What happens to the status of capital assets charged to an internal service fund?

When capital assets are charged to an internal service fund, they are treated in a specific manner that reflects both their usage and the financial responsibilities associated with those assets. The correct answer highlights that these funds record depreciation as a basis for charges. This means that the internal service fund will systematically allocate the cost of the capital assets over their useful lives, which is an important aspect of accrual accounting.

Depreciation ensures that the expense related to the asset is recognized in the periods in which the asset is used, aligning the financial reporting with the matching principle of accounting. As the internal service fund provides services and invoices other departments or funds for those services, the cost recovery incorporates depreciation, allowing for a more accurate representation of the cost of services provided.

Additionally, this practice supports financial transparency and accountability, as it reflects the cost of using capital assets in the charges made to other funds or departments, facilitating a clear understanding of the financial impacts of asset usage.