Question

The City of Island Grove uses encumbrance accounting and its fiscal year ends on June 30. On May 6, a purchase order was approved and issued for supplies in the amount of $6,000. Island Grove received these supplies on June 2, and the $6,000 invoice was approved for payment. What General Fund journal entry should Island Grove make on May 6, to record the approved purchase order?

Transaction General Journal Debit Credit
A) Encumbrances 6,000
Appropriations 6,000

B) Supplies 6,000
Vouchers Payable 6,000

C) Encumbrances 6,000
Encumbrances Outstanding 6,000

D) Expenditures 6,000
Encumbrances 6,000

Answer 1

On May 6, the correct General Fund journal entry for Island Grove to record the approved purchase order for supplies is a debit to Encumbrances for $6,000 and a credit to Appropriations for $6,000, in line with encumbrance accounting practices.

Step-by-step explanation:

On May 6, when the City of Island Grove approved and issued a purchase order for supplies in the amount of $6,000, the appropriate General Fund journal entry to record the approved purchase order in encumbrance accounting would involve recording an encumbrance and reserving the corresponding amount of appropriations. Therefore, the correct General Fund journal entry should be:

• Debit: Encumbrances $6,000
• Credit: Budgetary Control or Appropriations $6,000

This entry sets aside funds for the anticipated expenditure but does not yet record an actual expense. It is an essential step in encumbrance accounting which ensures that a government entity does not overspend its budget. The actual expenditure will be recorded once the supplies are received and the invoice is approved for payment, at which point the encumbrance account will be reversed, and the expenditure will be recognized.