Chapter 4

General Fund and Special Revenue Funds

 

Accounting for Outstanding Encumbrances

 

As we discussed in class, some states and local governments have laws requiring annual appropriations to lapse at the end of the fiscal year. When appropriations lapse, the authority to spend the appropriation does not carry over to the next fiscal period. If purchase orders are outstanding at year-end, the estimated cost of goods on order must be included in appropriations for the following year. Other states and local governments have laws that allow appropriations to carry over to the following fiscal year, which means the appropriations do not lapse.

 

Accounting Implications

 

The accounting for outstanding encumbrance at year-end and additional entries in following year when the good are received depends on whether appropriations lapse or do not lapse.

 

ILLUSTRATION

 

Assume that a city has outstanding purchase orders at the end of 2001 in the amount to $10,000. The Encumbrances and the Budgetary Fund Balance由eserved for Encumbrances accounts have year-end balances of $10,000 each.

 

 

When Appropriations Lapse

 

1.                  At year-end 2001, the Encumbrances account is closed against the Budgetary Fund Balance由eserved for Encumbrances account.

 

Budgetary Fund Balance由eserved for Encumbrances 10,000

Encumbrances 10,000

 

Entry (1) indicates that the account Budgetary Fund Balance由eserved for does not carry over to the following fiscal year.

 

2.                  For financial reporting purposes, the Fund Balance section of the General Fund balance sheet must show that $10,000 of the fund balance is reserved for pay for outstanding purchases and is not available to finance new expenditures in the coming fiscal year. The following entry is made at the end of 2001:

 

Fund Balance誘nreserved 10, 000

Fund Balance由eserved for Encumbrances 10,000

 

Entry (2) is necessary because entry (1) closed out the account Budgetary Fund Balance由eserved for Encumbrances.

 

 

3.                  At the beginning of fiscal year 2002, the following entry is made to restore the encumbrance closed out at end of 2001:

 

Encumbrances 10,000

Budgetary Fund Balance由eserved for Encumbrances 10,000

 

Entry (3) restores the encumbrance for purchase order outstanding at the end of 2001. When the goods are received, the expenditure is recorded and entry (3) is reversed.

 

 

When Appropriations DO NOT Lapse

 

In Chapter 4, on page 95, describes a situation in which the appropriation does not lapse and the Budgetary Fund Balance由eserved for Encumbrances account carries forward to the following fiscal year. The following entries are made when appropriations do not lapse.

 

1.                  At year-end, the Encumbrances account is closed but the Budgetary Fund Balance由eserved for Encumbrances stays open to reflect that purchase orders are outstanding and the goods have not been received.

 

2.                  Reclassification entry. For financial reporting purposes, the following reclassification entry must be made:

 

Budgetary Fund Balance由eserved for Encumbrances 10,000

Fund Balance由eserved for Encumbrances--2001 10,000

 

The purpose of Entry (2) is to report in the Balance Sheet that $10,000 of the

Fund Balance is reserved to pay for goods and services ordered in 2001 that will be received and paid for in 2002. This tells the public that $10,000 of the Fund Balance is not available for financing new expenditures in 2002.

 

3.                  In 2002, the city receives those goods that were ordered in 2001. Assume that the actual cost of the goods is $10,300. The following entry is made:

 

Expenditures2001 10,000

Expenditures 300

Vouchers Payable 10,300

 

Entry (3) above indicates that Expenditures-2001 of $10,000 is for goods received in 2002 that ere ordered in 2001. The additional $300 is treated as a current-year expenditure in 2002.

 

 

4. At the end of 2002, the following closing entry is necessary:

 

(4) Fund Balance由eserved for Encumbrances--2001 10,000

Expenditures2001 10,000

 

Entry (4) above closes out the Expenditures2001 account and the

Fund Balance由eserved for Encumbrances2001 account. Because the goods were received the reservation of the Fund Balance is no longer needed.