Which account is credited when a purchase order is approved?

Which account is credited when a purchase order is approved?

• A. Encumbrances Outstanding
• B. Expenditures
• C. Accounts Payable
• D. Budgetary Fund Balance

Answer: (A)

When a purchase order is approved, a commitment against the budget is created. This encumbrance shows that part of the available appropriations is set aside to cover that future expenditure. The standard journal entry reflects this by recognizing the encumbrance in the budgetary accounts: you reserve the budget by debiting Budgetary Fund Balance - Reserved for Encumbrances and you record the encumbrance against the outstanding commitments by crediting Encumbrances Outstanding. Expenditures aren’t recorded yet because goods or services haven’t been received, and Accounts Payable isn’t established until an invoice creates a liability. Budgetary Fund Balance alone isn’t the appropriate offset here, since the encumbrance is the mechanism that reduces the portion of resources available for other uses.

When a purchase order is approved, a commitment against the budget is created. This encumbrance shows that part of the available appropriations is set aside to cover that future expenditure. The standard journal entry reflects this by recognizing the encumbrance in the budgetary accounts: you reserve the budget by debiting Budgetary Fund Balance - Reserved for Encumbrances and you record the encumbrance against the outstanding commitments by crediting Encumbrances Outstanding. Expenditures aren’t recorded yet because goods or services haven’t been received, and Accounts Payable isn’t established until an invoice creates a liability. Budgetary Fund Balance alone isn’t the appropriate offset here, since the encumbrance is the mechanism that reduces the portion of resources available for other uses.