Tutorial 1

In the expendable fund entity there are critical events in the use of the financial resources. The
sequence of events is as follows:

- Appropriation (authorization of max amount allowed for expenditure)

- Encumbrances (purchase order)

- Expenditure (receipt of goods)

- Disbursement (payment)

Example 1:

- An order was placed for the purchase of goods for $15,000.

- The goods ordered are received and invoiced for $18,000.
- The appropriation for budget category 103 is $60,000. Prior expenditure in this category
was $20,000
Required:
1- Record the journal entries for purchase order, purchase receipt, and payment.
2- Identify the unencumbered balance.

Solution:
Appropriation = 60,000
Encumbrance (purchase order)
(entry 1)
Encumbrance 15,000
Reserve of encumbrance 15,000
To record purchase order of goods
Expenditure (purchase receipt)
(entry 2)
Expenditure 18,000
Voucher payable 18,000
To record the receipt of goods invoiced
(entry 3)
Reserve for encumbrance 15,000
Encumbrance 15,000
To record the removal of the recorded encumbrance for goods received and recorded in
expenditure.
Disbursement (payment) for goods received
(entry 4)
Voucher payable 18,000
Cash 18,000
To record payment of voucher payable
Unencumbered balance = appropriations – (encumbrance + expenditures)

A B C D=B+C E = unencumbered
appropriation encumbrance expenditure balance (A – D)
Prior balance 60,000 --- 20,000 20,000 40,000
Purchase order --- 15,000 --- 15,000 (15,000)
(entry 1)
balance 60,000 15,000 20,000 35,000 25,000
Expenditure --- (entry 3) (entry 2) 3,000 (3000)
(entry 2 and 3) (15,000) 18,000
balance 60,000 --- 38,000 38,000 22,000

Note:

(entry 1) Assume that an order was placed for the purchase of goods in the amount of $15,000.

(entry 2 and 3) Assume that the goods ordered in (entry 1) are received and invoiced at $18,000.

(entry 4) Assume a cash payment was made for expenditures/for goods purchased in (entry 2).

Unencumbered balance = appropriations – (encumbrance + expenditures)

Unencumbered balance: the amount of resources that can still be obligated or expended without
exceeding the legal or authorized limit.
Example 2:

- An order was placed for the purchase of goods for $20,000.

- The goods ordered are received and invoiced for $18,000.
- The appropriation for budget category 103 is $60,000. Prior expenditure in this category
was $20,000
Required:
1- Record the journal entries for purchase order, purchase receipt, and payment.
2- Identify the unencumbered balance.

Solution:
Appropriation = 60,000
Encumbrance (purchase order)
(entry 1)
Encumbrance 20,000
Reserve of encumbrance 20,000
To record purchase order of goods
Expenditure (purchase receipt)
(entry 2)
Expenditure 18,000
Voucher payable 18,000
To record the receipt of goods invoiced

(entry 3)
Reserve for encumbrance 20,000
Encumbrance 20,000
To record the removal of the recorded encumbrance for goods received and recorded in
expenditure.
Disbursement (payment) for goods received
(entry 4)
Voucher payable 18,000
Cash 18,000
To record payment of voucher payable
Unencumbered balance = appropriations – (encumbrance + expenditures)

A B C D=B+C E = unencumbered
appropriation encumbrance expenditure balance (A – D)
Prior balance 60,000 --- 20,000 20,000 40,000
Purchase order --- 20,000 --- 20,000 (20,000)
(entry 1)
balance 60,000 20,000 20,000 40,000 20,000
Expenditure --- (entry 3) (entry 2) (2,000) 2000
(entry 2 and 3) (20,000) 18,000
balance 60,000 --- 38,000 38,000 22,000