Accounting ManualDisbursements: Encumbrance AccountingUC Accounting ManualVI. Accounts Payable OperationsD-371-21 (TL 51, 3/15/88)***************************************************************** ENCUMBRANCE ACCOUNTING "Words pay no debts." --William Shakespeare I. INTRODUCTION This chapter presents the guidelines for establishing, amending, and removing encumbrances (liens) against appropriations. Specific procedures in regard to encumbrances against appropriations in the Plant Funds group are presented in chapter P-415-8, Plant Accounting: Unexpended Plant Funds, and chapter P-415-21, Plant Accounting: State Appropriations, Expenditures, and Encumbrances.II. FUNCTION OF ENCUMBRANCES A. BUDGETARY CONTROL Obligations incurred in the form of purchase orders, contracts, and internal requisitions are ordinarily entered as encumbrances in the general ledger. The recording of these encumbrances (1) reserves within an expenditure subaccount the anticipated amounts required to cover these obligations as they become payable after the goods are delivered or the services are rendered, and (2) reduces the available fund balance in that particular subaccount. Thus, the recording of encumbrances serves as a valuable aid to departments for keeping expenditures within amounts budgeted. B. CARRY FORWARD TO THE FOLLOWING FISCAL YEAR Encumbrances also serve as a mechanism by which fund balances can be carried forward to the following fiscal year. (Refer to section IV., below.) III. PROCEDURES A. ESTABLISHING ENCUMBRANCES Ordinarily, an encumbrance for a specific purchase order is established at the time the purchase order is originated by the Purchasing Department. The original of the purchase order, or a photocopy of the same, is used as the source document for setting up the encumbrance in the general ledger. Encumbrances can also be established for contracts, internal requisitions, blanket purchase orders, Low Value Purchase Authorizations, and various other commitments and authorizations that result in financial obligations. Ordinarily, for each such commitment and authorization to be liened, a Lien Voucher Form, UFIN 284 (Exhibit I), (A campus version may be used instead.) is used as the source document for entering the encumbrance in the general ledger. A Lien Adjustments Form, UFIN 285 (Exhibit II) (A campus version may be used instead.), can be used instead. Campuses with computerized systems can automatically establish encumbrances for commitments such as those associated with computer generated purchase orders and automated recharge activities. In order to provide a check against errors in key entry, a lien entry must have both a debit and a credit side. To establish a lien, the appropriate expenditure account is debited and the Encumbrance Control account is credited. The offsetting entry to the Encumbrance Control account can be generated automatically at campuses with computerized systems. Included in the amount of the encumbrance should be (1) any applicable tax, and (2) a provision, as can best be determined, for freight charges. A sample journal entry to encumber an obligation appears below: Dr. Division of Library X-600200-19900-3 Automation $250.00 Cr. Encumbrance Control X-999998-99999-3 $250.00 Note: An object code is used only when recording the actual expenditure, not when setting up the encumbrance. This encumbrance would appear in the general ledger for the month as illustrated below: (chart) As illustrated above, the appropriation balance would be decreased by the amount of the encumbrance ($250.00), as well as by the total actual expenditures for the fiscal year charged against this subaccount to date. In the example above, type of entry (TE) code 61 has been used to enter the lien in the general ledger. Type of entry codes 61-69 are designated for use in the entry or cancellation of liens. Specific TE designations within this range may vary by campus. (Refer to Accounting Manual chapter A-115-2, Accounting Codes: General Ledger, section III.F.) B. AMENDING AND CORRECTING ENCUMBRANCES A lien can be amended or corrected by completing a Lien Adjustments Form, UFIN 285. (A campus version may be used instead.) If all the information regarding a lien has been entered in the general ledger correctly except for the amount, it can be amended by entering the required increase or decrease on a UFIN 285, (A campus version may be used instead.) referencing the same account number and description of transaction information used previously. However, if other discrepancies have occurred--such as when (1) the requisition or purchase order number has been entered in error, (2) the wrong account number has been charged, or (3) the original vendor could not supply the goods or services and the order has since been placed with a new vendor--the lien must be removed via a UFIN 285 (A campus version may be used instead.) and a new one established. C. CANCELLING ENCUMBRANCES A lien can be cancelled in whole or in part via a UFIN 285 (A campus version may be used instead.) or with direct coding on an invoice payment or other specified accounting form used as a direct input to the general ledger. A sample journal entry to record the payment of the