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

Budgetary Control in Payables

If you use Oracle Public Sector General Ledger's Budgetary Control feature, you can check funds before you save a transaction and you can have Payables Approval automatically create encumbrances to reserve funds for your transactions. For example, when you enter an invoice, you can use the Funds Check program to check if you have available budgeted funds to pay for an invoice or invoice distribution.

If you select absolute budgetary control in General Ledger, Payables Approval places an Insufficient Funds hold on any invoice that fails funds checking. If you use advisory budgetary control, Payables will allow the invoice to pass Approval, even if it fails funds checking. During Approval, Payables creates encumbrances to reserve funds against the budgets you define in Oracle Public Sector General Ledger. When you create the accounting entries for the transactions, it relieves the encumbrances.

As the final step of budgetary control in Payables, if you enable Use PO Encumbrance in the Financials Options window, Oracle Public Sector Purchasing automatically creates encumbrance entries to reserve funds for invoice expenditures against the budgets you define in Oracle Public Sector General Ledger.
Funds checking and budgetary control include nonrecoverable tax as part of the item cost to fully recognize the commitment because nonrecoverable tax becomes part of the acquisition cost of the item.

Setup=>http://sbllc3.solutionbeacon.net/pls/a159vis2/fndgfm/fnd_help.get/US@PSA_US/gl/@p_bc_setup@PSA_US#p_bc_setup