Question

Explain the purposes of encumbrance accounting. Might encumbrance accounting be used by commercial enterprises?

Answer 1

Answer:-

Encumbrance Accounting tracks expected spending in the budgeted amount. It is also known as Commitment accounting. It aimed at more effective cash planning and control by a two step process. The first step of the process is encumbers new purchase order line items and second step is to encumber the line items once they go into Accounts Payable invoice for payment.

Purposes of encumbrance accounting:-

• The purpose of encumbrance accounting is to prevent any further expenditure of funds due to commitments already made. It avoids overspending. Encumbrances are generally shown or reported in general legder.
• Encumbrance Accounting can be used to forecast cash outflows.
• Encumbrance Accounting can be used as a general planning tool.

Encumbrance accounting can be used by commercial enterprises. But the balance in the reserve for encumbrances was offset by the balance in encumbrance account for reporting purposes. The need for encumbrance accounting arises due to penalties by law for government administartors who expend funds in surplus of significant.

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