Chapter 7, Problem 1Q

To determine

Describe the characteristics of proprietary fund.

Explanation of Solution

Proprietary Funds: These are the funds that are established to report for the government’s business type organization and activities which deal with providing benefits to others by charging the user of the public utilities, hospitals, and transportation systems.

The following are the characteristics of proprietary fund:

• Proprietary fund follows accounting and financial reporting principles similar to those for commercial business organization.
• This fund assists financial statement users to measure operational accountability for business-type activities.
• It helps the government in managing the resources efficiently.
• Proprietary funds are classified into two types of funds- Internal service fund and enterprise fund.

To determine

Explain the difference between internal service fund and enterprise fund.

Explanation of Solution

The difference between internal service fund and enterprise fund are as follows:

• Internal service funds record the activities that are related to purchase and distribution within the departments of the government whereas, the enterprise funds record the activities that provide goods or service to the public.
• Internal service fund accounts for the internal financial transactions and the enterprise funds account for the external financial transactions.
• The “Governmental accounting standards board” (GASB) requires the government to report the financial transactions of the internal service funds in the “governmental activities” column and the financial transaction of the enterprise funds in the “business-type activities” column.