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An internal service fund is a fund used in governmental accounting to track goods or services shifted between departments on a cost reimbursement basis. An example of an internal service fund is a maintenance department that provides equipment maintenance services to other departments.

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Ana McGrath

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5y ago

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What accounting problems arise if an internal service fund is operated at a significant profit?

Additional problems arise if the internal service fund has significant positive (or negative) operating income. Operating income is the excess of service revenues over the costs of providing the service (i.e., operating expenses). Consider the case of an internal service fund servicing police, fire, and other vehicles used in departments reported in the General Fund. If the internal service fund has positive operating income, the expenditures reported in the General Fund exceed the true cost of operating the government. If these amounts are significant over periods of time, some of the accumulated surplus (fund balance) of the General Fund is effectively shifted to the internal service fund (net assets).


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