Encumbrance: How to Stick to Your Budget Without Really Trying

Michael V. Milano
Oracle Corporation
Abstract
Improve your understanding of encumbrance
accounting and budgetary controls. This paper
provides an overview of budgetary controls,
encumbrance accounting, case scenarios, and
troubleshooting.
Scope
I. Budgetary Controls
II. Encumbrance Accounting
III. Case Scenarios
IV. Troubleshooting
I. Budgetary Controls
Budgetary Controls allows you to check to see
if the expenditure is within your budget
constraints, i.e. if there are funds available for
that expenditure. That is to say, do we have
enough money (funds available) to incur this
expenditure? Budgetary controls help to
control and analyze spending practices.
Budgetary Controls consists of two processes:
Funds Checker and Funds Reservations.
Funds Checker
Funds Checker is a feature of budgetary
controls that helps prevent overspending
budgets by verifying available funds online
before processing a transaction.
Funds Checker both checks and reserves funds
and is shared by Oracle Payables, Oracle
Purchasing and Oracle General Ledger.
You can elect to do funds checking with
encumbrance accounting. Funds Checking used
with Encumbrance Accounting immediately
updates the accounts and verifies that funds are
available.
Funds Reservations
Funds Reservation reserves the funds for the
expenditure and immediately updates the funds
available. You can view Funds Available in GL
(Inquiry > Funds Available) this screen is
automatically updated when funds are reserved.
The formula for funds availability is:
Funds Available = Budget Actuals - Encumbrances.
Budgetary Controls have three levels:
Absolute, Advisory and None.
Absolute funds reservation will not take
place unless there are funds available. This
prevents overspending the budget.
Advisory funds reservations will take
place even if there are insufficient funds.
This will produce a warning message on the
screen advising that this expenditure will
cause you to exceed the budget.
None funds reservation will take place
even if there is insufficient funds, although
no message will be produced. This level is
the most likely to allow overspending.
Summary and Detail Level Control:
Detail Budgetary Control is used to control
expenditures against a budget amount for a
particular GL account. When using this method
of control you must budget to each account for
which you enable budgetary controls.
Summary Budgetary Control is used to control
budget expenditures at a less detailed level,
such as department or cost center. The
advantage here is that each account does not
need a budget.
Budgetary Control Setup:
1. Assign Reserve for Encumbrance Account
and Enable Budgetary Control Options in
Oracle General Ledger (Setup -> Set of
Books)
2. Open the latest Encumbrance year (Setup -
> Open/Close)
3. Define the Budget which will be the
Funding Budget (Budgets -> Define
Budgets)
4. Define a Budget Organization and specify
the accounts for which Funds Checker will
take place including the level of checking,
i.e. absolute vs. advisory (Budgets ->
Define Organizations)
5. Click the MAINTAIN button to submit the
program Maintain Budget organization
(Budget -> Define Organizations)
6. Select Budget Organization and Budget for
steps 2 & 5. Enter accounts to budget and
amounts for each period. Click on the
Create Journals button and go to the
Check and Reserve Funds Screen. Reserve
Funds (Budgets -> Enter Journals)
7. Query the journal batch created in step 6
and post it. (Journals -> Post)
8. Select Encumbrances to be created (i.e.
Requisition, PO), and select the type of
encumbrance (obligation, commitment)
(Payables > Setup -> Options ->
Financial, Encumbrance Region)
II. ENCUMBRANCE ACCOUNTING
Encumbrance entries are used in conjunction
with funds checker to immediately update
funds available. In other words, encumbrance
accounting is a process to track spending
before it becomes an actual cost to the
organization. This combined with budgetary
controls can assist in the prevention of
overspending a budget. You can use
Budgetary Controls without Encumbrance
Accounting, but you cannot use Encumbrance
Accounting without Budgetary Controls.
Oracle Applications use Encumbrance
Accounting to account for funds reserved on
certain transactions. Counting these reserved
funds as spent ensures that these funds cannot
be used for some other purpose before these
funds are changed into actual costs.
You determine if encumbrances are created at
the time requisitions or purchase orders are
approved. Invoice encumbrances are
automatically enabled if PO encumbrance is
turned on. (Setup -> Options -> Financials,
Encumbrance Region)
Encumbrance entries are automatically created
when an invoice (not matched to a PO) is
approved, or a requisition or purchase order is
reserved. Information about these encumbrance
entries is stored in the table
GL_BC_PACKETS. The information remains
in this table until the Program Create
Journals is run from Oracle General Ledger.
