Question

If the actual liability for goods received in the current year differs from the estimated liability recorded when the goods were ordered in the prior year, the Encumbrances account should be credited in the amount of the estimated liability.

True
False

Answer 1

It is true that the Encumbrances account should be credited with the estimated liability when the actual liability for received goods differs from the prior year's estimate. Encumbrances track reserved funds for anticipated expenses, ensuring that actual liabilities are accounted for.

Step-by-step explanation:

If the actual liability for goods received in the current year differs from the estimated liability recorded when the goods were ordered in the prior year, the statement that the Encumbrances account should be credited in the amount of the estimated liability is true. Encumbrances in accounting refer to funds that have been reserved for anticipated expenses which are not yet incurred. When the actual invoice is received and the goods or services are delivered, the encumbrance is relieved by crediting the Encumbrances account and debiting the actual expense account. If the actual cost is more than the encumbrance, an additional expense is recognized; if it is less, the difference is typically credited to a budgetary control account. This adjustment ensures that the books reflect the actual liabilities rather than just the estimates.