Encumbrance

Reservation of funds is known as encumbrance. The purpose of tracking encumbrance is mainly to avoid
overspending a budget. Encumbrance is a commitment to pay in the future for goods or services ordered
but not yet received.

The Budget amount is reduced on two occasions:

 On creation where approval is not required.

 On Approval where the approval is required.

When the goods are received or services are obtained and the invoice is created and matched, then the
encumbrance is released and the current year expenditure is accounted.

Encumbrance Accounting:

Encumbrance accounting is a form of budgetary control that enables a company to allocate funding for
specific account code combinations. The funds checking feature which is an integral part of
encumbrance accounting, checks for availability of funds on a particular accounting code combination.

If the approval process is in place then the approval process checks for the funds and the approval is
made only when the transaction is passed with the funds check process.

Modules Involved in Oracle Financials:

The encumbrance accounting is involved dealt in the following modules.

 Oracle Purchasing
 Oracle Payables and finally
 Oracle General Ledger.

The table GL_BC_PACKETS is used to store the encumbrance transactions. Each row is created with a
packet_id that stores values such as balance_type, encumbrance_type and so on. The values in these
columns can be used to identify the nature of the encumbrance (Requisition / purchase order).
 Encumbrance Setup

Enable Budgetary Control for the Ledger. Assign Reserve for Encumbrance Account to Ledger.

(N): General Ledger  Setup  Financials  ASM  Accounting Setups:

Define Reserve for Encumbrance account for each ledger. When you post encumbrance transactions,
General Ledger automatically posts offset amounts to this account.

Enable Budgetary Control for your ledger to automatically create encumbrance entries from Oracle
Purchasing and Oracle Payables. Also to use funds checking, enable budgetary control when you create a
ledger.
Open Encumbrance Year

(N): General Ledger  Setup Open/Close

When you open the first period defined for your ledger, General Ledger automatically opens your first
encumbrance year as well. You do not need to open encumbrance years if you are not using
encumbrance accounting. There is no concept of closing encumbrance periods or years. General Ledger
automatically displays your Latest Open encumbrance year. You can enter and post encumbrance
balances up to the last period of your latest open encumbrance year. If you want to open a new
Encumbrance year click on “Open Next Year”.

General Ledger submits a concurrent process to open the next encumbrance year.
Define Budget

(N) Budgets----- Define --- Budget:

The encumbrance is basically for the budgets defined for an organization.

Budget is the collection of the estimated amounts defined for an organization,
for a range of accounting periods and for specified accounting code
combinations.

Give a name to your Budget; Assign it to a Ledger; Select “Require Budget

Journals” checkbox if you require Budget Journals. Select the period for the
Budget.

Here we do only two things:

 Define Budget (give a name to Budget)

 Assign it to a Ledger & a time period.
Define Budget Organization:

(N) Budgets----- Define --- Organization

Define a new budget organization that includes only specific ranges of accounts.
Each budget organization can be created only for specific flexfield combinations.
Choose the accounts for which the budgetary control is required and link it to
the budget defined as above.

For each combination chosen, we can define budget amount (YTD; PTD; QTD)
and the budgetary control (funds check level: advisory; absolute) can be
enforced separately for each combination.
Click on Ranges:
Enter a Line number and an account Low and High for each range you want to
assign to your budget organization. Therefore when you enter these accounts
code combinations, budget will be encumbered against these accounts.

Click on Range Assignments: if the low and high are different (4 above).
Click on Budgetary control

Here we link the Budget (PL-56 Budget) that we have created earlier to the range
of accounts and also we define the funds check level.

Save your work. General Ledger launches a concurrent program to

assign all the existing accounts within the designated ranges to the
budget organization.

Funds check level:

 None: for no funds checking or funds reservation.

 Advisory: for online notification when transactions fail funds checking. The system still

reserves funds for transactions even when no funds are available.

• Absolute: to prohibit you from reserving funds for a transaction unless funds are available.
Click on the Assignments tab on the Budget Organization form. This will show
exactly the same information that we have defined as above under the Ranges
tab and budgetary control tab.

Define Encumbrance Type:

General Ledger  setup Journals Encumbrances:

Encumbrance types let you classify and track expenditures according to the
purchasing approval process. You can define your own encumbrance types in
addition to the General Ledger standard encumbrance types or disable existing
encumbrance types. You specify an encumbrance type when you enter an
encumbrance and when you perform inquiries.
General Ledger has the following predefined encumbrance types:

 Commitment

 Obligation

Define Budgetary Control Group:

General Ledger  Budgets  Define  Controls:

You create additional budgetary control groups to give people different

budgetary control tolerances and abilities to override insufficient funds
transactions.
Assign Budgetary Control Group:

Enable Encumbrance
(N) ------ Payables  Setup  Options  Financials Options

Enable the required options in Payables Financials options.

Using the Budget
This is the most important step in Encumbrance setup.
Before using the Budget that we have created, we need to enter
amounts for that Budget. First we need to enter budgets for the
specified accounts ranges selected in the Budget Organization defined.
Enter budget journals to maintain an audit trail for your budget
balances. You can use budget rules to calculate budget journal
amounts automatically.

Query your account and enter budget amount. Choose “Create

Journals” to create budget journals in the GL.
Click on “Check Funds” which passes the funds check when there is sufficient
balance in the specified account.
Next choose “Reserve Funds” which will reserve the funds for this account.

Click view results to see the Budget Controls Report which displays the Budget
amounts for that account, duly passed.

Budgetary Control
Results .pdf

At the last click on “Done”.

Request for creating journal entries will be generated. Create Journal Entries
Execution Report will be called which gives the Batch name of Journals created.

Query with the batch name in the Journal entry window to see journals created
in “Unposted” mode.
Click on “Post” that will post the journals in the GL. When the batch status is
“Posted” click on “Review Journal” to see the posting of journal in GL.
Now having posted the budget amounts against the account, we will verify the
funds available once to confirm the budget postings.

General ledger  Inquiry  Funds:

Here in the Funds Inquiry window we can see:

We have queried for period 12-11 to see the total funds available for the entire
year.

Budget for the entire year is 60,000/-

Funds available is 60,000/-

Funds reserved (encumbered) against budget: Commitment = 0 Obligation = 0.

Therefore Budget (Funds) available for the year = 60,000.

Now we will have a look at the Encumbrance Accounting Flow from Payables.
Enter an invoice with the distribution account as same as we have defined
budget for: 01-03100-000-000-000

Please note the “Encumbrance Status”.

There is no separate step to reserve funds in AP unlike in PO. In AP, Validation

process takes care of the funds reservation.
Now, before we validate the invoice perform “Funds check”. This is to ensure
that sufficient funds are available for this invoice amount.

This action will perform the budgetary control process:

When there are sufficient funds available for a specific account, the invoice will
pass the budgetary control process. Please note the “Encumbrance status”.

Now we will validate the invoice.

Note that the status is now “Validated”.

Now after validation of invoice, check the “Encumbrance Status”.

The “Encumbrance Status” changed from the “Not Encumbered” in the un-
validated invoice to “Encumbered” after the invoice validation. This means
funds for this invoice amount have been encumbered (reserved).
Now we will go to funds inquiry window to check the changes in the budget
after the funds encumbrance for the above invoice.

Note that we have entered the invoice in the 05-11 periods. So we have to check
the funds availability status for the month of 05-11.

Important Points
You can have only one Current budget at a time for each ledger. (Open; Current; Frozen).

Enter the Last period for your budget. Your budget can include up to sixty periods per year, and can
span an unlimited number of fiscal years.