A proprietary fund is an account in which certain transactions by the government and many nonprofit organizations are handled. The services that are accountable by these funds are not relative to the services that are considered to be entitled to their clients. Therefore, these accounts operate similar to a business model. The services that fit into a proprietary fund are grouped by similarities to evaluate their performance.
Proprietary funds are accounts that are part of the accounting practices of a government and other nonprofit organizations. These funds call for the services rendered under these accounts to be paid for by their patrons who use them, basically working like a business. Although the model can result in a profit or loss for the company, most operating a proprietary fund aren't eligible to make a profit. Therefore, the ideal situation is for its costs to balance out with its revenue.
Having a proprietary fund keeps track of services that are important but not a requirement to run a business. With the services depending on variables of consumption and other costs such as gas, food and wages, it's sensible for this fund to operate in a business manner. Also, by deferring the costs of providing service to the consumer who benefits from using them, it doesn’t burden the taxpayer or company whose margin for operation can be minimal.
There are two types of proprietary funds used within a government model: enterprise and internal service funds. Enterprise funds operate by creating a cash flow to pay for the services by issuing fees and charges. Examples of services in an enterprise fund are water and sewer services, and cafeteria services in school districts. Internal service funds account for the costs of companies assets. This account values the depreciation and pays for the repair costs of these assets as well. Computers, copiers and company vehicles are assets monitored under this account.
Unlike most funds within the government and nonprofit sector, proprietary funds don't get their recovery costs from taxes. Instead, they're paid through their services or goods. They are dependent on the fees and charges they issue to their clients. The equipment used to provide these services often require maintenance and repair. These costs, along with the depreciation value, are monitored and recorded. The values are published with the fund’s yearly statement.
Proprietary funds are used to help pay for services without using monies set aside for regular operation. By utilizing the principles that are similar to a private business, the business is able to pay for services that aren’t considered to be entitled to its customers. The company charges and asserts fees that would generate income to pay for its services. This method allows companies to decide what should be replaced or upgraded--or whether fees and charges warrant an increase--by evaluating performance.
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