Encumbrance: How to Stick to Your Budget Without Really Trying

Michael V. MilanoOracle Corporation

Abstract

Improve your understanding of encumbranceaccounting and budgetary controls. This paperprovides an overview of budgetary controls,encumbrance accounting, case scenarios, andtroubleshooting.

Scope

I. Budgetary ControlsII. Encumbrance AccountingIII. Case ScenariosIV. Troubleshooting

I. Budgetary Controls

Budgetary Controls allows you to check to seeif the expenditure is within your budgetconstraints, i.e. if there are funds available forthat expenditure. That is to say, “do we haveenough money (funds available) to incur thisexpenditure”? Budgetary controls help tocontrol and analyze spending practices.

Budgetary Controls consists of two processes:Funds Checker and Funds Reservations.

Funds Checker

Funds Checker is a feature of budgetarycontrols that helps prevent overspendingbudgets by verifying available funds onlinebefore processing a transaction.

Funds Checker both checks and reserves fundsand is shared by Oracle Payables, OraclePurchasing and Oracle General Ledger.

You can elect to do funds checking withencumbrance accounting. Funds Checking usedwith Encumbrance Accounting immediatelyupdates the accounts and verifies that funds areavailable.

Funds Reservations

Funds Reservation reserves the funds for theexpenditure and immediately updates the fundsavailable. You can view Funds Available in GL(Inquiry –> Funds Available) this screen isautomatically updated when funds are reserved.The formula for funds availability is:

Funds Available = Budget – Actuals - Encumbrances.

Budgetary Controls have three levels:Absolute, Advisory and None.• Absolute – funds reservation will not take

place unless there are funds available. Thisprevents overspending the budget.

• Advisory – funds reservations will takeplace even if there are insufficient funds.This will produce a warning message on thescreen advising that this expenditure willcause you to exceed the budget.

• None – funds reservation will take placeeven if there is insufficient funds, althoughno message will be produced. This level isthe most likely to allow overspending.

Summary and Detail Level Control:

Detail Budgetary Control is used to controlexpenditures against a budget amount for aparticular GL account. When using this methodof control you must budget to each account forwhich you enable budgetary controls.

Summary Budgetary Control is used to controlbudget expenditures at a less detailed level,such as department or cost center. Theadvantage here is that each account does notneed a budget.

Budgetary Control Setup:

1. Assign Reserve for Encumbrance Accountand Enable Budgetary Control Options inOracle General Ledger (Setup -> Set ofBooks)

2. Open the latest Encumbrance year (Setup -> Open/Close)

3. Define the Budget which will be theFunding Budget (Budgets -> DefineBudgets)

4. Define a Budget Organization and specifythe accounts for which Funds Checker willtake place including the level of checking,i.e. absolute vs. advisory (Budgets ->Define Organizations)

5. Click the MAINTAIN button to submit theprogram – Maintain Budget organization(Budget -> Define Organizations)

6. Select Budget Organization and Budget forsteps 2 & 5. Enter accounts to budget andamounts for each period. Click on the“Create Journals” button and go to theCheck and Reserve Funds Screen. ReserveFunds (Budgets -> Enter Journals)

7. Query the journal batch created in step 6and post it. (Journals -> Post)

8. Select Encumbrances to be created (i.e.Requisition, PO), and select the type ofencumbrance (obligation, commitment)

(Payables –> Setup -> Options ->Financial, Encumbrance Region)

II. ENCUMBRANCE ACCOUNTING

Encumbrance entries are used in conjunctionwith funds checker to immediately updatefunds available. In other words, encumbranceaccounting is a process to track spendingbefore it becomes an actual cost to theorganization. This combined with budgetarycontrols can assist in the prevention ofoverspending a budget. You can useBudgetary Controls without EncumbranceAccounting, but you cannot use EncumbranceAccounting without Budgetary Controls.

Oracle Applications use EncumbranceAccounting to account for funds reserved oncertain transactions. Counting these reservedfunds as spent ensures that these funds cannotbe used for some other purpose before thesefunds are changed into actual costs.

You determine if encumbrances are created atthe time requisitions or purchase orders areapproved. Invoice encumbrances areautomatically enabled if PO encumbrance isturned on. (Setup -> Options -> Financials,Encumbrance Region)

Encumbrance entries are automatically createdwhen an invoice (not matched to a PO) isapproved, or a requisition or purchase order isreserved. Information about these encumbranceentries is stored in the tableGL_BC_PACKETS. The information remainsin this table until the Program – CreateJournals is run from Oracle General Ledger.This process creates unposted journal entries,which will need to be posted. Once theProgram – Create Journals has completedsuccessfully, the data regarding theencumbrances will no longer be inGL_BC_PACKETS.

