A proprietary fund is a type of fund used in governmental accounting to finance the ongoing operations of activities that function more like businesses than government functions. The revenues and expenses of these activities are tracked similarly to those in the private sector, using full accrual accounting and including measures of net income and capital maintenance.
Proprietary funds are divided into two types:
- Enterprise Funds: These are used to account for operations that provide goods or services to the public on a user charge basis, similar to private businesses. Examples include utilities, transportation systems, and parking garages. The intention is that the costs of providing the goods or services should be financed primarily through user charges.
- Internal Service Funds: These are used to account for the financing of goods or services provided by one department to other departments on a cost-reimbursement basis. Examples include fleet services, data processing, and insurance services.
The proprietary fund model is designed to allow the calculation of a “net income” figure, so it is possible to see whether fees and charges cover the full cost of services. This is different from governmental funds, which focus on the short-term inflow and outflow of spendable resources.
Example of a Proprietary Fund
Let’s consider a fictional city called “MetroCity”. MetroCity operates several services which are financed and operated in a manner similar to private businesses.
- Enterprise Fund: MetroCity operates a city-wide water and sewer system. The costs of operating this system (including maintenance, upgrades, and employee salaries) are financed primarily through charges to residents for water and sewer usage. MetroCity uses an enterprise fund to account for the financial activities associated with the water and sewer system. This way, it can track whether the charges to residents are covering the cost of running the system.
- Internal Service Fund: MetroCity also has a central IT department that provides technology services to all other city departments. The IT department is financed through charges to these other departments based on the amount of services they use. MetroCity uses an internal service fund to account for the financial activities associated with the IT department. This allows the city to track whether the charges to other departments are sufficient to cover the cost of running the IT department.
These examples are typical uses of proprietary funds. They allow government entities to track the full cost of services that are intended to be financed through user charges, whether those users are the public (in the case of enterprise funds) or other government departments (in the case of internal service funds).