A municipal utility provides water and sewer services to its residents on a fee-for-service basis. The utility operates like a private business, aiming to recover its costs through user charges. In the context of governmental accounting, how should this municipal utility be classified and accounted for?
- AAs a General Fund, using full accrual accounting.
- BAs a Special Revenue Fund, using modified accrual accounting.
- CAs an Internal Service Fund, using modified accrual accounting.
- DAs an Enterprise Fund, using full accrual accounting.
Show answer & explanationAnswer & explanation
Correct answer: D. As an Enterprise Fund, using full accrual accounting.
Enterprise Funds are proprietary funds used to account for operations that are financed and operated in a manner similar to private business enterprises, where the intent is that the costs (including depreciation) of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges. They use full accrual accounting.
Why the other options are wrong
- A. The General Fund is a governmental fund, not proprietary, and uses modified accrual accounting. It's for general government operations, not business-like services.
- B. Special Revenue Funds are governmental funds, not proprietary, and use modified accrual. They are for specific operating purposes, not business-like services to the public.
- C. Internal Service Funds are proprietary funds, but they provide services primarily to other government departments, not the general public, and they use full accrual, not modified accrual.
Enterprise Fund
A proprietary fund used to account for operations that are financed and operated in a manner similar to private business enterprises, where the intent is that the costs of providing goods or services to the general public on a continuing basis be financed or recovered primarily through user charges.
- Provides goods/services to the general public.
- Financed primarily through user charges.
- Uses full accrual accounting and economic resources measurement focus.
Memory trick: Proprietary funds are for 'Businesses Inside' and 'Businesses Outside'.