense.)
Depr. Expense-Autos & Trucks 30,000
Accum Depr – Autos & Trucks 30,000
(To record depreciation on autos and trucks.)
· Make payment on Advance and make entries for Investment acct.
Advance from Airport Fund 25,000
Interest Expense 1,500
Cash 26,500
(To pay half of advance from Airport Fund plus interest .)
Cash 1,700
Investment Revenue 1,700
(To record investment income paid during the year.)
Accrued Interest Receivable 200
Investment Revenue 200
(To accrue investment income earned but not paid yet.)
Investment Revenue-Decrease in FV 3,000
Investments 3,000
(To adjust investments to fair value at end of year.)
· Closing entry to write off revenues and expenses to Net Assets
Revenue-Vehicle Charges 66,000
Transfer In-Capital Contr. 700,000
Investment Revenue 1,900
Gasoline & Oil Expense 7,000
Maintenance Expense 5,000
Salaries Expense 6,000
Rent Expense 1,500
Depreciation Expense 30,000
Interest Expense 1,500
Investment Revenue-Decrease in FV 3,000
Net Position-Unrestricted 713,900
(To close revenue and expense for the period.)
On the balance sheet you are to break the Net Position
section up between three categories: unrestricted, restricted
and invested in capital assets net of related debt. We will
make those adjustments using journal entries.
Net Position-Unrestricted 245,000
Net Position-Invested in Capital Assets
Net of Related Debt 245,000
(To adjust for Net Position Invested in Capital Assets tems.)
To calculate Net Position-Invested in Capital Assets Net of
Related Debt, take the $300,000 invested in capital assets,
less their depreciation for the year of $30,000, less the
related debt outstanding for capital assets at the end of the
year, $25,000. Net Position-Unrestricted would get the
remaining balance.
There are no restricted assets (normally there are none for
internal service funds). If there had been you would have
taken them from Net Position-Unrestricted and transferred
them to Net Position-Restricted.
· Financial statements
Statement of Net Position—Proprietary Funds (Ill. 6-3 for
Internal Service Fund)
The Statement of Net Position is to have a classified
balance sheet, with assets and liabilities broken up
into current and long-term categories. Net Position
has three categories: Investment in capital assets net
of related debt, restricted, and unrestricted net assets.
Statement of Revenue, Expenses, and Changes in Fund Net
Position—Proprietary Funds (Ill. 6-4)
This financial statement is to have separate captions
for 1) operating revenue, 2) operating expenses, 3)
non-operating revenue and expenses, 4) net income
(loss) before contributions and transfers, and 5)
capital contributions, transfers in(out), special items
and extraordinary items. The result is Change in Net
Position, which is added to be Beginning Balance of
Net Position to get the Ending Balance of Net
Position.
Statement of Cash Flows—Proprietary Funds (Ill. 6-5 for Internal Service Fund)
The cash flow statement is required for proprietary
funds and the use of the direct method. The cash flow
statement has four categories: 1) operating activities,
2) noncapital financing activities, 3) financing
activities, and 4) investing activities, rather than the
three that you are used to in a business, i.e., operating,
investing, and financing. A reconciliation is required
between cash flow provided by operating activities on
the Cash Flow Statement and Operating Income
shown on the Statement of Revenue, Expenses, and
Changes in Net Assets for Proprietary Funds.
B. Enterprise Fund – used if gov’t unit supplies goods and services to
public and normally is financed by user charges (e.g., utilities, golf
courses).
Enterprise funds are now required to be used if: 1) the activity is financed with debt secured solely by the activity’s fees and charges, 2) laws or regulations require that the activity’s cost be recovered from fees and charges, rather than taxes, or 3) the activity’s pricing policies establish fees and charges designed
to recover its cost.
· Summary of activities
Acquire capital, buy assets, bill for services and goods, and
record costs, including depreciation of assets
· Control of activities
Does not use budget accts, nor encumbrance accting.
Also uses economic resources measurement (capital
maintenance) focus and full accrual accting. As a result,
they account for their long-term assets and long-term
liabilities, just as a business would.
Since proprietary funds are suppose to cover their costs, they use similar accounting methods to a business. For example, when bonds are issued, the cash and the liability
shows up on the enterprise fund books as they would with a
regular business. Purchase of capital assets and depreciation of them also is recorded like a business.
· Record revenues from public and other gov’t depts and units,
and cash collected from them
Accounts Receivable 500,000
Due from General Fund 100,000
Revenue from Rentals 600,000
(To record rental revenue for the year.)
Uncollectible Account Expense 5,000
Allow. for Uncollectible Accounts 5,000
(To record the estimated uncollectibles on receivables.)
Note that you don’t net receivables/revenue/allow for bad
debt as with modified accrual method.
Cash 450,000
Accounts Receivable 350,000
Due from General Fund 100,000
(To record collections from customers.)
