First, it is important to remember that in the government-wide financial statement ALL funds are reported using FULL accrual accounting (this includes the governmental funds).

I like to think of it as the internal service fund is a subsidiary of the governmental funds (because those are the funds they support with their services most of the time) so you have to consolidate them.  Luckily for us all we really have to know is that intercompany revenue/expenses are eliminated and the net assets of the internal service fund are just added to the governmental funds.

I hope this helped.