Identify the major categories of funds used by state and local government units.

The major categories of funds used by state and local government units are categorized into governmental, proprietary, and fiduciary funds.

Governmental funds are used to account for activities primarily supported by taxes and similar revenue sources. This includes funds like the general fund, special revenue funds, capital projects funds, and debt service funds. They focus on current financial resources and make decisions based on budgets and taxpayer obligations.

Proprietary funds are used to account for activities that operate similarly to private enterprises and are intended to recover their costs through fees rather than taxes. This includes enterprise funds and internal service funds, which manage services provided to other departments or governmental units.

Fiduciary funds are held in a trust for the benefit of parties other than the government itself. These funds account for resources that the government holds as a trustee or agent on behalf of others, such as pension trusts, investment trusts, and agency funds.

This classification is essential for understanding how state and local governments manage their finances, including resource allocation and reporting of financial activities. Understanding the distinction between these categories is crucial for accurately interpreting governmental financial statements and ensuring compliance with applicable accounting standards.