Encumbrance Accrual Accounting for PO and Invoice

 Encumbrance Accrual Accounting for PO and Invoice

R12 Encumbrance Accrual Accounting for PO and Invoice

What is Budgetary Control?

A method of systematically enforcing spending limits by ensuring availability of budgeted funds before approval of transactions, including pre-expenditures.

What is Encumbrance?

A method of tracking and controlling an organization’s spending from the very early stage of initial documented evidence showing intention to buy to the final stage of actual expenditure. It is a management tool used to reflect commitments in the accounting system and attempt to prevent overspending. Mostly Used by Government and Non-Profit Firms

How it works?

Once an encumbrance document(PO, Invoice..etc) is created, funds are set aside for the sole purpose of enabling the organization to pay for it. If funds are insufficient due to budget or previous commitments and expenditures, no new encumbrances can be entered, ensuring that budget will not be exceeded.

Calculation of fund available

F.A. = Budget – (Encumbrance + Actual)

F.A. - Amount of money left in the account to spend

Budget – Maximum amount that can be spend for the account

Encumbrance – Reserved amount (Requisition, PO, invoice, and others)

Actual – Amount liable to another party

Encumbrance Accounting for documents PO and Invoice When accounting method Encumbrance Accrual is set

Example:

Budget is $1000

Purchasing an item which costs $200

Assume encumbrance is enabled for Purchase Orders and Invoices

Fund available before transaction

   F.A. = Budget – (Encumbrance + Actual)

   F.A. = 1000   –  (0+0) = 1000

Create a PO for $200.

   Application RESERVES the fund of $200 for PO

   PO  A/C------------------------200-----Dr

   RFE A/C------------------------200-----Cr

  

   F.A. = Budget – (Encumbrance + Actual)

   F.A. = 1000   - (200+0) = 800

Created an Invoice for $200 and matched it to the above said PO and validate Invoice(bc_event and validation event get created).

   Step 1: Application REVERSES PO encumbrance accounting.

   PO  A/C------------------------200-----Cr

   RFE A/C------------------------200-----Dr

  

   Step 2: Application RESERVES the fund of $200 for Invoice(bc_event)

   Inv A/C------------------------200-----Dr

   RFE A/C------------------------200-----Cr

   F.A. = Budget – (Encumbrance + Actual)

   F.A. = 1000   - (200+0) = 800

Run accounting for invoice actuals(Invoice Validation event).

   Step 1: Application REVERSES above Invoice encumbrances accounting(bc_event).

   Inv A/C------------------------200-----Cr

   RFE A/C-----------------------200-----Dr

   Step 2: Application creates original entries for invoice(Invoice Validation event).

   ItemExpenseA/C----------------200-----Dr

   LiabilityA/C---------------------200-----Cr

   F.A. = Budget – (Encumbrance + Actual)

   F.A. = 1000   - (0+200) = 800

Note: Payment accounting may happen in two stages based on option selected in Payables->Setup->Options->PayablesOptions->AccountingOption tab->PaymentAccounting.

Payment Accounting:

   Direct Pay-No Clearance

     Payment Time

     LiabilityA/C-------------------200----Dr

     CashA/C----------------------200----Cr

   Or

   Pay and Clear

     Payment Time

     LiabilityA/C-------------------200----Dr

     CashClearingA/C--------------200----Cr

     Clearing Time

     CashClearingA/C--------------200----Dr

     CashA/C----------------------200----Cr