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Encumbrance Final Edited1
Encumbrance Final Edited1
Encumbrance
Brownbag
An Oracle White Paper
August 2006
Encumbrance Brownbag – Setup and Usage
SECTION 2 INTRODUCTION
This section is basically to gives a broad idea about Encumbrance and Encumbrance Accounting. It
also provides explanations to the word encumbrance, encumbrance accounting and how they are
used in Oracle Applications and the modules involved.
2.1 Encumbrance:
Reservation of funds is known as encumbrance. The Thesaurus explains the meaning of encumbrance as
‘burden’ or ‘Load’. The purposes of tracking encumbrances are as follows:
Avoid overspending a budget
To facilitate effective control and consumption of budget by pre-allocating budget amount
To Predict cash outflow and as a general planning tool.
Encumbrance is a commitment to pay in the future for goods or services ordered by not yet received. The
terms encumbrance and commitment are used interchangeably. The budget amount can be reduced by the
amount of encumbrance as listed below.
On creation where approval is not required.
On Approval where the approval is required.
When the goods are received or services are obtained and the invoice is created and matched, then the
encumbrance is released and the current year expenditure is accounted.
2.3 Usage:
The complete use of capabilities of encumbrance accounting, users must enable the budgetary control flag
for a set of books. When users enable the budgetary control flag, the system automatically creates
encumbrances from requisitions, purchase orders and other transactions originating in feeder systems such
as Purchasing and Payables. When users do not enable the budgetary control flag, they can still enter
manual encumbrances via journal entry, but Users cannot generate encumbrances from requisitions and
purchase orders. Users have two options for using encumbrance data to monitor over–expenditure of a
budget. After actual and encumbrances have been posted, users can generate reports to show over–
expenditures. Users can also use funds checking to prevent over–expenditures before they occur.
2.5 Prerequisites:
The pre-requisites to enable encumbrance are as follows:
Installation of required modules
Creation of Set of Books in General Ledger
Create a Encumbrance Calendar
Assign the Set of Books in the other modules (Purchasing and Payables)
Enable Budgetary Control in SOB.
Description: Figure 2 displays the Set of Books window. The window is described in point no. 4.1.1
and 4.1.2
Description: Figure 5 displays the Define Budget Organization window. The above window is
discussion in point no. 4.1.5
Description: Figure 6 displays the Encumbrance Types window. The above window is discussed in
point no. 4.1.6
Description: Figure 7 displays the Budgetary Control Groups window. The above window is
discussed in point no. 4.1.7
Description: Figure 8 displays the System Profile Values window. The above window is discussed
in point no. 4.1.8
Description: Figure 9 displays the Financials Options window. The above window is discussed in
point no. 4.2.1
SECTION 5 USAGE
This section gives an idea to the users on how the encumbrance entries have to be created and the
flow of encumbrances from other modules. This section deals with the following.
Entering Budget
Encumbrance Accounting Flow from Purchasing and Payables
Reviewing Encumbrances in GL
Encumbrances Accounting and Relief in Various Scenarios
Viewing Funds Available
Year–End Encumbrance Processing
Navigations: BudgetsEnterJournals
Figure 10: Entering Budgets through budget journals form
Figure 10: The above figure shows the budget journals form with an amount of 10000 entered
against account 01-130-7230-0000-000 for the month of Jan-03
Figure 11: Check Budget Amount through Funds Available form
Figure 11: The above figure shows the Funds available for the Account 01-130-7230-0000-000 for
the month of Jan-03 after the budget journal was created
5.1 Encumbrance Accounting Flow from Purchasing and Payables
Encumbrances entries can be created as below.
5.1.1 Purchasing
Encumbrance can start from Purchasing. To have the full cycle of encumbrance, we need to create
the following
5.1.1.1 Requisition
Users can enter, approve and reserve Funds for Requisition.
Navigation: Requisitions -> Requisitions.
Create a requisition, reserve and approve the requisition. When approved users can do a funds
check in GL and this should be in requisition phase, provided requisition is the type of encumbrance
Users have attached at requisition level in Financial options. Reserving the requisition kicks of the
funds checker program and encumbrance line gets created in the table GL_BC_PACKETS. The
encumbrance journal entries get created when the program – Create Journal Entries is run from GL.
The data in GL_BC_PACKETS table would get deleted, only when the Create Journal Program in
GL is run and the journal gets posted.
The Transaction Created can have the following feature
Balance Type = E (Encumbrance)
Encumbrance Type = REQ (Requisition)
CCID = CCID given in Requisition Distribution
Accounting when the journal gets posted in General Leger
Figure 12 shows the requisition for RS 1000 with the distribution form showing that the
charge and budget are to account 01-130-7230-0000-000
Figure 13: Checking encumbrance balance through Funds Available Form after creating a Requisition in
Purchasing
Figure 13 shows the encumbrance balance of 1000 after creating the requisition and reserving the
same
5.1.1.2 Purchase Order
Users can create, approve and reserve Funds for Purchase Order from requisition
Navigation: Auto Create
Find your requisition, Select the requisition and go to automatic. Make sure that the supplier
information is entered and select create. This creates the PO. Complete, reserve and approve the
PO. When approved users can do a funds check and this should be in PO phase, assuming PO
encumbrance is the type attached at PO level.
No journal entries are created at this stage but similar to the previous step Users can create
encumbrance entries by Create Journal Entry program. While using PO Encumbrance, users cannot
change price, quantity, shipment or currency once a PO has been reserved and approved, the only
way to deal with such a situation is to cancel the existing PO and create a new one when a PO is
cancelled system takes care of adjusting encumbrance.
The encumbrance created on Requisition is relived when the PO encumbrance is created and Funds
are reserved for the PO.
