
a
Concept introduction:
Accounting for expenditures: The governmental funds use a variety of controls over expenditures to ensure that the legal restrictions are followed. The expenditure process in governmental accounting comprises the following sequential order, appropriation, encumbrance, expenditure, and disbursement. The budgets are prepared for target expenditure and an encumbrance is a reservation for that budgetary appropriation and these encumbrances will be recognized at the time of placing the order for goods or services. The main aim of encumbrance is to see that expenditures are within the budgeted appropriations.
Requirement 1
The entries related to encumbrances assuming that the city has a policy that outstanding encumbrance’s lapse at the end.
a

Explanation of Solution
Date | Particulars | Debit $ | Credit $ |
11/03/X2 | Encumbrance | 21,000 | |
Budgetary fund balance − reserved for encumbrances | 21,000 | ||
(New computer equipment ordered) | |||
12/31/X2 | Budgetary fund balance − reserved for encumbrances | 21,000 | |
Encumbrances | 21,000 | ||
(Closing of budgeted encumbrances on non-receipt of computer equipment) | |||
Fund balance − unreserved | 21,000 | ||
Fund balance − reserved for encumbrance | 21,000 | ||
(Encumbrance reserves transferred to unreserved fund balance account) | |||
01/01/X3 | Fund Balance − reserved for encumbrances | 21,000 | |
Fund balance − unreserved | 21,000 | ||
(Outstanding encumbrance on computer equipment accepted) | |||
Encumbrances | 21,000 | ||
Budgetary fund balance − reserved for encumbrances | 21,000 | ||
(Renewal of prior year encumbrances) | |||
01/18/X3 | Budgetary fund balance − reserved for encumbrances | 21,000 | |
Encumbrance | 21,000 | ||
(Budgetary reserve for goods received removed) | |||
Expenditures | 21,800 | ||
Vouchers payable | 21,800 | ||
(Actual cost of goods received recognized) | |||
12/31/X3 | Fund balance − unreserved | 21,800 | |
Expenditures | 21,800 | ||
(Closure of expenditure account for the year) |
- Encumbrance recorded at the order of equipment, the budgeted amount will be debited to the encumbrance account and budgetary provision is created in the budgetary fund account.
- At the end of the year encumbrance is reversed due to non-receipt of equipment, and reserved fund for encumbrance transferred to the unreserved fund balance at the end of the year.
- Outstanding encumbrances of the previous year accepted in the current year and debited to encumbrance account.
- Budgetary reserve removed on receipt of goods, and expenditure on receipt of goods recognized with an actual cost of $21,800.
- Expenditure account closed by payment from the unreserved fund balance account.
b
Concept introduction:
Governmental accounting: Generally, the fund-based system of accounting is used in governmental entities but in some of the funds a modified accrual accounting method is used. All the resources collected and all the expenditures that have made to fulfill societal needs must be appropriately recognized. The governmental accounting system must be in accordance with accepted legal and contractual provisions. A system of comprehensive budgetary accounting is used under governmental accounting that helps in the establishment of the significant control mechanism and also useful for comparison of actuals against budgeted amounts.
Requirement 2
The entries related to encumbrances assuming that the city has a policy that outstanding encumbrance’s are non-lapsing at the end of the year.
b

Explanation of Solution
Date | Particulars | Debit $ | Credit $ |
11/03/X2 | Encumbrance | 21,000 | |
Budgetary fund balance − reserved for encumbrances | 21,000 | ||
(New computer equipment ordered) | |||
12/31/X2 | Budgetary fund balance − reserved for encumbrances | 21,000 | |
Encumbrances | 21,000 | ||
(Closing of budgeted encumbrances on non-receipt of computer equipment) | |||
Fund balance − unreserved | 21,000 | ||
Fund balance − reserved for encumbrance | 21,000 | ||
(Encumbrance reserves transferred to unreserved fund balance account) | |||
01/01/X3 | Fund Balance − reserved for encumbrances | 21,000 | |
Fund balance − reserved for encumbrances 20X2 | 21,000 | ||
(Outstanding encumbrance on computer equipment reclassified) | |||
01/18/X3 | Encumbrances -20X2 | 21,000 | |
Encumbrances -20X3 | 800 | ||
Vouchers payable | 21,800 | ||
(Actual expenditure for goods received recognized) | |||
12/31/X3 | Fund balance − reserved for encumbrance 20X2 | 21,000 | |
Expenditure 20X2 | 21,000 | ||
(Prior year encumbrance expenditure paid and closed) | |||
Fund balance − Unreserved | 800 | ||
Expenditure 20X3 | 800 | ||
(Current year expenditure account closed) |
- Encumbrance recorded at the order of equipment, the budgeted amount will be debited to the encumbrance account and budgetary provision is created in the budgetary fund account.
- At the end of the year encumbrance is reversed due to non-receipt of equipment, and reserved fund for encumbrance transferred to the unreserved fund balance at the end of the year.
- Encumbrance lapsed in the prior year reclassified in the current year and credited to fund balance reserved for the encumbrance account.
- Actual expenditure on receipt of goods recognized.
- Encumbrances of the previous year paid and closed from by debiting reserve for encumbrance account and additional expenditure on encumbrance transferred to unreserved funds balance account.
c
Concept introduction:
Governmental accounting: Generally, the fund-based system of accounting is used in Governmental entities but in some of the funds a modified accrual accounting method is used. All the resources collected and all the expenditures that have made to fulfill societal needs must be appropriately recognized. The governmental accounting system must be in accordance with accepted legal and contractual provisions. a system of comprehensive budgetary accounting is used under governmental accounting that helps in the establishment of the significant control mechanism and also useful for comparison of actuals against budgeted amounts.
Requirement 3
The entries required on January 1 20X3 to cancel the encumbrance reserve for the equipment ordered on November 3, 20X2
c

Explanation of Solution
Date | Particulars | Debit $ | Credit $ |
1/1/X3 | Fund balance- Reserved for encumbrances | 21,000 | |
Fund balance − Unreserved | 21,000 | ||
(Outstanding encumbrances cancelled) |
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Chapter 17 Solutions
Advanced Financial Accounting
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