Proprietary Funds: Definition, Explanation, and How do Propitiatory Funds Work?

Definition

Governmental planning involves considerable budgeting and planning. In this regard, it is rudimentary to account for all the transactions that take place, so that there are no chances of fraud, or any money being lost.

Proprietary Funds are created for the same reason. The main premise behind these funds is to account for the governments’ ongoing organizations and activities that are fairly similar to the ones in the private sector.

These activities are similar to the general protocol that is followed in general commercial activities. The accounting protocols and measurement that are mostly followed in this regard is similar for both, private, as well as for government-related organizations. They are duly accounted for as proprietary funds.

When it comes to accounting, recording, and measurement slightly differs for government and private organizations. This is predominantly because of the fact that objectives for both these types of organizations differ. While government organizations are mostly run on objectives or motifs, private organizations are mostly directed towards profit generation.

However, for some government or pubic-related activities, the accounting treatment is the same. Therefore, they are classified as proprietary funds, because they are treated as such in the financial records of the company.

Explanation:

Proprietary Funds are created in order to record and account for transactions in government-related activities. The main premise behind proprietary funds is to account for investments related issues.

Accounting for proprietary-related funds is similar to that of investor-owned businesses. Proprietary funds mainly focus on the flow of economic resources recognized on the accrual basis of accounting. These funds mostly account for all the assets and liabilities that are relevant to the operations, both for the short-term as well as for the long term.

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As far as Financial Reporting for Proprietary Funds are concerned, it is included in Classified Statement of Net Position, Statement of Revenues, Expenses, as well as Changes in Net Fund Position, and Statement of Net Cash Flows. Factually, it is supposed to be reported in all the relevant places.

Having proprietary funds recommends the usage of flexible budgeting over inflexible or rigid budgeting. It is based on accrual method of accounting. Examples of Proprietary Funds include interfund loans, proceeds of tax-supported bond issues, as well as transfers from other relevant governments.

How do Propitiatory Funds Work?

Proprietary Funds are broadly classified into two categories. They include enterprise funds and internal service funds. As far as an enterprise fund is concerned, it can be seen that it is mainly used in order to account for any activity for which external users are charged a subsequent fee against those goods and services. An activity is categorized under enterprise fund only if it meets the following criteria;

  • The activity is funded using debt. This debt can only be secured by a stated pledge from the net proceeds from the activity.
  • The activity’s stated provision costs are meant to be covered with the stated fees, under the mentioned rules and regulations.
  • The stated activity’s pricing policy is designed to recover its cost.

On the other hand, an internal service fund is used in order to account for activities that mainly provide goods and services to other funds. These funds might include departments, agencies, primary governments, or even other government-related agencies of the primary government on basis of cost-reimbursement. This fund is only used in cases where the reporting government is assumed to be the primary participant from the stated activity.

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Additionally, it can be stated that generally, examples of Internal Service Funds include general purchases, as well as information systems. On the contrary, examples of external funds include public utilities, as well as airports. 

This respective categorization is used in order to classify the proprietary funds. They are subsequently presented in the Statement of Financial Position, as well as Statement of Revenues, Expenses, as well as Changes in the Fund Net Position.

Journal Entries for Proprietary Funds                 

As mentioned earlier, the accounting treatment for proprietary funds is similar to that of investor-related accounting. In order to record for the proprietary fund, the following journal entries are made:

ParticularsDebitCredit
Expensesxxx 
Proprietary Funds xxx

Internal Service Fund is mainly used to finance risk management, equipment purchases, and operations, as far as other functions. Therefore, for all the respective resources for which proprietary funds are used, it is categorized as such in the financial statements accordingly. Hence, proprietary funds are recorded in the financial statements depending on their expenses.

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