How many broad categories can funds used by governments be classified into?

Funds used by governments can be classified into three broad categories: governmental funds, proprietary funds, and fiduciary funds.

Governmental funds are primarily used for purposes that include the administration of public services and the provision of various programs. They focus on the flow of current financial resources and typically include the general fund, special revenue funds, capital projects funds, debt service funds, and permanent funds.

Proprietary funds, on the other hand, are utilized for activities that operate in a manner similar to private enterprises. These funds are divided into two types: enterprise funds, which provide goods or services to the public for a fee, and internal service funds, which supply goods or services to other governmental departments on a cost-reimbursement basis.

Fiduciary funds are used to account for resources that the government holds in trust for external parties, including pension funds, investment trusts, and custodial funds. These funds are not available to support the government’s own programs.

This classification helps in presenting the financial position and the financial activities of government entities clearly, as it organizes resources according to their purposes and the nature of their use. Recognizing these three categories is essential for understanding how governments manage and report their financial activities.