Purpose:
To establish policies and procedures associated with encumbrances. To create an encumbrance means to set aside funds as designated for payment of future expenses (e.g., payments on contracts or monthly lease or maintenance agreements). Encumbered funds are not available for other than the specified purposes. An encumbrance is recorded at the time a purchase order is issued or a contract is signed for the purchase of goods or services. The difference between an encumbrance and a liability is that an encumbrance is a formal commitment of budgeted resources at the time a purchase order is issued or a contract is signed, whereas a liability is incurred when services or goods are received and the legal obligation to disburse cash is created.
The use of encumbrances enhances financial monitoring and decision making. It provides early warning of spending commitments and significantly reduces the opportunity for over expenditures. Through effective use of information, encumbrances enable management to:
- monitor and control commitments to expend funds,
- forecast expenditures and cash needs,
- ensure and demonstrate compliance with spending plans, budgets, and other legal requirements,
- maximize investment earnings through accounting control of available funds,
- avoid double orders and similar errors in the purchasing process,
- report spending commitments consistently in accordance with generally accepted accounting principles and other reporting requirements, and
- identify the need for contract amendments.
Policy:
An encumbrance is required for any purchase or commitment of $5,000 or more, with the exception of:
- utilities, and
- commitments that will be fully paid within the first quarter of the fiscal year (by September 30th).
The following procedures will be used for processing encumbrances.
Procedures:
Note:
- Purchase orders in FIS automatically create an encumbrance.
- Encumbrances resulting from commitments that do not involve a purchase order are created in the Financial Information System (FIS) by Business Processing Staff.
- Department Head or Department Approver notifies Business Processing Staff of special commitments not requiring a purchase order (e.g., monthly lease payments or services procured via a contract). Department Head may also request an encumbrance for other types of anticipated expenses, as a means of ensuring availability of funds.
- As payments against encumbrances are made by Business Processing Staff the encumbered amount is adjusted accordingly.
- Department Head or Department Approver notifies Business Processing Staff of encumbrances that need to be manually liquidated; for example, when total expenses for a completed contract are less than the encumbered amount.
- In June of each year Business Processing Staff will provide Department Heads with a list of outstanding encumbrances for review and/or liquidation prior to fiscal year-end.
Outstanding Encumbrances at Fiscal Year End:
Under generally accepted accounting principles, as prescribed by the AICPA "Audits of Colleges and Universities" and applicable pronouncement of the GASB, encumbrances at the end of the fiscal year are not reported. Detailed procedures are presented in the OUS Closing of the Books instructions.
Banner Input Forms:
- FGAENCB Encumbrance/Reservations Maintenance Form
Banner Query Forms:
- FGIDOCR Document Retrieval Inquiry Form
- Query on posted encumbrances with option of seeing FGQDOCP document postings (accounting detail information)
- FGIENCB Encumbrance List Form
- FGIENCD Detail Encumbrance Activity Form
- FGIOENC Organizational Encumbrance List Form
Banner Reports:
- FGROPNE Open Encumbrances Report
- Shows encumbrances for POs and Encumbrances
Last Updated: 11/17/03