The funds checker looks at theGL_BC_PACKETS table to verify whetherthere are any encumbrance entries andimmediately updates the funds available, whichcan be viewed in Oracle General Ledger(Inquiry – >Funds)

Once the encumbrance becomes an actual cost,Oracle automatically reverses theencumbrances and replaces them with actualjournal entries. The reversing entries aredependent on whether the Accrual Method is‘Receipt Accrual’ or ‘Accrue at Period End’.

Below is the summary of common transactionsand the encumbrance entries created.

Common Nomenclature:

Charge A/C – account to be affected by thePO or invoice distribution

Budget A/C – account against whichbudgetary controls is done and for whichencumbrance entries are created. For expenseitems, the budget a/c and the charge a/c are thesame.

RFE A/C – reserve for encumbrance account

AP LIAB – Accounts Payable LiabilityAccount

Cash – cash account

Rec. A/C – receiving account

AP Exp Accr – Accounts Payable expenseaccrual account

AP Inv. Accr – Accounts Payable Inventoryaccount

CJE – Program – Create Journals

BALANCE_TYPE – Table level flag toindicate whether the transaction is anencumbrance or actual transaction.

III. Case Scenarios

1) Unmatched Invoice (Direct Pay)Approve the direct pay invoice for $10, runCJE.This will create the encumbrance entry:Debit to the Charge A/C for $10 and credit toRFE for $10 with a Balance type = E.

When you run the Payables Transfer to GL, theencumbrance entries are relieved. That is to saya credit is created to the Charge A/C and debitto RFE with balance type = E. In addition,actual entries are created, a debit to theexpense with a balance type = A and credit tothe AP LIAB with a balance type = A

Invoice Approval and Run CJEAccount Debit CreditCharge A/C 10(E)RFE A/C 10(E)

Payables Transfer to GL (Part 1)Account Debit CreditCharge A/C 10(E)RFE A/C 10(E)

Payables Transfer to GL (Part 2)Account Debit CreditCharge A/C 10(A)AP LIAB 10(A)

2) Create a $20 Requisition and run CJE.This will create the encumbrance entry:Debit to Charge A/C for $20 and Credit to theRFE A/C for $20.

Run AutoCreate and run CJE.

This relieves the requisition encumbrance andcreates a PO encumbrance for the sameamounts. When the requisition is approved andreserved, CJE creates the encumbrance entries.

Approve/Reserve Requisitions and Run CJEAccount Debit CreditCharge A/C 20(E)RFE A/C 20(E)

AutoCreate PO from Requisition and Run CJEAccount Debit CreditCharge A/C 20(E)RFE A/C 20(E)

AutoCreate (cont.)Account Debit CreditCharge A/C 20(E)RFE A/C 20(E)

NOTE: The original encumbrance entrycreated by the requisition was reversed andreplaced with new PO encumbrance. Note thatthe encumbered_flag in PO_DISTRIBUTIONS= Y after reserving the funds for the purchaseorder. In addition, the encumbrance_amountwill now have a value.

3) Cancel an Unmatched Invoice $25.23.Note the cancel of the invoice results in anegative debit to the Charge A/C.

Approve Invoice and Run CJEAccount Debit CreditCharge A/C 25.23(E)RFE A/C 25.23(E)

Cancel Invoice and Run CJEAccount Debit CreditCharge A/C -25.23(E)RFE A/C 25.23(E)

NOTE: When canceling the invoice a negativedebit to the Charge A/C is created.

4) Cancel an Approved Reserved Requisitionfor $15.15.

Approve/Reserve RequisitionAccount Debit CreditCharge A/C 15.15(E)RFE A/C 15.15(E)

Cancel the RequisitionAccount Debit CreditCharge A/C -15.15(E)RFE A/C 15.15(E)

NOTE: When canceling the requisition anegative debit to the Charge A/C is created.

5) Approve/Reserve a PO and final match it toan invoice for less than the amount of the PO.Create and Approve a purchase order for$44.44 then run CJE.This creates a debit to the charge account for$44.44 and a credit to the RFE account for$44.44.

Final Match purchase order to invoice for$11.11, then run CJE.This relieves the matched amount for $11.11.This results in a credit to the charge accountfor $11.11 and a debit to the RFE account for$11.11.