This process creates unposted journal entries,
which will need to be posted. Once the
Program Create Journals has completed
successfully, the data regarding the
encumbrances will no longer be in
GL_BC_PACKETS.
The funds checker looks at the
GL_BC_PACKETS table to verify whether
there are any encumbrance entries and
immediately updates the funds available, which
can be viewed in Oracle General Ledger
(Inquiry >Funds)
Once the encumbrance becomes an actual cost,
Oracle automatically reverses the
encumbrances and replaces them with actual
journal entries. The reversing entries are
dependent on whether the Accrual Method is
Receipt Accrual or Accrue at Period End.
Below is the summary of common transactions
and the encumbrance entries created.
Common Nomenclature:
Charge A/C account to be affected by the
PO or invoice distribution
Budget A/C account against which
budgetary controls is done and for which
encumbrance entries are created. For expense
items, the budget a/c and the charge a/c are the
same.
RFE A/C reserve for encumbrance account
AP LIAB Accounts Payable Liability
Account
Cash cash account
Rec. A/C receiving account
AP Exp Accr Accounts Payable expense
accrual account
AP Inv. Accr Accounts Payable Inventory
account
CJE Program Create Journals
BALANCE_TYPE Table level flag to
indicate whether the transaction is an
encumbrance or actual transaction.
III. Case Scenarios
1) Unmatched Invoice (Direct Pay)
Approve the direct pay invoice for $10, run
CJE.
This will create the encumbrance entry:
Debit to the Charge A/C for $10 and credit to
RFE for $10 with a Balance type = E.
When you run the Payables Transfer to GL, the
encumbrance entries are relieved. That is to say
a credit is created to the Charge A/C and debit
to RFE with balance type = E. In addition,
actual entries are created, a debit to the
expense with a balance type = A and credit to
the AP LIAB with a balance type = A
Invoice Approval and Run CJE
Account Debit Credit
Charge A/C 10(E)
RFE A/C 10(E)
Payables Transfer to GL (Part 1)
Account Debit Credit
Charge A/C 10(E)
RFE A/C 10(E)
Payables Transfer to GL (Part 2)
Account Debit Credit
Charge A/C 10(A)
AP LIAB 10(A)
2) Create a $20 Requisition and run CJE.
This will create the encumbrance entry:
Debit to Charge A/C for $20 and Credit to the
RFE A/C for $20.
Run AutoCreate and run CJE.
This relieves the requisition encumbrance and
creates a PO encumbrance for the same
amounts. When the requisition is approved and
reserved, CJE creates the encumbrance entries.
Approve/Reserve Requisitions and Run CJE
Account Debit Credit
Charge A/C 20(E)
RFE A/C 20(E)
AutoCreate PO from Requisition and Run CJE
Account Debit Credit
Charge A/C 20(E)
RFE A/C 20(E)
AutoCreate (cont.)
Account Debit Credit
Charge A/C 20(E)
RFE A/C 20(E)
NOTE: The original encumbrance entry
created by the requisition was reversed and
replaced with new PO encumbrance. Note that
the encumbered_flag in PO_DISTRIBUTIONS
= Y after reserving the funds for the purchase
order. In addition, the encumbrance_amount
will now have a value.
3) Cancel an Unmatched Invoice $25.23.
Note the cancel of the invoice results in a
negative debit to the Charge A/C.
Approve Invoice and Run CJE
Account Debit Credit
Charge A/C 25.23(E)
RFE A/C 25.23(E)
Cancel Invoice and Run CJE
Account Debit Credit
Charge A/C -25.23(E)
RFE A/C 25.23(E)
NOTE: When canceling the invoice a negative
debit to the Charge A/C is created.
4) Cancel an Approved Reserved Requisition
for $15.15.
Approve/Reserve Requisition
Account Debit Credit
Charge A/C 15.15(E)
RFE A/C 15.15(E)
Cancel the Requisition
Account Debit Credit
Charge A/C -15.15(E)
RFE A/C 15.15(E)
NOTE: When canceling the requisition a
negative debit to the Charge A/C is created.
5) Approve/Reserve a PO and final match it to
an invoice for less than the amount of the PO.
Create and Approve a purchase order for
$44.44 then run CJE.
This creates a debit to the charge account for
$44.44 and a credit to the RFE account for
$44.44.
Final Match purchase order to invoice for
$11.11, then run CJE.
This relieves the matched amount for $11.11.
This results in a credit to the charge account
for $11.11 and a debit to the RFE account for
$11.11.