· Record expenses incurred, as well as depreciation of fixed assets
General Operating Expense 450,000
Cash 375,000
Accounts Payable 75,000
(To record operating expenses for the year.)
Depreciation Expense-Equipment 20,000
Depreciation Expense-Bldg 30,000
Accum Depr-Equipment 20,000
Accum Dept-Bldg 30,000
(To record depreciation for equipment and bldg.)
Equipment 350,000
Cash 350,000
(To purchase additional equipment.)
· If issued revenue bonds, they are accounted for by the fund
benefited, e.g., issue bonds to built a golf course or airport, and
would make interest and principal payments. We do accrue
interest payable at year end.
Cash 300,000
Bonds Payable 300,000
(To issue a bond for purchase of capital equipment.)
Bond Payable 70,000
Interest Expense 35,000
Cash 105,000
(To record payment of interest and principal on bonds during year.)
Interest Expense 3,000
Interest Payable 3,000
(To accrue interest expense of bonds at year end.)
· If a refundable deposit is collected, restricted assets is debited
and a liability is credited
Restricted Assets-Cash 19,000
Customer Deposits 19,000
(To record amounts restricted for customer deposits.)
· To adjust allowance acct for expected uncollectible receivables
at year end
Uncollectible Account Expense 2,000
Allow. for Uncoll. Accounts 2,000
(To adjust allowance acct. to actual expected bad debt.)
· Adjust supplies acct for those used during the year
Supplies Expense 1,000
Supplies 1,000
To adjust supplies to actual at year end.)
· Closing entry to eliminate revenues and expenses to
Net Assets
Revenue from Rental 600,000
General Operating Expense 450,000
Depr. Expense-Equipment 20,000
Depr. Expense-Bldg 30,000
Interest Expense 38,000
Uncollectible Acct. Expense 7,000
Supplies Expense 1,000
Net Position-Unrestricted 54,000
(To close the revenue and expense accts at year end.)
· To make yearly adjustment to Net Assets-Invested in Capital
Assets, Net of Related Debt by providing for the increases in capital assets ($350,000), less the amount depreciated ($50,000), and minus or plus the net increase or decrease in related debt $300,000 less $70,000 is $230,000 increase in related debt).
Net Position-Unrestricted 70,000
Net Position-Invested in Capital
Assets Net of Related Debt 70,000
(To adjust Net Position-Invested in Capital Assets Net of
Related Debt for increase in net assets over the year.)
· To make year-end adjustment for restricted assets Retained earnings are reserved for restricted assets (e.g., customer deposits or if required by contractual/legal provision)
Net Position-Unrestricted 95,000
Net Position-Restricted 95,000
(To adjust unrestricted Net Position by setting up sufficient
reserves for restricted assets at year end.)
· Financial statements
Statement of Net Position—Proprietary Funds (Ill. 6-3)
The Statement of Net Position is to have a classified
balance sheet, with assets and liabilities broken up
into current and longterm categories. Net Position
has three categories: Investment in capital assets net
of related debt, restricted, and unrestricted net assets.
Statement of Revenue, Expenses, and Changes in Fund Net
Position—Proprietary Funds (Ill. 6-4)
The Statement of Revenues, Expenses and Changes in
Net Position is to have separate captions for 1)
operating revenue, 2) operating expenses, 3) non-
operating revenue and expenses, 4) net income (loss)
before contributions and transfers, and 5) capital
contributions, transfers in(out), special items and
extraordinary items. The result is Change in Net
Position, which is added to be Beginning Balance of
Net Position to get the Ending Balance of Net
Position.
Statement of Cash Flows—Proprietary Funds (Ill. 6-5)
The cash flow statement is required for proprietary
funds and has four categories: 1) operating activities,
2) noncapital financing activities, 3) financing
activities, and 4) investing activities, rather than the
three that you are used to in a business, i.e., operating,
investing, and financing. A reconciliation is required
between cash flow provided by operating activities on
the Cash Flow Statement and Operating Income
shown on the Statement of Revenue, Expenses, and
Changes in Net Assets for Proprietary Funds.
· Required Segment Information
Note disclosure is required of segments of enterprise funds. Segments are identifiable activities reported as or within enterprise funds for which one or more revenue bonds or revenue-backed debt instruments are outstanding. They have identifiable revenue streams pledged in support of these bonds. Their related expenses, gains and losses, assets, and liabilities are also identifiable.
For example, if a Airport Fund also had a major food concession activity within the airport and had issued bonds to support that activity, then it would be considered a segment of the larger fund. Segment disclosure is not required if no debt exists or when a single activity is reported as a major fund. Governments may choose to provide segment disclosure whether required or not.
Segment disclosure is required for: 1) the type of goods or services provided, 2) a condensed statement of net assets, 3) a condensed statement of revenues, expenses, and changes in net assets, and 4) a condensed statement of cash flows.
2