Disbursements:  Encumbrance Accounting

UC Accounting Manual
VI.  Accounts Payable Operations
D-371-21 (TL 51, 3/15/88)
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                          ENCUMBRANCE ACCOUNTING

                     "Words pay no debts."
 
                          --William Shakespeare

     

I.   INTRODUCTION

 This chapter presents the guidelines for establishing,
 amending, and removing encumbrances (liens) against
 appropriations.  Specific procedures in regard to
 encumbrances against appropriations in the Plant Funds group
 are presented in chapter P-415-8, Plant Accounting: 
 Unexpended Plant Funds, and chapter P-415-21, Plant
 Accounting:  State Appropriations, Expenditures, and
 Encumbrances.

II.  FUNCTION OF ENCUMBRANCES

 A.  BUDGETARY CONTROL

     Obligations incurred in the form of purchase orders,
     contracts, and internal requisitions are ordinarily
     entered as encumbrances in the general ledger.  The
     recording of these encumbrances (1) reserves within an
     expenditure subaccount the anticipated amounts required to
     cover these obligations as they become payable after the
     goods are delivered or the services are rendered, and (2)
     reduces the available fund balance in that particular
     subaccount.  Thus, the recording of encumbrances serves as
     a valuable aid to departments for keeping expenditures
     within amounts budgeted.
        
 B.  CARRY FORWARD TO THE FOLLOWING FISCAL YEAR

     Encumbrances also serve as a mechanism by which fund
     balances can be carried forward to the following fiscal
     year.  (Refer to section IV., below.)  



III. PROCEDURES

 A.  ESTABLISHING ENCUMBRANCES

     Ordinarily, an encumbrance for a specific purchase order
     is established at the time the purchase order is
     originated by the Purchasing Department.  The original of
     the purchase order, or a photocopy of the same, is used as
     the source document for setting up the encumbrance in the
     general ledger.
        
     Encumbrances can also be established for contracts,
     internal requisitions, blanket purchase orders, Low Value
     Purchase Authorizations, and various other commitments and
     authorizations that result in financial obligations. 
     Ordinarily, for each such commitment and authorization to
     be liened, a Lien Voucher Form, UFIN 284 (Exhibit I), (A
     campus version may be used instead.) is used as the source
     document for entering the encumbrance in the general
     ledger.  A Lien Adjustments Form, UFIN 285 (Exhibit II) (A
     campus version may be used instead.), can be used instead.

     Campuses with computerized systems can automatically
     establish encumbrances for commitments such as those
     associated with computer generated purchase orders and
     automated recharge activities.

     In order to provide a check against errors in key entry, a
     lien entry must have both a debit and a credit side.  To
     establish a lien, the appropriate expenditure account is
     debited and the Encumbrance Control account is credited. 
     The offsetting entry to the Encumbrance Control account
     can be generated automatically at campuses with
     computerized systems.  Included in the amount of the
     encumbrance should be (1) any applicable tax, and (2) a
     provision, as can best be determined, for freight charges. 
     A sample journal entry to encumber an obligation appears
     below:






     Dr.   Division of Library     X-600200-19900-3
        Automation                    $250.00

     Cr.   Encumbrance Control     X-999998-99999-3
                                      $250.00

     Note:  An object code is used only when recording the
     actual expenditure, not when setting up the encumbrance. 
     This encumbrance would appear in the general ledger for
     the month as illustrated below:



                                  (chart)



     As illustrated above, the appropriation balance would be
     decreased by the amount of the encumbrance ($250.00), as
     well as by the total actual expenditures for the fiscal
     year charged against this subaccount to date.
        
     In the example above, type of entry (TE) code 61 has been
     used to enter the lien in the general ledger.  Type of
     entry codes 61-69 are designated for use in the entry or
     cancellation of liens.  Specific TE designations within
     this range may vary by campus.  (Refer to Accounting
     Manual chapter A-115-2, Accounting Codes:  General Ledger,
     section III.F.)  

 B.  AMENDING AND CORRECTING ENCUMBRANCES

     A lien can be amended or corrected by completing a Lien
     Adjustments Form, UFIN 285. (A campus version may be used
     instead.)  If all the information regarding a lien has
     been entered in the general ledger correctly except for
     the amount, it can be amended by entering the required
     increase or decrease on a UFIN 285, (A campus version may
     be used instead.) referencing the same account number and
     description of transaction information used previously. 
     However, if other discrepancies have occurred--such as
     when (1) the requisition or purchase order number has been
     entered in error, (2) the wrong account number has been
     charged, or (3) the original vendor could not supply the
     goods or services and the order has since been placed with
     a new vendor--the lien must be removed via a UFIN 285 (A
     campus version may be used instead.) and a new one
     established.


