Encumbrance:
Reservation of funds is known as encumbrance. The Thesaurus explains the meaning of encumbrance as
'burden' or 'Load'. The purposes of tracking encumbrances are as follows:
1. Avoid overspending a budget
2. To facilitate effective control and consumption of budget by pre-allocating budget amount
3. To Predict cash outflow and as a general planning tool.
Encumbrance is a commitment to pay in the future for goods or services ordered by not yet received.
The terms encumbrance and commitment are used interchangeably. The budget amount can be reduced by the amount of encumbrance as listed below.
1. On creation where approval is not required.
2. 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.
2.2 Encumbrance Accounting:
Encumbrance accounting is a form of budgetary control within Oracle Applications that enables a company to allocate funding for specific accounts. The funds checking feature which is an integral part of encumbrance accounting, checks for availability of funds on a particular accounting combination.
The funds checking feature can be performed either at the entry level itself before committing the transaction or when the approval is made for the transaction. The approval process checks for the funds check level and the approval is made only when the transaction is passed with the funds check process.
2.3Usage:
The complete use of capabilities of encumbrance accounting, users must enable the budgetary control flag for a set of books. When users enable the budgetary control flag, the system automatically creates encumbrances from requisitions, purchase orders and other transactions originating in feeder systems such as Purchasing and Payables. When users do not enable the budgetary control flag, they can still enter manual encumbrances via journal entry, but Users cannot generate encumbrances from requisitions and purchase orders. Users have two options for using encumbrance data to monitor over- expenditure of a budget. After actual and encumbrances have been posted, users can generate reports to show over-expenditures. Users can also use funds checking to prevent over-expenditures before they occur.