Encumbrance

Accounting

Anjan Baruah
Procurement-QE

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 Agenda

 Basic Concepts of Encumbrance

 Encumbrance Terminologies
 Modules affected by Encumbrance Accounting
 Encumbrance Setup
 Encumbrance Functional Details-PO Module
 Encumbrance Functional Details-AP Module
 Encumbrance Functional Details-GL Module
 New Features in FPJ
 Conclusion
 Q&A 

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 Basic Concepts
Encumbrance accounting facilitates:

 Effective control and consumption of a budget.

 Monitoring of future expense against a pre-allocated
budgetary amount.
 To avoid overspending a budget.
 Predict cash outflow and as a general planning tool.
 Monitor one’s future liabilities and to be able to
operate effectively within a budget.

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 Basic Concept –Business need !
• Budgetary Control, monitoring of future commitments or obligations,
and monitoring the overall expense of a organization is clearly
facilitated by using of encumbrance accounting functionality.

• To use the full capabilities of encumbrances accounting, you must

enable the budgetary control flag for a set of books.

• When Budgetary Control flag is enabled, the system automatically

creates encumbrances from requisitions, purchase orders and other
transactions originating in the feeder systems such as purchasing and
payables.

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 What is Encumbrance ?
• With General Ledger you can record pre-expenditures commonly
known as Encumbrances.
• Encumbrance Accounting maintains an up-to-date funds
available balance with a view to facilitate accurate budgetary
control.

• When we encumber, the system will check against the funds that
are available. This can result is two situation:
• 1). Amount Required < Available Funds
• No problem and can be encumbered

• 2). Amount Required > Available Funds

• Under such situation, Encumbrance accounting transactions has
two options.

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 What is Encumbrance ?- Contd.
Option1:
• Advisory: When the required amount exceeds the available
amount, a Warning message is generated but allows the
transaction to go forward.

Option2:
• Absolute: When the required amount exceeds the available
amount, an error message is generated; depending on the
funds available.
• Hence depending on the setup options, the budgetary control
process can be either:
• a). Advisory
• b). Absolute 
• This entire process of checking the available funds against
what is required to be encumbered is done by funds checker.

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 Encumbrance Terminologies
 Commitment: The encumbrance created by a Purchase
Requisition or BPA is called a Commitment. On Approving and
Reserving a Requisition or a BPA, the amount that is reserved is a
Commitment and is deducted or netted from the Budget.

 Obligation: Encumbrance created by a PO or Release is called

Obligation. On reserving and approving a PO, the PO amount that
is reserved is an Obligation and is deducted or netted from the
Budget amount.
 
 Encumbrance Entry: When we reserve a Requisition or a PO or
an unmatched invoice, it basically creates a commitment or an
obligation, this results in creating an encumbrance entry in an
interface table called the GL_BC_Packet. So a commitment or
obligation basically results in creating an enc entry

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 Definitions – Contd.
• Reversal of Encumbrance: Having created an Encumbrance entry
if we decide to cancel that particular document be it a Requisition or
a PO or an invoice. We basically need to do back and nullify the
earlier created encumbrance. This process of nullifying or de-
encumbering the earlier created encumbrance is called Reversal of
Encumbrance

• Funds Available: FA at any point of time is basically the amount of

funds available that can be further encumbered
At any point of time:
• Funds Available = Budget Amount- Total Encumbrance Amount
(Commitment+Obligation+Inv)- Actual.
  
• The Budgeted Amount is basically specified against a particular
account.

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 Definitions – Contd.
• Budget Accounts: The account against which the budget or a pre-
allocated amount is specified for expenses is called Budget
accounts. Budgetary constraints can be imposed either at the detail
account level or at the Summary account level

• Amount to Encumber: The Amount to Encumber is the user-

specified amount they choose to encumber for the BPA. If this
amount is different than the “Amount Limit” the user will receive a
warning. If this amount is more than the amount in the Budget
Account the user will receive an error.

• Encumbered Amount: The Encumbered Amount displays the

Amount currently encumbered on the Purchasing Document.It is
increased or decreased only by the accounting entries generated in
Purchasing, and does not reflect the amount of encumbrance
moved into actual be receiving or invoicing.

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 Definitions – Contd.
• Active Encumbrance Amount: The Active Encumbrance is the
amount encumbered on the document by purchasing, minus any
encumbrance moved into actual by AP or Costing.
 Active Encumbrance Amount = Encumbrance amount of the PO Document -
Encumbrance moved into actual.

• Budget: The term Budget basically indicates a pre-allocated

amount within which one need to control the expenses. A Budget
represents a collection of estimated amounts for a range of
accounting period. We can have only one current budget at a time
for each Set of Books

• Budget Organization: An entity such as a department, division

responsible for entering and maintaining budget data. We associate
Budget accounts to a Budget within the Budget Organization.

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 Definitions – Contd.
• Encumbrance Type: An encumbrance category that allows you to
track your expenditures according to the Purchase approval process.
For example,
 Requisition Encumbrance Type = Commitment
 Purchase Order Encumbrance Type = Obligation
 Invoice Encumbrance Type = INV / Others
 
• Budgetary Control: An Oracle Financial feature to control actual
and anticipated expenditures against a budget. When Budgetary
Control is enabled, we can check funds online for transactions, and
can reserve funds for transactions by creating encumbrance.
 