Run Payables Transfer to GL.This relieves the encumbrance amount notmatched and creates a credit to the chargeaccount for $33.33 and a debit to the RFEaccount for $33.33. The Payables Transfer toGL also creates the actual accounting entries torecord the non-encumbrance transactions.

Approve/Reserve PO and Run CJEAccount Debit CreditCharge A/C 44.44(E)RFE A/C 44.44(E)

Final Match Invoice for less than PO and RunCJEAccount Debit CreditCharge A/C 11.11(E)RFE A/C 11.11(E)

Run Payables Transfer to GL (Part 1)Account Debit CreditCharge A/C 33.33(E)RFE A/C 33.33(E)

Run Payables Transfer to GL (Part 2)Account Debit CreditCharge A/C 33.33(A)AP LIAB 33.33(A)

NOTE: When Payables Transfer to GL is run,encumbrance entries are created to relieve theamount matched to PO. This is denoted by thebalance type = ‘E’. In addition, actualaccounting entries are created at this time, nowthat the expenditure has become an actual cost.This is denoted by the balance type = ‘A’.

6) Match an invoice for a greater amount thanthe original purchase order encumbrance.Create a purchase order for $90.00.Approve and reserve the PO, then run CJE.This creates a debit to the charge account for$90.00 and a credit to the RFE account for$90.00.Match PO to Invoice for $99.00. Approve theInvoice. Run Payables Transfer to GL.This creates the relieving entries. A credit tothe charge account for $99.00 and a debit tothe RFE for $99.00.

Run CJE.This creates the encumbrance entry for thedifference between the invoice and purchaseorder. It creates a debit to the charge accountfor $9.00 and a credit to the RFE account for$9.00.

Create a Purchase Order, Approve/ReserveAccount Debit CreditCharge A/C 90.00RFE A/C 90.00

Match Invoice for Greater Amount RunTransfer to General LedgerAccount Debit CreditCharge A/C 99.00RFE A/C 99.00

Match Invoice for Greater Amount RunProgram Create JournalsAccount Debit CreditCharge A/C 9.00RFE A/C 9.00

NOTE: When matching an invoice for agreater amount than the original encumbrance,the system will need to encumber additionalfunds to cover the difference between theinvoice and purchase order. In order toaccomplish this the Program Create Journalsmust be run. If not, your encumbrance accountwill not be in balance. In the above example thefull value of the invoice, $99.00 was relieved,even though only $90.00 was originallyencumbered. Only when the Create Journalsprogram is run will the additional invoiceamount be encumbered, bringing the accountsback in balance.

7) Cancel a PO after it has been AutoCreated.Create a requisition for 1 item @ $4.30.Approve/Reserve requisition. Run CJE.This creates a debit to the expense a/c for$4.30 and a credit to the RFE a/c for $4.30.AutoCreate the requisition into a PO.Reserve/Approve the PO. Run CJE.This creates two sets of journal entries. Thefirst relieves the requisition encumbrance bycrediting the expense a/c for $4.30 and debitingthe RFE a/c for $4.30. The second set ofentries creates the purchasing encumbrance by

debiting the expense a/c for $4.30 and creditingthe RFE a/c for $4.30.

Cancel the PO line without canceling it’sassociated requisition. Run CJE.This creates two sets of accounting entries.The first relieves the purchasing encumbranceby debiting a $–4.30 to the expense a/c anddebiting the RFE a/c for $4.30. But by notcanceling the requisition this also creates anadditional journal entry. This entry credited theexpense for $-4.30 and a credit to RFE a/c for$4.30.Note that this requisition encumbrance entrywill never be automatically offset by thesystem. The only way to offset this entry is tocreate a manual journal entry in Oracle GeneralLedger. The proper way to handle this issue isto cancel the associated requisition whencanceling the PO line.

