This document discusses proprietary funds accounting, which deals with accounting for business-type activities of governmental units. There are two types of proprietary funds: enterprise funds and internal service funds. Enterprise funds may be used to report any activity for which a fee is charged to external users, like utilities. Internal service funds are used to account for activities that provide goods/services to other funds/agencies on a cost reimbursement basis, like central computer facilities. Examples are provided for journal entries related to transactions for enterprise funds and internal service funds.

1. Chapter Four : Proprietary
Funds Accounting

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Proprietary Funds
Proprietary funds are another category of funds
which deals accounting for business-type activities of
governmental units.
Proprietary funds uses accrual methods. Fixed assets
and long-tem debts are recorded in this fund
There are two types of proprietary funds:
 Enterprise funds
 Internal service funds

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Enterprise Funds
 Enterprise Funds may be used to report any activity for which
a fee is charged to external users for goods and services.
 The most common examples of governmental enterprises are
public utilities that provide such services as water or
electricity.
 Other activities of governmental units that are accounted for
in Enterprise Funds include airports, transportation systems,
parking lots and garages, and recreational facilities such as
swimming pools.
 Enterprise funds have records of certain restricted assets and related
liabilities and retaining earnings like - Customer deposits, Revenue bonds –
construction, DSF, contingencies, etc , Customer deposit payable from
restricted assets, Construction payables, Revenue bond payables, and
Retained earning reserved for revenue bonds

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Enterprise Funds
 Activities are required to be reported as Enterprise Funds if
any one of the following is met:
 The activity is financed with debt that is secured solely by
a pledge of the net revenues from fees and charges of the
activity.
 Laws or regulations require that the activity’s costs of
providing services including capital costs (such as
depreciation or debt service) be recovered with fees and
charges, rather than with taxes or similar revenues.
 The pricing policies of the activity establish fees and
charges designed to recover its costs, including capital
costs (such as depreciation and debt service).

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Enterprise Funds
Example 1: Hargeisa City established an Electric Energy Department and has
the following transactions occurred during the fiscal year:
1)Billing to customers and other departments for the electric energy totaled
$756,000 and $150,000 respectively
2)A progress billing of $20,000 was received from contractor for construction
of steam boiler. This amount will be paid later from the proceeds of revenue
bond
3)Operating expenses totaled $751,000
4)$400,000 of 15-year, 9% bond was sold at par.
5)Depreciation on the electric plant and equipment total $80,000
6)Construction contract payable of $40,000 was paid out from proceeds of the
revenue bond. $23,000 was last year’s construction payable
7)Customer deposits, $2,000, were returned to customers who discontinued
their service
a)Prepare journal entries for above transactions

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Internal Service Funds
 Internal Service Funds are used to account for any activity
that provides goods or services to other funds, departments,
or agencies of the primary governmental unit and its
component units, or to other governments, on a cost
reimbursement basis.
 Internal service funds should be used only if the reporting
government is the predominant participant in the activity.
Otherwise, the activity should be reported as an Enterprise
Fund.
 Typical examples of activities accounted for in Internal
Service Funds include the operations of central computer
facilities, central garages and motor pools, central purchasing
and stores departments, and central printing departments.

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Internal Service Funds
Example 1: The administrators of the City of Hargeisa have
obtained approval from the City Council to centralize the
computer facility as of January 1, 2016. An internal service fund
is created to account for the activities of the computer facility.
The City Council has approved a contribution of $25,000 from
the General Fund for use as working capital and an advance
from the Electric Utility Fund of $355,000 for the purchase of
equipment and facilities. The $355,000 advance will be repaid
by the internal service fund in 20 equal annual installments.
The following transactions relate to the establishment and
operation of the Internal Service Fund.
1)The computer facility received the contribution from the
General Fund and the advance from the Electric Utility Fund.

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Internal Service Funds
2) Land and a building were purchased for $175,000 of which
$25,000 was assigned to land. Hardware was purchased for
$125,000 and equipment to protect the hardware was
purchased for $55,000.
3) The computer facility billed the Electric Utility Fund for
service provided. The service cost $200,000 and was billed at
a mark-up of 25% on cost.
4) Administrative expenses totaling $10,000 were approved for
payment and was paid
5) Payment of $37,750 was received from the Electric Utility in
partial payment of the billing in transaction (3).

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Internal Service Funds
6) The first of 20 equal annual installments to the Electric
Utility Fund was paid.
7) Depreciation expense was recorded for the year as
administration expense. The building was estimated to have
a remaining useful life of 25 years; the hardware was
estimated to have a useful life of 5 years; the equipment to
protect the hardware was estimated to have a useful life of
10 years.
Required:
Prepare the journal entries necessary in the Internal Service
Fund to record the transactions and events described above.

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Internal Service Funds
Example 2: Hargeisa City operates a central garage through
internal service fund to provide garage space and repairs for all
vehicles of the government departments. The fund is established
with contribution of $200,000 from the City’s General Fund. The
following transactions relate to the operations of the fund:
1)Materials and supplies were purchased on account for
$74,000 The inventory of materials and supplies at the end of
the year were $58,000
2)Salaries and wages of $230,000 were paid
3)A billing of $30,000 was received from Hargeisa Electric
Utility
4)Depreciation of $13,000 were recorded

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Internal Service Funds
5) Billing to other department were as follows:
General Fund $262,000
Special Revenue fund $40,000
6) Unpaid from other funds receivables balances were as
follows:
General Fund $10,000
Special Revenue fund $4,000
Required:
a) Prepare journal entries for the above transactions