If you enable Budgetary Control for a ledger in General Ledger, you can reserve funds, or encumber them, when a supplier invoice is entered. If an invoice is matched to an encumbered PO, the PO encumbrance is relieved.
If you enable the Use PO Encumbrance Financials option, Purchasing and Payables create encumbrances and encumbrance reversals against the budgets you define in General Ledger.
The system calculates funds available using the following equation:
Funds Available = Budget - Actuals - Encumbrances
If you use accrual basis accounting as your primary accounting method, the system encumbers nonrecoverable tax.
Note: Payables creates encumbrances for prepayment type matched invoices but not for prepayment applications.
The encumbrances Purchasing and Payables create depend on whether the invoice is purchase order matched and whether On Receipt (Perpetual) or Period End Accrual method is used.
Unmatched Invoice: If you enable the Use PO Encumbrance Financials option and enter an unmatched invoice, Payables creates an expense encumbrance during invoice validation and reverses this encumbrance during creation of invoice accounting entries.
The following table displays the encumbrance entries Payables creates for unmatched invoices.
| Timing | Expense/ Encumbrance Type | Quantity Variance | Invoice Price Variance | Exchange Rate Variance |
|---|---|---|---|---|
| Invoice Validation | Encumbrance/ Invoice | N/A | N/A | N/A |
| Accounting | Encumbrance reversal/Invoice | N/A | N/A | N/A |
Matched Invoice, On Receipt (Perpetual) Accrual: If you use the On Receipt Accrual method for expense items in Purchasing, Purchasing creates an encumbrance for the goods when the purchase order is approved, then reverses that encumbrance when it records the actual expense at the time of delivery of goods. When the invoice is matched to a purchase order and validated in Payables, it is not necessary for Payables to record an encumbrance for the expense. However, Payables will create an encumbrance for any invoice price variance or exchange rate variance. Payables does not currently create encumbrances for quantity variances when you accrue on receipt.
The following table displays the encumbrance entries Payables creates under the On Receipt Accrual Method.
| Timing | Expense/ Encumbrance Type | Quantity Variance | Invoice Price Variance | Exchange Rate Variance |
|---|---|---|---|---|
| Invoice Validation | N/A in Payables | N/A | Payables encumbrance | Payables encumbrance |
| Accounting | N/A in Payables | N/A | Reverse Payables encumbrance | Reverse Payables encumbrance |
Matched Invoice, Period End Accrual: If you use the Period End Accrual method for your expense items in Purchasing, Payables reverses the PO encumbrances. When the invoice is matched to a purchase order and validated in Payables, Payables records an encumbrance for the expense only if the PO Encumbrance Type and the Invoice Encumbrance Type in the Financial Options window are the same. Payables creates an encumbrance for any quantity variance, invoice price variance, or exchange rate variance even if the PO Encumbrance Type and the Invoice Encumbrance Type are not the same.
The following table displays encumbrance entries Payables creates for purchase order matched invoices under the Period End Accrual method.
| Timing | Expense/ Encumbrance Type | Quantity Variance | Invoice Price Variance | Exchange Rate Variance |
|---|---|---|---|---|
| Invoice Validation | Encumbrance/ Invoice | Encumbrance | Encumbrance | Encumbrance |
| Accounting | Encumbrance reversal/Invoice | Reverse Payables encumbrance | Reverse Payables encumbrance | Reverse Payables encumbrance |
Cancelling a matched invoice reestablishes the PO encumbrance if the purchase order is not in Final Closed status.
If you use the cash basis accounting method, Payables creates encumbrances when the invoices are approved in Payables and when the PO is approved. Payables relieves the encumbrances when the invoice is transferred and posted in General Ledger. Payables prorates your encumbrance reversal based on the invoice payment amount. Payables reinstates the invoice encumbrance when payment cancellation is accounted..
If you use the combined basis accounting method, Payables creates encumbrances for your primary accrual ledger only.