Question

The Encumbrances Outstanding account is properly termed a

a. Long-term Liability
b. Current liability if paid within a year; otherwise, long-term debt
c. Reservation of unassigned fund balance
d. Budgetary account

Answer 1

The Encumbrances Outstanding account is a budgetary account, representing contracts made for future purchases not yet resulting in a payment. It helps manage spending and is not considered a liability until goods or services are received, at which point it is reclassified accordingly.

Step-by-step explanation:

The Encumbrances Outstanding account on a governmental budgetary accounting system is best defined as a budgetary account. It represents commitments or contracts made by a government entity for spending that has not yet resulted in a payment. For instance, when a government signs a contract for the future purchase of supplies or services, the amounts are recorded as encumbrances. They do not represent expenses until the goods or services are actually received and a liability is incurred.

Accordingly, an Encumbrances Outstanding account is not a liability account, neither long-term nor current; instead, it is a control account used in budgetary accounting to help manage appropriations and spending. Once the goods or services are received, the encumbrance is liquidated, and the actual expenditure is recorded, effectively converting the budgetary amount into a liability, which will then be classified as current or long-term based on when it is expected to be paid.