Introduction to Governmental and

Not-for-Profit Accounting, 7e
Chapter 7: The Governmental
Fund Accounting Cycle
Proprietary-Type Funds

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Chapter 7 Topics
Specific Aspects of Internal Service Funds
Specific Aspects of Enterprise Funds

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Overview: Proprietary Funds

Proprietary: businesslike
Provide goods and services to paying
customers on an exchange basis

Two types
Enterprise funds
Customers are primarily individual citizens

Internal service funds

Customers are various departments of same
government and occasionally nearby governments
Reporting government is predominant participant
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Overview: Proprietary Funds

Pricing for goods and services
Charge above cost
For future expansion, equipment replacement
Lotteries

OR under-price, subsidize from another fund

Each activity requires a separate fund

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Proprietary Funds: Operating Cycle

3

Profit (loss)
increases
(decreases)
net position

Acquire
Assets

2
Provide Goods/Services:
Record revenue from user charges
Record operating and nonoperating expenses
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When Must Use

Enterprise Funds
Must use enterprise fund if:
Required to cover costs with fees
Pricing intended to cover costs OR
Debt secured only by the activitys net
revenues
Debt is typically revenue bonds

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Review: Measurement Focus and

Basis of Accounting
Economic resources measurement focus
Record fixed assets and related depreciation
Record long-term debt

Full accrual basis of accounting

Recognize revenue when earned
Recognize expenses when incurred

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Review: Proprietary Fund

Financial Statements
Like commercial enterprises

1.

2.

Statement of Net Position

Classified
Balance Sheet

OR

(Assets + Deferred Outflows)

(Liabilities + Deferred Inflows)
= Net Position
(invested/restricted/unrestricted)

Statement of
Revenues, Expenses,
and Changes in Fund Net Position

3.

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Statement of
Cash Flows

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Review: Format for Proprietary

Operating Statement
Operating revenues
- Operating expenses
= Operating income (loss)
+/- Non-operating revenues and expenses
= Income before other revenues, expenses, gains,
losses, and transfers
+ Capital contributions
+/- Special and extraordinary items
+/- Transfers
= Increase (decrease) in net position
+ Net position at beginning of period
= Net position at end of period
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Specific Aspects of
Internal Service Funds
For lower cost, convenience
Examples: motor pool, supplies, duplicating

Controlled indirectly through operating

budgets of funds/departments
Flexible budgets: based on operation levels
(Governmental funds use fixed budgets)

No budget entries, no encumbrances

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Specific Aspects of
Internal Service Funds
To create fund:
Cash
500,000
Transfer in from general fundcapital contribution
500,000
(and corresponding entry in general fund)

Other entries same as commercial

enterprises
examples
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Internal Service Funds:

Sample Ordinary Transactions
Automobiles
Cash

300,000
300,000

Due from general fund

Revenues-vehicle charges

57,000

Maintenance expense
Cash (or accounts payable)

4,500

57,000

4,500

Depreciation expense-automobiles 20,000

Accumulated depreciation-automobiles 20,000
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Internal Service Funds:

Year-End
Closing same as commercial enterprises
Debit revenues or transfers in
Credit expenses or transfers out
Difference to net position
Called owners equity for commercial enterprises

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Notes on Internal Service Funds

Financial Statements
Statement of revenues, expenses, and
changes in fund net position
Statement of net position
Net position: net investment in capital assets,
restricted, and unrestricted

Statement of cash flows

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Specific Aspects of
Enterprise Funds
Examples: airports, swimming pools, utility
operations
Electric, water, sewer

Control
Customer: very little control
Little or no competition

Legislative/governing body helps ensure

reasonable rates
continued
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Specific Aspects of
Enterprise Funds
Flexible budgeting helps control
No budget entries or encumbrances

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Enterprise Funds:
Sample Ordinary Transactions
Accounts receivable
495,000
Due from general fund
5,000
Revenue from waste coll.
500,000
Portion of sales to internal departments

Interest expense
Cash

40,000

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40,000
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Enterprise Funds:
Sample Ordinary Transactions
Revenue bonds payable
Cash

50,000
50,000
to pay principal on revenue bond

Cash-contractor deposits
Contractor deposits payable

20,000

Estimated uncollectible accounts

5,000
Allowance for uncollectible accounts
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20,000

5,000
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Enterprise Funds:
Sample Ordinary Transactions
Depreciation expense-equipment 50,000
Depreciation expense-buildings 15,000
Accumulated depreciation-equipment
50,000
Accumulated depreciation-buildings
15,000

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Enterprise Funds:
Year-End
Close revenues, expenses, and other
temporary accounts
To net position

Same financial statements as internal

service funds

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Enterprise Funds:
Classify Net Assets
Statement of net assets
Must classify net position
Net investments in capital assets
Capital assets less accumulated depreciation and
related debt
Examples: land, buildings, equipment

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Enterprise Funds:
Classify Net Assets
Restricted: restricted for payments
Example: restricted for revenue bond payments

Unrestricted: all remaining net assets

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