An enterprise fund is a type of fund used in governmental accounting to account for activities that provide goods or services to the public for a fee that is meant to make the entity self-sustaining. It operates in a manner similar to private business enterprises, with the intent that the costs (expenses, including depreciation) of providing goods or services to the general public on a continuing basis be financed primarily through user charges.
Examples of enterprise funds can include utilities (like water, sewer, or electricity services), transportation services, public hospitals, parking garages, and recreational facilities. The revenues and expenses associated with these services are tracked separately to ensure that they are indeed self-sustaining and do not require additional support from taxes or other government resources.
Government financial statements often present information on enterprise funds separately to allow the public, government officials, and other stakeholders to see the full cost of running these operations and how effectively they are managed.
Enterprise funds use the accrual basis of accounting, which is similar to that used by businesses. This means revenues are recognized when they are earned, and expenses are recognized as they are incurred, regardless of the timing of related cash flows.
In essence, an enterprise fund is a tool that enables governments to isolate the financials of a public service, track its revenues and expenses, and ensure it is financially sustainable.
Example of an Enterprise Fund
Let’s consider a city-owned water utility service as an example of an enterprise fund:
In this case, the city government is responsible for providing water services to the local community. To cover the costs associated with this service, they charge residents a fee based on their water usage. These fees are collected and kept separate from other city funds.
This separate fund, known as the Water Utility Enterprise Fund, is used to track all revenues from water usage fees, as well as all expenses associated with providing water services, such as maintenance of the water supply infrastructure, salaries of utility workers, cost of water purification, etc.
By segregating these transactions into an enterprise fund, the city can:
- Accurately track and manage the revenues and expenses of the water utility service.
- Determine whether the fees charged are sufficient to cover the cost of providing the service.
- Make informed decisions about necessary infrastructure upgrades or changes to fee structures.
- Provide transparency to the public about the cost and operation of the water utility service.
At the end of the fiscal year, if the revenues of the Water Utility Enterprise Fund exceed its expenses, the surplus could be reinvested into the fund for infrastructure improvements or rate stabilization. If expenses exceed revenues, the city might need to consider increasing fees or finding other ways to reduce costs.
This scenario illustrates how an enterprise fund can be used to manage and track a specific government service that operates similar to a business.