Run Payables Transfer to GL.
This relieves the encumbrance amount not
matched and creates a credit to the charge
account for $33.33 and a debit to the RFE
account for $33.33. The Payables Transfer to
GL also creates the actual accounting entries to
record the non-encumbrance transactions.
Approve/Reserve PO and Run CJE
Account Debit Credit
Charge A/C 44.44(E)
RFE A/C 44.44(E)
Final Match Invoice for less than PO and Run
CJE
Account Debit Credit
Charge A/C 11.11(E)
RFE A/C 11.11(E)
Run Payables Transfer to GL (Part 1)
Account Debit Credit
Charge A/C 33.33(E)
RFE A/C 33.33(E)
Run Payables Transfer to GL (Part 2)
Account Debit Credit
Charge A/C 33.33(A)
AP LIAB 33.33(A)
NOTE: When Payables Transfer to GL is run,
encumbrance entries are created to relieve the
amount matched to PO. This is denoted by the
balance type = E. In addition, actual
accounting entries are created at this time, now
that the expenditure has become an actual cost.
This is denoted by the balance type = A.
6) Match an invoice for a greater amount than
the original purchase order encumbrance.
Create a purchase order for $90.00.
Approve and reserve the PO, then run CJE.
This creates a debit to the charge account for
$90.00 and a credit to the RFE account for
$90.00.
Match PO to Invoice for $99.00. Approve the
Invoice. Run Payables Transfer to GL.
This creates the relieving entries. A credit to
the charge account for $99.00 and a debit to
the RFE for $99.00.
Run CJE.
This creates the encumbrance entry for the
difference between the invoice and purchase
order. It creates a debit to the charge account
for $9.00 and a credit to the RFE account for
$9.00.
Create a Purchase Order, Approve/Reserve
Account Debit Credit
Charge A/C 90.00
RFE A/C 90.00
Match Invoice for Greater Amount Run
Transfer to General Ledger
Account Debit Credit
Charge A/C 99.00
RFE A/C 99.00
Match Invoice for Greater Amount Run
Program Create Journals
Account Debit Credit
Charge A/C 9.00
RFE A/C 9.00
NOTE: When matching an invoice for a
greater amount than the original encumbrance,
the system will need to encumber additional
funds to cover the difference between the
invoice and purchase order. In order to
accomplish this the Program Create Journals
must be run. If not, your encumbrance account
will not be in balance. In the above example the
full value of the invoice, $99.00 was relieved,
even though only $90.00 was originally
encumbered. Only when the Create Journals
program is run will the additional invoice
amount be encumbered, bringing the accounts
back in balance.
7) Cancel a PO after it has been AutoCreated.
Create a requisition for 1 item @ $4.30.
Approve/Reserve requisition. Run CJE.
This creates a debit to the expense a/c for
$4.30 and a credit to the RFE a/c for $4.30.
AutoCreate the requisition into a PO.
Reserve/Approve the PO. Run CJE.
This creates two sets of journal entries. The
first relieves the requisition encumbrance by
crediting the expense a/c for $4.30 and debiting
the RFE a/c for $4.30. The second set of
entries creates the purchasing encumbrance by
debiting the expense a/c for $4.30 and crediting
the RFE a/c for $4.30.
Cancel the PO line without canceling its
associated requisition. Run CJE.
This creates two sets of accounting entries.
The first relieves the purchasing encumbrance
by debiting a $4.30 to the expense a/c and
debiting the RFE a/c for $4.30. But by not
canceling the requisition this also creates an
additional journal entry. This entry credited the
expense for $-4.30 and a credit to RFE a/c for
$4.30.
Note that this requisition encumbrance entry
will never be automatically offset by the
system. The only way to offset this entry is to
create a manual journal entry in Oracle General
Ledger. The proper way to handle this issue is
to cancel the associated requisition when
canceling the PO line.
