Encumbrance Accounting: CPA FAR Governmental Accounting

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In this video we walk through how encumbrance accounting works for the governmental accounting portion of the FAR CPA exam.

So in this video, we're gonna do a quick example that will walk you through how encumbrance accounting works for the government accounting section on the FAR exam.

The 2020 General Fund budget for Corona County included $100,000 budgeted for face masks for county employees on November 1st, 2020, Corona had the following balances related to the face masks budget. They had appropriations of $100,000, encumbrances of $20,000, expenditures of $70,000, and vouchers payable for $5,000.

One of the county employees has asked for more face masks for their department. So you need to review the information related to the budget above to determine if there are funds available from the budget for additional facemasks. So down here, this is the description of what you're trying to figure out. We need to figure out the amount and if the budget is available or overspent. For the rationale on this, you think of appropriations as the amount that has been set aside for a purpose at the beginning of the budgeting process.

So appropriations is essentially, if we go back to this, it's essentially the entire amount that was budgeted at the beginning of the budgeting process. Encumbrances is the amount from the appropriations that are currently tied up in an actual purchase. So when a purchase order has been issued, that amount will be listed as an encumbrance. So here there are currently $20,000 worth of encumbrances that are going against this appropriations amount of $100,000. Expenditures on the other hand, these are the amounts that have been filled, meaning the transaction is basically over. So there was an encumbrance and then the goods were received.

So the encumbrance was reversed back out and then it was recorded as an expenditure. So it's the amount has actually been spent. So when a purchase, when the when the purchase order from up here has actually been filled, then the amount of the encumbrance is reversed out and that amount becomes an expenditure. And then vouchers payable is just the government term for accounts payable.

So, when an expenditure is recorded, there will be a voucher payable recorded at the same amount, which is basically just saying, this is what we still owe for these goods that we received. In the example above, having this amount listed as vouchers payable, that just means that on this date on November 1st, this is the amount of vouchers payable that is still outstanding. In other words, it's already been included in this expenditures amount. So we wouldn't use this to calculate what amount of the budget is still leftover.

So the calculation in this example is, you have the appropriations or the budgeted amount and we would subtract from that the expenditures. Those are the transactions that have been fulfilled. Purchase order was made, goods were received, the purchase order was filled, and it was recorded as an expenditure. So in this encumbrance amount, we'd subtract this as well because there's currently twenty thousand of our budget tied up in outstanding purchase orders. So the purchase orders have been issued, but they haven't been filled. So a hundred thousand minus seventy thousand minus twenty thousand leaves us with ten thousand dollars of budget available. So that is what the amount would be.

Ten thousand of available budget. Now, down here, if the expenditures. Let's say they were ninety thousand and there were encumbrances of twenty thousand, then the budget would be overspent by ten thousand. So that's pretty simple. You know, once you know how these work and how to figure out this kind of problem, it's obviously very basic math at that point. It's really just understanding what these mean and how they work against the appropriations account.

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