Proprietary funds are those that are most like funds in the private sector. According to GAAFR (the Blue Book), proprietary funds are “used to account for activities that receive significant support from fees and charges.” There are two types of proprietary funds: enterprise funds and internal service funds.
As defined by GAAFR, enterprise funds are used to “report activities for which a fee is charged to external users for goods or services.” Examples include Water Fund, Sewer Fund, Natural Gas Fund, Airport Fund, and possibly the Solid Waste Fund.
Internal service funds are used to track the activity provided by one department for another department within the government itself. A common example is the city garage charging various city departments for its services. The benefit to tracking the expenditures this way is to encourage efficiency. If a department is being charged for an otherwise “free” activity, the department using the service will be less likely to abuse it.