Approve/Reserve Requisition, Run CJE
Account Debit Credit
Charge A/C 4.30
RFE A/C 4.30
AutoCreate PO, Run CJE
Account Debit Credit
Charge A/C 4.30
RFE A/C 4.30
Charge A/C 4.30
RFE A/C 4.30
Cancel PO Line without Canceling Requisition
Account Debit Credit
Charge A/C -4.30
RFE A/C 4.30
Charge A/C -4.30
RFE A/C 4.30
Essential Table Level Detail
1. Requisitions
PO_REQ_DISTRIBUTIONS
Fields: encumbered_flag
Encumbered_amount
2. Purchase Orders
PO_DISTRIBUTIONS
Fields: Encumbered_flag
Encumbered_amount
3. General Ledger
GL_BC_PACKETS
Fields: Reference1 (document type)
Reference4 (document number)
Reference5 (invoice #)
GL _INTERFACE (receiving against PO)
Fields: Encumbrance_type_id
Actual_flag
Reference24 (document number)
GL_JE_LINES (storing PO information)
Fields: Reference1 (document indicator)
Reference2 (po_header_id)
Reference3 (po_distribution_id)
Reference4 (po number)
4. Accounts Payable
AP_INVOICE_DISTRUBUTIONS
Field: Encumbered_flag
NOTE: In the
FINANCIALS_SYSTEM_PARAMS table the
flags req_encumbrance_flag and
purch_encumbrance_flag must have a value of
Y.
NOTE: When importing a requisition as
Approved, and Encumbrance is ON,
ReqImport will force the status to Pre-
Approved. This requires you to perform the
Reserve action explicitly.
NOTE: If a PO has been AutoCreated from a
Requisition, then the cancellation process will
re-encumber the Requisition Encumbrance
based on setup parameters.
IV. Troubleshooting - Diagnosing Issues
with missing or incorrect encumbrance
entries.
In order to diagnose issues with missing or
incorrect encumbrance entries it is imperative
that you take the following steps:
1. Review the encumbrance setup. This
should show you when you have chosen to
encumber (at requisition, purchase order or
invoice creation). Setup->Options-
>Financials -> Encumbrance region.
2. Determine if the problem is with an invoice
matched to a purchase order.
3. If it is a matched invoice, the
encumbrance entries generated will vary
depending on a variety of factors:
Review the charge, budget, accrual and
variance accounts from the purchase order
distribution screen.
Determine if the item is accrue on receipt
or accrue at period end by viewing the
purchase order shipment screen.
Determine if the item is an inventory item
or an expense item by viewing the purchase
order distribution screen.
Determine if there is a variance involved
and if there is, determine if it is a price
variance, quantity variance or an exchange
rate variance.
4. Determine which accounts you are
expecting the encumbrance entry to affect
and then verify that this is correct based on
the information obtained in step 3. For
example, if the budget account and the
charge account are different for the
purchase order, you should be looking at
the budget account to view the PO
encumbrance entry; the invoice
encumbrance will affect the charge
account, which is also the invoice
distribution account.
5. Remember that some screens like the
Account Inquiry screen will only show
encumbrance entries that have been
successfully posted.
Account Inquiry screen in General Ledger
Funds Available screen in General Ledger
Journal Posting Execution report
Program Create Journals in General
Ledger
Journal Entry Audit report from the
Payables Transfer to General Ledger
FSG reports from General Ledger (these
should not be relied upon as they are user
defined)
6. Ensure that the Program > Create
Journals in General Ledger has been run to
generate the Encumbrance journals.
7. Ensure ALL Encumbrance journal batches
have been posted in order to get an up-to-
date view of the Account Inquiry screen
and in General Ledger reports being run.
8. Check the Enter Encumbrance screen, the
Enter Journals screen for any unposted
journals or journals with exceptions which
might prevent posting.
The following describes actions you can take
on purchasing documents and the budgetary
control/encumbrance effect the action might
have.
Action Impact on Budgetary Control
Approve No budgetary control entries made
Accept No budgetary control entries made
Cancel Negative debit encumbrances
Import No budgetary control entries made
Forward No budgetary control entries made
Reject Reversing encumbrance entries
made
Return Reversing encumbrances entries
made
Reserve Attempts to reserve funds for
document
Submit No budgetary entries made
Approve/
Reserve
Attempts to reserve funds in
addition to submitting for approval
The following describes various statuses of
purchasing documents and the effect they have
on funds reservations.
Status Funds Reservations Impact
Approved Reserved funds for the document
Rejected No funds are reserved
In Process No funds are reserved
Conclusions
It is my desire that this paper has helped you
understand the fundamentals of Budgetary
Control and Encumbrance Accounting.
Breaking up the processes should help you
understand the overall process. I hope that you
are now better equipped to troubleshoot
problems and to determine what needs to be
done to resolve any issues that may come up.
In addition, if you encounter a problem that
requires assistance, please remember to call
Oracle Support. They may have seen the issue
before and may already have a solution for the
issue!
About the Author
Michael Milano is a Technical Analyst with the
Oracle Support financials group. He has been
working for Oracle Support for approximately
1 1/2 years.