• GL Date: The date, referenced from Oracle General Ledger, used to
determine the correct accounting period for your transactions.

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Modules affected by Encumbrance Accounting
• The three main modules that play a major role in encumbrance
accounting are:
 Sub Ledger Purchase Order
 Sub Ledger Accounts Payables
 Main Ledger General Ledger

• Within the Sub Ledgers of Purchasing and Accounts Payables there

are various elements that contribute to Encumbrance Accounting
•  Within Purchasing we have the following elements:

 Purchase Requisition
 Purchase Order
 Purchase Agreement and associated Release

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 Modules affected by Encumbrance Accounting

•  Within Payables we have the following elements:

 Matched Invoice
 Unmatched Independent Invoice

• Essentially the Purchasing and Payables modules feed all

their encumbrance transactions into the General Ledger

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 Encumbrance Setup
Setups Step in GL:
1). Setups  Financials  Books  Budgetary Control Tab
 Set “Enable Budgetary Control” to Yes
 Set “Require Budget Journal” to Yes.
 
2). Setup  Open / Close
 Verify that 2004 Encumbrance year is Open,
 If not than Click “Open Next Year”, to open the Budgetary Year
 Also ensure that the Periods from Jan-2004 to Dec”2004 are open

3). Setups  Financials  Flexfields  Key  Values

 Select “Operations Account” value
 Create a New Account (e.g: 5900)
 Allow Posting/ Budgeting Type =Yes

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 Encumbrance Setup

4). Setups  Account  Combinations.

 Create a New Account Combination
 e.g:L 01-999-5900-0000-000

5). Budget  Define  Budget

 Create a “New Budget” with the status as Current
 Require Budget Journal = Yes
 Effective Period of the Budget
 

6). Budget  Define  Control

 Query open “Standard”
Source / Category =Other
Funds Check Level = Advisory or Absolute

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 Encumbrance Setup

7). Set Profile Option

Set the Profile Option “ Budgetary Control Group” to
“Standard”

8). Budget  Define  Organization

Create a New Budget Organization
 Display Segments =1.2.3.4.5
 Press “Range” button
 Account Range = 01-999-5900-0000-000
Type = Entered
 Currency =USD
Funds Check Level = None / Advisory / Absolute
Automatic Encumbrance =Yes

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 Encumbrance Setup

Setups in PO

9). Setups  Organizations  Financial Options

 
Use Requisition Encumbrance = Yes
Requisition Encumbrance Types = Commitment
Reserve at Completion = Yes
 
Use PO Encumbrance = Yes
PO Encumbrance Type =Obligation
Invoice Encumbrance Type = INV

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 Encumbrance Functional Details-PO Module
• Within the Purchasing module the various events that can
occur are:
1). Reserving a Requisition.
2). Reserving a PO.
3). Auto-creating a encumbered Requisition to encumbered PO.
4). Cancel / Final Close of a Requisition / PO.
6). Reject / Return of PO.
7). Receiving against the PO.
8). Reserving a BPA (FPJ feature).
9). Un-reserving for all types and at all levels (FPJ feature).
10). Requisition Split with Encumbrance

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 Requisition Encumbrance

Create Requisition Accounting Transactions:

Reserve Requisition • Balance Type: E

• Encumbrance Type = Requisition
Data in GL_BC_packets Encumbrance / Commitment
• CCID from Requisition Distribution
• DR Encumbrance / Charge Account
Create Journal Entries
• CR Reserve for Encumbrance account
• Requisition Encumbered Flag : Y
Post
• Encumbered Amount = Requisition
amount
GL Balances

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 Cancel/ Final Close Requisition
Accounting Transactions:
Approved Requisition • Balance Type: E
• Encumbrance Type = Requisition
Cancel/ Final Close Req
Encumbrance / Commitment

• Cancel a Requisition
Data in GL_BC_packets
• -ve DR Encumbrance / Charge Account
• DR Reserve for Encumbrance account
Create Journal Entries • Requisition Encumbered Flag : N

Post • Final Close a Requisition

• CR Encumbrance / Charge Account
GL Balances • DR Reserve for Encumbrance account
• Requisition Encumbered Flag : N

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 Purchase Order Encumbrance

Create Purchase Order Accounting Transactions:

Reserve Purchase Order • Balance Type: E

• Encumbrance Type = PO Encumbrance /
Data in GL_BC_packets Obligation
• CCID from PO Distribution
• DR Encumbrance / Charge Account
Create Journal Entries
• CR Reserve for Encumbrance account
• PO Encumbered Flag : Y
Post
• Encumbered Amount = PO Amount

GL Balances

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 Auto-create Purchase Order Encumbrance
Accounting Transactions:
• Balance Type: E
Approved Requisition Step#1: De-encumber the Requisition Encumbrance
• Encumbrance Type = Req Encum/Comm
Auto-create PO • CR Encumbrance / Charge Account
• DR Reserve for Encumbrance account
Data in GL_BC_packets • Req Encumbered Flag : N
• Encumbered Amount = Zero

