Which of the following correctly distinguishes between governmental funds and proprietary funds?

The distinction between governmental funds and proprietary funds is primarily centered around measurement focus differences. Governmental funds are designed to account for resources that are used to provide services for the benefit of the public and typically utilize a current financial resources measurement focus. This means that these funds recognize financial resources available for spending during the current reporting period and typically use modified accrual accounting to reflect revenues when they are available and measurable, and expenditures when the liability is incurred.

On the other hand, proprietary funds, which include enterprise and internal service funds, have an economic resources measurement focus. This focus recognizes revenues when they are earned and expenses when they are incurred, aligning with accrual accounting principles. Thus, the principal distinction lies in the different approaches to accounting for financial resources, reflecting the various objectives of governmental versus proprietary activities.

While reporting frequency, type of expenditures, and revenue generation methods may exist as characteristics of these funds, they are not the primary basis for differentiating between governmental and proprietary funds. The key difference remains the measurement focus, which fundamentally impacts how financial transactions are recorded and reported for each type of fund.