Question

What entry must be made at the beginning of the new period when encumbrance accounting is used for a construction project that continues beyond the end of an accounting period?

a. A credit to Revenues
b. A debit to Cash
c. A debit to Expenditures
d. A debit to Encumbrances

Answer 1

At the start of a new accounting period in encumbrance accounting, the correct entry for a continuing construction project is to debit Encumbrances, which reestablishes the commitment of funds from the prior period.

Step-by-step explanation:

When encumbrance accounting is used and a construction project continues beyond the end of an accounting period, the correct entry at the beginning of the new period is to debit Encumbrances and credit the related reserve account (e.g., Reserve for Encumbrances). Encumbrance accounting is a budgetary control method where entries are made to record commitments for future expenditures, typically for government accounting or non-profit organizations.

The process effectively earmarks funds for specific purposes, and the initial entry would have included a credit to Encumbrances and a debit to the reserve account. As the new period begins, the encumbrance must be reestablished to continue accounting for the commitment of funds. Therefore, the correct answer is d. A debit to Encumbrances.