Create Journal Entries

Step#2: Encumber the PO Encumbrance
• Encumbrance Type = PO Encumbrance /
Post
Obligation
• DR Encumbrance / Charge Account
• CR Reserve for Encumbrance account
GL Balances
• PO Encumbered Flag : Y
• Encumbered Amount = PO Amount

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 Cancel Purchase Order Encumbrance

Reserved Purchase Order Accounting Transactions:

• Balance Type: E
Cancel Purchase Order • Encumbrance Type = PO Encumbrance /
Obligation
Data in GL_BC_packets • CCID from PO Distribution
• -ve DR Encumbrance / Charge Account
• DR Reserve for Encumbrance account
Create Journal Entries
• PO Encumbered Flag : N
Note:
Post
• If PO is auto-created from a Requisition,
than cancellation of PO will re-encumber
GL Balances the Requisition

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 Final Close Purchase Order Encumbrance

Reserved Purchase Order Accounting Transactions:

Final Close PO • Balance Type: E

• Encumbrance Type = PO Encumbrance /
Data in GL_BC_packets Obligation
• CCID from PO Distribution
• CR Encumbrance / Charge Account
Create Journal Entries
• DR Reserve for Encumbrance account
• PO Encumbered Flag : N
Post

GL Balances

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 Receiving against a Purchase Order
Approved Purchase Order
Accounting Transactions:
Receive PO

Accrual = Period End Accrual = On Receipt • Reverse PO Obligation

• DR Charge / Expense
Account
Period End Encumb Immediate Encumb
Reversal Reversal
• CR Accrual account

Post Post

GL Balances GL Balances

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 Invoice Encumbrance Flow
Enter Invoice
Accounting Transactions:
• Unlike PO Module in AP there
exists no Reserve steps. Approving
Approve Invoice an Invoice does it all.
• Payables automatically creates an
AP to GL post
Data in encumbrance entry in GL when we
GL_BC_packets Approve an Invoice.And as all other
encumbrance entries go, the
transactions also go into the
Data in Create Journal gl_bc_packets.
GL_BC_packets Entries
• Payables also creates
Encumbrance when we successfully
Post Post
Approve and Invoice having a
Invoice Quantity Variance (IQV),
Purchase Price Variance (PPV) and
Exchange Rate Variance (ERV)
GL Balances GL Balances with a Matched PO

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 Approve Unmatched Invoice

Enter Invoice Accounting Transactions:

• Balance Type: E
Approve Invoice
• Encumbrance Type = INV
Encumbrance
Data in GL_BC_packets
• DR Encumbrance Account
• CR Reserve for Encumbrance
Create Journal Entries account

Post

GL Balances

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 Approve Matched Invoice

Enter Invoice Accounting Transactions:

• Balance Type: E
Match / Approve
• Encumbrance Type = INV
Encumbrance
Data in GL_BC_packets
• DR Encumbrance Account
• CR Reserve for Encumbrance
Create Journal Entries account
Note:
Post • Additional Encumbrance entries are
made when there exists a Variance
GL Balances

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 Post an Invoice

Approved Invoice Accounting Transactions:

• Balance Type: A
AP to GL Post
• Encumbrance Type = PO / INV
Encumbrance
Data in GL_BC_packets
• CR INV Encumbrance Account
• DR Reserve for Encumbrance
Journal Import account
• Dr. to Expense /Accrual Account
Post • Cr. To AP Liability Account

GL Balances

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 New Features in FPJ

• Re-write of C code to PL/SQL

• Support BPA Encumbrance
• Support Services Procurement Encumbrance
• Support Un-Reserve for all types, at all levels
• Resolve errors with Encumbered Flag
• GL Override usage reporting
• Resolve AP integration issues
• Requisition Split with Encumbrance
• Re-opening of Finally Matched PO Shipment (JFMIP)

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 Profile Options:
The Most common profiles options used:

Profile Site Level User

PO:Use Document GL Date to Un-Reserve Yes / No

PO:Override Funds Reservation Yes/No
 PO: Restrict Requisition line modify to
Quantity Splits only
PO: Use Need-by Date for Default Auto-
Create Grouping
  PO: Auto-Create GL Date Option Yes/ No
Enable Transaction Code Yes/No
Industry Commercial /
Government

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 Conclusion

• This brings us to the end of the module level functional details and
also the technical details. Thus far we have covered the Purchasing
Module, Payables Module and the GL Module. We have basically
covered the various documents created in Purchasing and
Payables modules and how it gets transferred to GL Module. We
have covered the various accounting transactions that gets
generated and the essential Tables and Flags.
Important
• I would like to stress upon the fact that the best approach to
understand the Encumbrance accounting functionality is to go step
by step.
• To clearly understand and appreciate the fact that the Accounts
Combination, the GL Date , the quantity and the Price play a very
vital role in Encumbrance accounting.
• It is essential that we check the funds at each stage noting clearly
the debits and Credits. Monitoring the funds will provide a very clear
understanding of what is happening after every event.

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Q&
A
Q U E S T I O N S
A N S W E R S