Ok so Encumbrances are involved in the budgeting process. Encumbrances are a set-aside for items that you have ordered or want to order. They will flow across budget years due to timing also.
When you are calculating your budget you have your original budget with your estimated operating costs for the year. You then will add in any encumbrances that were not expended in the previous year in order to get your adjusted budget amount.
You need to know the difference between encumbrances, payables, and expenditures.
Encumbrances = Items you have obligated or created a PO
Payables = Encumbrances become a payable when an invoice is received.
Expeditures = when you finally pay the invoice.
There are many budgetary control accounts: Appropriations, Encumbrances, Expenditures, Estimated Revenues, etc. Budgetary accounting does not have a “fund balance” in the same way a financial statement does in government because government budgets need to be balanced (zero sum).
Reserve for Encumbrances (financial statement account) will equal your Encumbrances (budgetary control account), but the entries for these accounts are different. Budgetary entries and FS entries do not converge. For example you will not have an entry that Dr Approprations & Cr A/P. Try to think of them as two separate sets of books. The Reserve is to be able to show the users that there are POs out there waiting to be satisfied. Otherwise it could potentially mislead the user about the financial statement fund balances.
Probably just confused you more but thats what I got lol
"It doesn't matter if you passed with a 75 or a 95, passing is passing..."
CPA, CFE, CICA
.