Approve/Reserve Requisition, Run CJEAccount Debit CreditCharge A/C 4.30RFE A/C 4.30

AutoCreate PO, Run CJEAccount Debit CreditCharge A/C 4.30RFE A/C 4.30Charge A/C 4.30RFE A/C 4.30

Cancel PO Line without Canceling RequisitionAccount Debit CreditCharge A/C -4.30RFE A/C 4.30Charge A/C -4.30RFE A/C 4.30Essential Table Level Detail

1. RequisitionsPO_REQ_DISTRIBUTIONSFields: encumbered_flag Encumbered_amount

2. Purchase OrdersPO_DISTRIBUTIONSFields: Encumbered_flag

Encumbered_amount

3. General LedgerGL_BC_PACKETSFields: Reference1 (document type)

Reference4 (document number)Reference5 (invoice #)

GL _INTERFACE (receiving against PO)Fields: Encumbrance_type_id

Actual_flagReference24 (document number)

GL_JE_LINES (storing PO information)Fields: Reference1 (document indicator)

Reference2 (po_header_id)Reference3 (po_distribution_id)Reference4 (po number)

4. Accounts PayableAP_INVOICE_DISTRUBUTIONSField: Encumbered_flag

NOTE: In theFINANCIALS_SYSTEM_PARAMS table theflags req_encumbrance_flag andpurch_encumbrance_flag must have a value of‘Y’.

NOTE: When importing a requisition asApproved, and Encumbrance is ON,ReqImport will force the status to “Pre-Approved”. This requires you to perform theReserve action explicitly.

NOTE: If a PO has been AutoCreated from aRequisition, then the cancellation process willre-encumber the Requisition Encumbrancebased on setup parameters.

IV. Troubleshooting - Diagnosing Issueswith ‘missing’ or ‘incorrect’ encumbranceentries.

In order to diagnose issues with ‘missing’ or‘incorrect’ encumbrance entries it is imperativethat you take the following steps:

1. Review the encumbrance setup. Thisshould show you when you have chosen toencumber (at requisition, purchase order orinvoice creation). Setup->Options->Financials -> Encumbrance region.

2. Determine if the problem is with an invoicematched to a purchase order.

3. If it is a ‘matched’ invoice, theencumbrance entries generated will varydepending on a variety of factors:

• Review the charge, budget, accrual andvariance accounts from the purchase orderdistribution screen.

• Determine if the item is ‘accrue on receipt’or ‘accrue at period end’ by viewing thepurchase order shipment screen.

• Determine if the item is an inventory itemor an expense item by viewing the purchaseorder distribution screen.

• Determine if there is a variance involvedand if there is, determine if it is a pricevariance, quantity variance or an exchangerate variance.

4. Determine which accounts you areexpecting the encumbrance entry to affectand then verify that this is correct based onthe information obtained in step 3. Forexample, if the budget account and thecharge account are different for thepurchase order, you should be looking atthe budget account to view the POencumbrance entry; the invoiceencumbrance will affect the charge

account, which is also the invoicedistribution account.

5. Remember that some screens like theAccount Inquiry screen will only showencumbrance entries that have beensuccessfully posted.

• Account Inquiry screen in General Ledger• Funds Available screen in General Ledger• Journal Posting Execution report• Program – Create Journals in General

Ledger• Journal Entry Audit report from the

Payables Transfer to General Ledger• FSG reports from General Ledger (these

should not be relied upon as they are userdefined)

6. Ensure that the Program –> CreateJournals in General Ledger has been run togenerate the Encumbrance journals.

7. Ensure ALL Encumbrance journal batcheshave been posted in order to get an up-to-date view of the Account Inquiry screenand in General Ledger reports being run.

8. Check the Enter Encumbrance screen, theEnter Journals screen for any unpostedjournals or journals with exceptions whichmight prevent posting.

The following describes actions you can takeon purchasing documents and the budgetarycontrol/encumbrance effect the action mighthave.

Action Impact on Budgetary ControlApprove No budgetary control entries madeAccept No budgetary control entries madeCancel Negative debit encumbrancesImport No budgetary control entries madeForward No budgetary control entries madeReject Reversing encumbrance entries

madeReturn Reversing encumbrances entries

madeReserve Attempts to reserve funds for

documentSubmit No budgetary entries madeApprove/Reserve

Attempts to reserve funds inaddition to submitting for approval

The following describes various statuses ofpurchasing documents and the effect they haveon funds reservations.

Status Funds Reservations ImpactApproved Reserved funds for the documentRejected No funds are reservedIn Process No funds are reserved

Conclusions

It is my desire that this paper has helped youunderstand the fundamentals of BudgetaryControl and Encumbrance Accounting.Breaking up the processes should help youunderstand the overall process. I hope that youare now better equipped to troubleshootproblems and to determine what needs to bedone to resolve any issues that may come up.

In addition, if you encounter a problem thatrequires assistance, please remember to callOracle Support. They may have seen the issue

before and may already have a solution for theissue!

About the Author

Michael Milano is a Technical Analyst with theOracle Support financials group. He has beenworking for Oracle Support for approximately1 1/2 years.