Lessons · Accounting · committing money before you spend it
Committing money before you spend it
When an order is placed the money is not yet spent, and it is no longer free either. An encumbrance records that commitment against the budget straight away, so the same money cannot be committed twice while the goods are still in transit.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.
What it is for
It is the control that makes staying within a limit possible in an organisation where many people can order things. Without it, three managers can each check the same remaining balance on the same morning and each commit it, and nobody has done anything wrong.
How to think about it
Record the encumbrance when the order is raised, not when the invoice arrives. Release it when the actual expenditure is recorded, so the commitment is replaced by the spend rather than counted alongside it.
Worked example
An order is placedNothing has been spent. Something has been promised.
The commitment is recorded against the budget nowSo the balance stops looking available.
The invoice arrives and becomes expenditureThe commitment is released as the spend is recorded.
Counting both at once would double countWhich is why the release matters as much as the entry.
Your turn
Name when an encumbrance should be recorded.
An encumbrance is recorded when the is placed
Solve one, graded on the server
The trap
Leaving an encumbrance in place after the invoice has been posted. The budget then shows the same money committed and spent, the remaining balance is understated, and the organisation stops spending money it actually has.