invoice for the encumbrance established in section III.A., above, appears below: Dr. Division of Library X-600200-19900-3-7200 Automation $250.00 Cr. Cash X-110XXX $250.00 The journal entry to record the cancellation of the lien would be as follows: Dr. Encumbrance Control X-999998-99999-3 $250.00 Cr. Division of Library X-600200-19900-3 Automation $250.00 The lien is cancelled and the payment is recorded as an expenditure, but the appropriation balance remains unchanged when the amount of the lien and the amount of the payment are identical. The general ledger would reflect this entry as follows: (Chart) When the invoice payment is greater than the amount of the lien, the appropriation balance will be decreased by the difference. When the invoice payment is less than the amount of the lien, the cancellation of the lien will result in the appropriation balance being increased by the difference, provided the lien has been established during the current fiscal year. In cases in which the final payment on an invoice in the current fiscal year partially cancels a lien of General Funds (199XX) which had been established in the preceding fiscal year, the unused balance must be transferred back to the Accounting Office. Type of entry code 60 is used for the cancellation of a lien resulting from a check payment or journal entry. Specific usage varies by campus. (Refer to Accounting Manual chapter A-115-2, Accounting Codes: General Ledger, section III.F.)IV. ENCUMBRANCES AND FISCAL CLOSING A. GENERAL FUNDS General Funds can be carried forward to the following fiscal year only in the form of bona fide encumbrances against approved budgets for the year in which the appropriation is intended. Bona fide encumbrances are those liens established using the following forms: 1) A valid purchase order issued on or before June 30 of each fiscal year by the campus Purchasing Office to a vendor for provision of goods and/or services to a University department or activity. 2) A contract (other than a purchase order) entered into by the University and a second party to furnish goods and/or services in which both parties have concluded agreement on or before June 30 of the year in question. 3) An internal requisition made by a University department on or before June 30 for specific goods and/or services. B. OTHER FUNDS Encumbered balances can be carried forward for donations, endowments, or other funds provided the period and terms of availability extend into the following fiscal year. A government contract or grant that has terminated may have outstanding charges which will not be recorded in the ledgers until the following fiscal year. Therefore, balances (encumbered and unencumbered) should be carried forward for government contracts and grants irrespective of whether the period and terms of availability extend into the following year. V. RESPONSIBILITIES A. DEPARTMENT HEAD The Department Head has the responsibility (1) to assure that incurrence of encumbrances is made consistent with the terms and conditions of the funding source(s) of the departmental budget and (2) to periodically determine departmental budgetary savings and take appropriate action in conformance with the procedures presented in this chapter. B. ACCOUNTING OFFICER In coordination with campus Internal Audit, the Accounting Officer has the responsibility to assure that encumbrances are established and removed in accordance with the procedures presented in this chapter. VI. REFERENCES Standing Orders of The Regents, section 100.4 (p). (See Appendix I.) Accounting Manual chapters: A-000-7 Official Documentation Required in Support of University Financial Transactions A-115-2 Accounting Codes: General Ledger A-115-6 Accounting Records D-224-17 Delegation of Authority--Signature Authorization P-415-8 Plant Accounting: Unexpended Plant Funds P-415-21 Plant Accounting: State Appropriations, Expenditures, and Encumbrances Letters and Memoranda: President Kerr, Memorandum to chief campus officers and statewide administrative officers, on The Disposition of General Funds Balances at June 30, March 26, 1964._________________________Historical note: This chapter supersedes Business and FinanceBulletin G-4, Modified Encumbrance Accounting, and updates thematerial formerly contained in that bulletin. Accounting Manualchapter first published 3/15/88; analyst--Nancy Partovi. APPENDIX: STANDING ORDERS OF THE REGENTS, SECTION 100.4 (p)The President is authorized to approve the incurring ofcommitments and expenditures against the following year's budgetin advance of the effective date thereof. Advance commitmentsfor expenditure for materials, services, and equipment shall notexceed fifty percent of the Governor's budget proposal to theLegislature for such purposes for the ensuing fiscal year. Advance commitments for appointments shall not exceed the numberof positions and the funds provided in the Governor's budgetproposal to the Legislature for the ensuing fiscal year. Thenumber of such advance commitments authorized shall be determinedannually by the President. EXHIBIT I: LIEN VOUCHER FORM, UFIN 284 (form) EXHIBIT II: LIEN ADJUSTMENTS FORM, UFIN 285 (form)Back to Accounting Manual Table of Contents