NOTE: The important point over here is that if a user creates the PO manually, it can lead to the
duplication of reservation of funds for the same transaction. This is because system treats PO as a
separate transaction and the user can end up having double reservation for the same transaction one
at requisition level and other at PO level. Hence it is suggested to use only Auto Create mode to
create a PO, while using Encumbrance Accounting.
The Transaction Created can have the following feature:
Balance Type = E (Encumbrance)
Encumbrance Type = PO (Purchase Order)
CCID = CCID given in PO Distribution
Accounting when the journal gets posted in General Ledger
Figure 14 shows the PO which has been created for the requisition and it is not accrued at the time of Receipt
Figure 15: Checking the encumbrance balance after Auto-creating the Purchase order
Figure 15 shows the Funds Available after creating the PO. The encumbrance amount has moved from
Requisition to PO
5.1.1.3 Receiving Receipts
On receipt of the goods, the entries are made as follows:
Navigation: Receiving Receipts
Query the PO. Mark as receipt and save. Depending on the routing users may have to deliver it.
Once the goods are received system creates Journal entries for the Receiving transaction. At this
point PO encumbrance is relieved. Otherwise, it gets relieved when Users post the invoice from
payables to GL in Accrual basis of Accounting. In case of Cash basis of accounting PO
encumbrance gets relieved when Users post payment information from Payables.
The PO encumbrance is getting relieved based on the setup the user has made, depending on
whether the period-end or on-line accrual is selected.
If on-line accrual method is selected, the PO encumbrance can be relieved when the goods are
received. In case of period-end accrual, we need run the period-end accrual process.
NOTE: Important reports that can be used to track the encumbrance entries are:
1. Requisition Distribution Detail Report.
2. Purchase Order Distribution Detail Report.
3. Encumbrance Detail Report.
Figure 17 does not show any accounting entries because the accrue at receipt is not
enabled for this PO 2548
Figure 18: Receiving Transaction Summary – With Accrual at Receipt
Figure 18 shows Receipt Transaction Summary with accounting entries when the Accrue at
receipt option is enabled.
5.1.2 Payables
Once the Goods are received and matched against the Purchase Order, the next step is to create an
invoice for the Goods received. Invoice can be created at the following scenarios.
Figure 19 shows the Invoice that has been created by Matching PO 2548 and is also validated.
It also shows the accounting entries created at the time of PO
Figure 20: Funds Available after creating Invoice but before running the AP Transfer to GL process and
doing the Journal Import
Figure 20 shows the Funds Available after creating the Invoice. The encumbrance amount has moved from
PO to Invoice
Figure 21: Funds Available after creating Invoice and running the AP Transfer to GL process and doing the
Journal Import
Figure 21 shows the Invoice after it was approved and transferred to GL using the AP transfer to GL process.
This brings in the actual entry and relieves the encumbrance for the transaction.
5.1.2.3 Transfer the data to General Ledger
Navigation: Other -> Request -> Run
Select the Payables Transfer to General Ledger. Complete parameters and submit request.
Creating another encumbrance entry can do relieving Encumbrance. For example when the
Purchase order is created for a requisition, the encumbrance created on the requisition is
reversed. A Distribution line is created to relieve the encumbrance created on the requisition and
the encumbrance is created for the Purchase Order. Similarly the encumbrance is relieved at the
subsequent stage. For example, for purchase order, the encumbrance is created on receiving the
goods or on creating the accrual for the purchase order and so on.
5.3.1.1 Final Close of a Requisition
First an Encumbrance is created as in step 5.1.1.2 for creation of the PO
and the encumbrance created on a requisition as in 5.1.1.1 is reversed.
The Transaction created can have the following features:
Balance Type = E (Encumbrance)
Encumbrance Type = REQ (Requisition)
Accounting = Cr Encumbrance / Charge Account
Dr Reserve for Encumbrance Account
5.3.1.2 Final Close of a Purchase Order
First an Encumbrance is created as in step 5.1.1.3 for creation of the
receipt and the encumbrance created on a PO as in 5.1.1.2 is reversed.
The Transaction created can have the following feature
Balance Type = E (Encumbrance)
Encumbrance Type = PO (Purchase Order)
Accounting = Cr Encumbrance / Charge Account
Dr Reserve for Encumbrance Account
5.3.1.3 Creating an Invoice and matched against a PO
If the invoice is created and matched with PO and the amount matched
equals to PO, then the encumbrance type can be reclassified from PO to
INV and no additional entries are generated.
5.3.2 Without creating another Encumbrance Entry
Encumbrance created once can be relieved without creating another encumbrance entry as
explained above. This can be achieved as follows.
5.3.2.1 Canceling a Requisition
The Transaction created can have the following features:
Balance Type = E (Encumbrance)
Encumbrance Type = INV (Invoice)
Accounting = Dr Encumbrance / Charge Account (-ve)
Cr Reserve for Encumbrance Account (-ve)
Quarter–to–Date Calculates funds available as the budgeted amount to date for the quarter,
less actuals and encumbrances to date for the quarter. For example, Users
Extended
budget $100 to an account for each of the three months in a quarter. The
available amount for the second month of the quarter is $200.
Quarter–to–Date Calculates funds available as the budgeted amount to date for the quarter,
less actuals and encumbrances to date for the quarter. For example, Users
Extended
budget $100 to an account for each of the three months in a quarter. The
available amount for the second month of the quarter is $200.
Year–to–Date Calculates funds available as the budgeted amount to date for the year, less
Extended actuals and encumbrances to date for the year. For example, Users budget
$100 to an account for each of the 12 months. The available amount for the
first half of the year is $600.
Project–to–Date Calculates funds available as the budgeted amount to date, less actuals and
encumbrances to date.
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