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
