ENCUMBRANCES - 8340
Purpose
Encumbrances are obligations of all or part of an appropriation. Outstanding encumbrances are the recognition of commitments related to unfulfilled purchase orders or outstanding contracts which will subsequently be recognized as expenditures when goods and services are received.
The purpose of accounting for encumbrances is to prevent the overspending of an appropriation. Encumbrances reserve a portion of an appropriation representing an obligation that has not been paid, or commitments related to unperformed contracts for goods and services.
An available appropriation represents the amount of the appropriation that can still be obligated or spent within the availability period allow in the Budget Act. The available appropriation is determined by subtracting actual expenditures and outstanding commitments from the appropriated amount.
Encumbering Method
Appropriations are encumbered by Purchase Orders, purchase estimates (provided the Department of General Services (DGS) Purchase Order is dated prior to the date the appropriation encumbrance availability ceases), printing requisitions, payroll estimates, leases, standard agreements, Public Works Project Authorization and Transfer Requests, encumbrance estimate, or other documents.
Agencies/departments will consider the necessity for encumbering small transactions that comprise a small percentage of total expenditures. For example, individually encumbering small purchases can be time consuming; therefore, the average amount of small purchases outstanding may be included in the encumbrance estimate. (See SAM Section 8342.)
Fiscal Year to Which an Encumbrance/Expenditure is Charged
Unless a specific law states otherwise, agencies/departments must apply the provisions of California Code of Regulations, title 2, division 2, chapter 1, Article 2, Section 610. The California Victim Compensation Board Rule 610 provides that the issue date of an agreement determines the fiscal year appropriation to which the encumbrance /expenditure for goods or services is charged. The issue date of an agreement is the date it is “made and entered into.”
Any required control agency approvals are retroactive to that date. However, agencies/departments must meet the deadlines for submitting procurement documents as specified by the DGS.
For support and local assistance appropriations, encumbrances/expenditures are charged to the fiscal year in which the agreement was issued when the delivery date of the goods/services is in the same fiscal year or the delivery date is interpreted to mean deliver as soon as possible. As soon as possible includes a delivery date that is:
- Not identified or specific
- Specific but not a requested delay in delivery
- Specified as 10 days, 30 days, or the like
The following exceptions may apply:
- Encumbrances/expenditures are charged to the fiscal year that the goods/services are received when the purchase agreement stipulates that goods/services be delayed until requested or delayed until on or after a specific date (e.g., agreement issued in June for which the agency/department requests equipment maintenance during the next fiscal year).
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Goods purchased and received in the months of May or June for use during the subsequent fiscal year may be paid from the appropriation for such subsequent fiscal year. Invoices covering such purchases shall be marked as follows:
"Purchased in ___F.Y. for use in ___F.Y." Payments for such invoices may not be made until enactment of the subsequent fiscal year budget.
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Multi-year Agreements – Agreements which span more than one fiscal year may be charged (1) totally to the first year of appropriation covered by the agreement, or (2) to more than one fiscal year's appropriation, depending on the:
- Appropriation authority – Sufficient spending appropriation authority must exist.
- Details of the agreement.
Agencies/departments will determine the budgetary plan for charging the encumbrance and subsequent expenditure when issuing a multi-year agreement. The budgeted amount will be reflected in the agreement total. Agencies/departments have discretion as to which fiscal year appropriation to charge; however, the budgetary plan is the key factor in making this determination.
The certificate of funds availability must be signed by the agency’s/department’s designated approver after ensuring that funds are available.
Recording Encumbrances
Encumbrances will be recorded in the agency's/department's accounting system. An encumbrance is not recognized as an expenditure when recorded as the items or services have not been received. An encumbrance will increase the unliquidated encumbrance amount and decrease the unencumbered balance.
As expenditures are recorded, amounts will be posted to reduce the related encumbrance amount. For partially received orders, many accounting systems will liquidate the encumbrance for the same amount as the expenditure. However, if it is determined that encumbrance amounts are materially misstated, either over or underestimated, adjustments will be recorded to more accurately reflect the expected expenditure. The encumbrance is fully liquidated when the order is fully satisfied.
Liquidating Encumbrances
Agencies/departments will closely monitor encumbrances to effect prompt delivery of requested goods or services and to ensure timely disencumbrances in instances where it is determined the goods or services will not be received or will cost less than originally estimated.
At year-end, agencies/departments should review encumbrances and liquidate reverting year encumbrances.
Accounting for Encumbrances at Year-End
Agencies/departments will reconcile encumbrance balances to subsidiary reports and supporting documents at least monthly during the year. At year-end, encumbrance balances must be reconciled with supporting procurement and other documents to validate the amount of valid encumbrances and obligations at year-end. Liquidation of encumbrances resulting from year-end accruals of expenditures, and reimbursements will be posted to the applicable appropriations. See SAM sections 10602 and 10608 for accrual procedures.
Encumbrances are treated as expenditures under the state’s budgetary basis of accounting and reported as such in the agency's/department’s year-end financial reports and in the Governor’s Budget for most governmental cost funds. Encumbrances and expenditures in the agencies/departments year-end financial reports must be accounted the way they were budgeted.
Encumbrances are not included in liabilities or expenditures in the Controller’s Budgetary/Legal Basis Annual Financial Report; encumbrances are reported as a reserve for encumbrance against the fund balance. Note: encumbrances are not classified as expenditures under the GAAP basis of accounting.