Question

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

A) d-Encumbrances 6,000
c-Appropriations 6,000

B) d-Supplies 6,000
c-Vouchers Payable 6,000

C) d-Encumbrances 6,000
c- Encumbrances Outstanding 6,000

D) d-Expenditures 6,000
c-Encumbrances 6,000

Answer 1

The correct answer is:

d-Encumbrances 6,000
c-Encumbrances Outstanding 6,000

Step-by-step explanation:

On May 6, when the City of Athens approved and issued a purchase order for supplies, the appropriate journal entry under encumbrance accounting is to record an encumbrance. Encumbrance accounting is employed by governments to commit a portion of appropriations for anticipated expenses prior to receiving goods or actual invoices. The entry does not affect the actual expenditures at this point; rather, it serves as a reservation against the budget. The entry made on that date should be:

This entry records the commitment to purchase the supplies, effectively setting aside funds within the General Fund budget to cover the expected expense. Encumbrances are part of the budgetary control process, and they represent the amounts committed through purchase orders, contracts, or other formal agreements prior to receiving goods or services.