AN INTRODUCTION TO ACCOUNTING FOR STATE AND LOCAL GOVERNMENTAL
UNITS — PROPRIETARY AND FIDUCIARY FUND
Answers to Questions
Enterprise and internal service funds are similar in the sense that their operations are like those of similar
business enterprises. They use full accrual accounting practices (including depreciation), have a capital
maintenance or profit objective, are financed through user charges, and have the same financial reporting
requirements. The primary difference between the two fund types is that an EF provides goods and
services to citizens and customers outside the government on a user charge basis, while an ISF provides
services to other departments and agencies within the same governmental unit (or occasionally to other
Typical operations of internal service funds include motor pools, centralized risk financing activities,
data processing services, printing shops, centralized purchasing, repair shops, and storage or warehouse
operations. Internal service funds may engage in almost any kind of operations that one would find in
An EF (and also an ISF) is required to prepare a statement of net assets, a statement of revenues,
expenses, and changes in net assets (or fund equity), and a statement of cash flows for fair presentation in
accordance with GAAP.
In the fund financial statements, governments include internal service funds with the proprietary funds.
They are aggregated into a single column within the proprietary fund statement of net assets, the
statement of revenues, expenses, and changes in net assets, and the statement of cash flows. Within the
government-wide statements, governments report internal service funds with the governmental activities.
The internal service fund asset and liability accounts are included in the governmental activity column of
the statement of net assets. The statement of activities will include only those internal service fund
transactions involving entities other than the primary reporting entity. Governments add external internal
service fund revenues and expenditures to the statement of activities, but they exclude internal
Internal service funds are never considered major funds and proprietary fund statements report internal
service funds with the enterprise funds.
Because proprietary funds account for transactions in much the same manner as commercial business
organizations, the GASB allows some reference to FASB statements. GASB Statement No. 20,
“Accounting and Financial Reporting for Proprietary Activities,” governs which accounting and reporting
standards apply to proprietary activities.
It is important to differentiate between revenues generated by interfund transactions and transactions with
external parties because of the way that these transactions are reported on the government-wide
statements. The statement of activities will include only those internal service fund transactions involving