 C.  CANCELLING ENCUMBRANCES

     A lien can be cancelled in whole or in part via a UFIN 285
     (A campus version may be used instead.) or with direct
     coding on an invoice payment or other specified accounting
     form used as a direct input to the general ledger.  A
     sample journal entry to record the payment of the invoice
     for the encumbrance established in section III.A., above,
     appears below: 

     Dr.  Division of Library      X-600200-19900-3-7200  
        Automation                       $250.00

     Cr.  Cash              X-110XXX     $250.00

     The journal entry to record the cancellation of the lien
     would be as follows:

     Dr.  Encumbrance Control      X-999998-99999-3
                                         $250.00

     Cr.  Division of Library      X-600200-19900-3
        Automation                       $250.00

     The lien is cancelled and the payment is recorded as an
     expenditure, but the appropriation balance remains
     unchanged when the amount of the lien and the amount of
     the payment are identical.  The general ledger would
     reflect this entry as follows:


                                  (Chart)


     When the invoice payment is greater than the amount of the
     lien, the appropriation balance will be decreased by the
     difference.  When the invoice payment is less than the
     amount of the lien, the cancellation of the lien will
     result in the appropriation balance being increased by the
     difference, provided the lien has been established during
     the current fiscal year.  In cases in which the final
     payment on an invoice in the current fiscal year partially
     cancels a lien of General Funds (199XX) which had been
     established in the preceding fiscal year, the unused
     balance must be transferred back to the Accounting Office.

     Type of entry code 60 is used for the cancellation of a
     lien resulting from a check payment or journal entry. 
     Specific usage varies by campus.  (Refer to Accounting
     Manual chapter A-115-2, Accounting Codes:  General Ledger,
     section III.F.)

IV.  ENCUMBRANCES AND FISCAL CLOSING

 A.  GENERAL FUNDS

     General Funds can be carried forward to the following
     fiscal year only in the form of bona fide encumbrances
     against approved budgets for the year in which the
     appropriation is intended.  Bona fide encumbrances are
     those liens established using the following forms:

     1) A valid purchase order issued on or before June 30 of
        each fiscal year by the campus Purchasing Office to a
        vendor for provision of goods and/or services to a
        University department or activity.

     2)    A contract (other than a purchase order) entered
           into by the University and a second party to
           furnish goods and/or services in which both parties
           have concluded agreement on or before June 30 of
           the year in question.

     3) An internal requisition made by a University department
        on or before June 30 for specific goods and/or
        services.
        


 B.  OTHER FUNDS

     Encumbered balances can be carried forward for donations,
     endowments, or other funds provided the period and terms
     of availability extend into the following fiscal year.

     A government contract or grant that has terminated may
     have outstanding charges which will not be recorded in the
     ledgers until the following fiscal year.  Therefore,
     balances (encumbered and unencumbered) should be carried
     forward for government contracts and grants irrespective
     of whether the period and terms of availability extend
     into the following year. 

V.   RESPONSIBILITIES

 A.  DEPARTMENT HEAD

     The Department Head has the responsibility (1) to assure
     that incurrence of encumbrances is made consistent with
     the terms and conditions of the funding source(s) of the
     departmental budget and (2) to periodically determine
     departmental budgetary savings and take appropriate action
     in conformance with the procedures presented in this
     chapter.

 B.  ACCOUNTING OFFICER

     In coordination with campus Internal Audit, the Accounting
     Officer has the responsibility to assure that encumbrances
     are established and removed in accordance with the
     procedures presented in this chapter.   

VI.  REFERENCES

 Standing Orders of The Regents, section 100.4 (p).  (See
 Appendix I.)


 Accounting Manual chapters:

     A-000-7   Official Documentation Required in Support of
               University Financial Transactions

     A-115-2   Accounting Codes:  General Ledger

     A-115-6   Accounting Records

     D-224-17  Delegation of Authority--Signature Authorization

     P-415-8   Plant Accounting:  Unexpended Plant Funds

     P-415-21  Plant Accounting:  State Appropriations,
               Expenditures, and Encumbrances 

     Letters and Memoranda:

        President Kerr, Memorandum to chief campus
        officers and statewide administrative officers, on The
        Disposition of General Funds Balances at June 30, March
        26, 1964.

_________________________
Historical note:  This chapter supersedes Business and Finance
Bulletin G-4, Modified Encumbrance Accounting, and updates the
material formerly contained in that bulletin.  Accounting Manual
chapter first published 3/15/88; analyst--Nancy Partovi. 





       APPENDIX:  STANDING ORDERS OF THE REGENTS, SECTION 100.4 (p)


The President is authorized to approve the incurring of
commitments and expenditures against the following year's budget
in advance of the effective date thereof.  Advance commitments
for expenditure for materials, services, and equipment shall not
exceed fifty percent of the Governor's budget proposal to the
Legislature for such purposes for the ensuing fiscal year. 
Advance commitments for appointments shall not exceed the number
of positions and the funds provided in the Governor's budget
proposal to the Legislature for the ensuing fiscal year.  The
number of such advance commitments authorized shall be determined
annually by the President.



 EXHIBIT I:  LIEN VOUCHER FORM, UFIN 284

           (form)




 EXHIBIT II:  LIEN ADJUSTMENTS FORM, UFIN 285


           (form)