Enterprise Funds

Enterprise funds are used when a government provides services to the general public for a charge. These services are typically those that could also be provided by private businesses, such as utilities (water, sewer, electricity), transportation (airports, mass transit), and healthcare (hospitals). The defining characteristic is the exchange of goods or services for a fee.

The primary purpose of an enterprise fund is to demonstrate the financial self-sufficiency of a particular government activity. By segregating the revenues and expenses related to the service, the fund provides a clear picture of its profitability and ability to cover its costs. This transparency helps stakeholders assess the efficiency and effectiveness of the operation.

Unlike governmental funds, which focus on the flow of current financial resources, enterprise funds use the full accrual basis of accounting, similar to private sector businesses. This means that revenues are recognized when earned, and expenses are recognized when incurred, regardless of when cash changes hands. This provides a more comprehensive view of the fund's financial position.

Enterprise funds are reported as part of the proprietary funds section of a government's financial statements. This section also includes internal service funds, which provide services to other departments within the same government. The distinction is that enterprise funds serve external customers, while internal service funds serve internal customers.

The use of enterprise funds promotes better management and accountability. Because the fund is expected to be self-supporting, managers are incentivized to operate efficiently and effectively to generate sufficient revenue to cover expenses. This can lead to improved service quality and lower costs for users.

Establishing an enterprise fund requires careful consideration of several factors. The government must determine whether the activity is truly self-supporting and whether it meets the criteria for enterprise fund reporting under generally accepted accounting principles (GAAP). This involves analyzing revenue projections, expense estimates, and the overall financial viability of the operation.

Enterprise funds are subject to specific accounting and reporting requirements outlined by the Governmental Accounting Standards Board (GASB). These standards ensure consistency and comparability in the financial reporting of government activities. Compliance with these standards is essential for maintaining transparency and accountability.

Examples of common enterprise funds include municipal water and sewer utilities, public transportation systems, and city-owned hospitals. These entities generate revenue from user fees and are expected to cover their operating costs through those fees. The financial performance of these funds is closely monitored to ensure their long-term sustainability.