The watergun is first available in the chapter "Fun and Games", which Riley and Ellie used before, which were eventually confiscated. Riley managed to steal them back, almost being killed in the process. After the watergun fight, Riley gives Ellie both the guns as she will be leaving with the Fireflies and will serve her no purpose.
The watergun has an unlimited amount of water, although it needs to be pumped often in order to continuously shoot the water. Pressing on the PlayStation 3, or on the PlayStation 4, pumps the water gun. Each pumping action restores 20% of the watergun's capacity. Both Ellie and Riley have a "Soak Level" which determines how wet they are when squirting each other with the gun. The first one to fill up the soak level bar loses the watergun fight.
During the game of 'Cat and Mouse', the gun now works as a normal weapon with a single shot on target being enough to count as a 'kill' or victory for the user.