Encumbrance Accounting Journal Entries

Encumbrance accounting is used in government accounting and budgeting to set aside funds for future expenditures. This ensures that funds are reserved for specific purposes and helps in better budget management.

Scenario 1: Setting Up an Encumbrance

A government entity encumbers ₹200,000 for the future purchase of office supplies.

Journal Entry to Record the Encumbrance:

Particulars	Debit (₹)	Credit (₹)
Encumbrance A/c	200,000
To Reserve for Encumbrance A/c		200,000
(Being funds encumbered for the purchase of office supplies)

Explanation:

1. Encumbrance A/c is debited to record the commitment to spend.
2. Reserve for Encumbrance A/c is credited to reserve the funds for the future purchase.

Scenario 2: Actual Expenditure Occurs

The actual purchase of office supplies takes place, costing ₹180,000.

Journal Entry to Record the Actual Expenditure:

Particulars	Debit (₹)	Credit (₹)
Office Supplies Expense A/c	180,000
To Accounts Payable A/c		180,000
(Being actual purchase of office supplies)

Explanation:

1. Office Supplies Expense A/c is debited to record the expense incurred.
2. Accounts Payable A/c is credited to reflect the liability for the purchase.

Journal Entry to Reverse the Encumbrance:

Particulars	Debit (₹)	Credit (₹)
Reserve for Encumbrance A/c	180,000
To Encumbrance A/c		180,000
(Being reversal of encumbrance for the actual expenditure)

Explanation:

1. Reserve for Encumbrance A/c is debited to reduce the reserved funds.
2. Encumbrance A/c is credited to reverse the previously recorded encumbrance.

Scenario 3: Encumbrance Adjustment

If the initial encumbrance was ₹200,000 but the actual expenditure was ₹180,000, the remaining encumbrance needs to be adjusted.

Journal Entry to Adjust the Remaining Encumbrance:

Particulars	Debit (₹)	Credit (₹)
Reserve for Encumbrance A/c	20,000
To Encumbrance A/c		20,000
(Being adjustment of remaining encumbrance)

Explanation:

1. Reserve for Encumbrance A/c is debited to eliminate the remaining reserved funds.
2. Encumbrance A/c is credited to reverse the remaining encumbrance.

Summary

Encumbrance accounting involves the following steps:

1. Setting Up an Encumbrance: Reserving funds for future expenses.
2. Recording the Actual Expenditure: Recognizing the actual expense when it occurs.
3. Reversing the Encumbrance: Adjusting the reserved funds to reflect the actual expenditure.
4. Adjusting Remaining Encumbrance: Correcting any differences between the initial encumbrance and the actual expense.