Unveiling Oracle Cloud's Encumbrance Accounting Terms
Difference between Budgetary Control and Encumbrance Accounting
Budgetary Control
Orchestrates the spending control process by validating if transactions have sufficient funds and if they're subject to spending control.
Stores the budget, performs funds check and funds reservation when transactions are submitted or approved.
Maintains budgetary control balances for expense accounts, including budget, funds reserved (commitments, obligations, and expenditures), and funds available balances based on the budget calendar and control budget structure (chart of account segments you control by), without any journal entries. Revenue, liability, and equity account types aren't supported.
Encumbrance Accounting
Creates encumbrance journal entries for requisitions and purchase orders. Also creates actual journal entries for invoices and journals using the Standard Accrual with Encumbrances accounting method in the Subledger Accounting module when the user submits or schedules the Create Accounting process.
Optionally creates Invoice Encumbrances to report actuals at the payment rather than invoice validation.
Stores and maintains the encumbrance and actual account balances in General Ledger based on the ledger's accounting calendar and chart of accounts.
Loads budget balances into General Ledger for comparison with actual balances.
Doesn't automatically maintain funds available balance in General Ledger. It is only automatically maintained in the Budgetary Control module.
What is Encumbrance Accounting?
Encumbrance accounting is the accounting of expenses from the time when it is intended to incur till it becomes actual expenditures.
Most of the spending happens in any organization during the procure-to-pay process.
There are multiple instances on the procure-to-pay process that uses Encumbrance Accounting:
creating and approving a requisition, creating and approving a purchase order from the requisition, creating and approving invoice matched to the purchase order, etc.
Commitment – Money that is committed to spending in the future is called commitment. In Oracle, it is the money committed to being spent on a purchase requisition document. When the requisition document is approved, commitment happens.
Obligation – When a requisition is converted to a purchase order and the order is approved then commitment is replaced by an obligation. It is an obligation to pay the amount to the vendor against the goods and services ordered as per the purchase order terms and conditions.
Encumbrance Entry – Journal entry is created when a reservation is placed on a requisition or PO. The type of encumbrance which is created is either commitment or obligation.
Budget – These are the amounts that are allocated to a particular account or project to spend on planned activities.
Actual – The actual expenditures that are incurred which offset the commitment or obligation i.e., encumbered amounts. In Oracle, actuals are booked when invoices are received from vendors for the goods and services procured and matched to PO.
Funds Available – The amount which is not reserved for any purpose and available to be encumbered is called available funds. The formula is: Funds Available = Budget – (Actual Expenses + Encumbrances)
How You Define the Default Date Rule for the Budgetary Control Liquidation??
You can select the budget date for the budgetary control liquidation of a prior related or backing document by using the Default Date Rule options. These are the options:
System date: Use this option if the period is open and control budget is active in the current period for liquidations to go through.
Current transaction budget date: Use this option if liquidations are expected to happen in the same period as the purchase order's budget date.
Prior related transaction budget date: Use this option if liquidations are expected to happen in the same period as the requisition's budget date.
Funds checking:
Is run from the invoice actions menu.
Compares a transaction amount on a document, such as a purchase order or invoice, against available funds, with consideration to tolerances and overrides, and provides the results of the comparison.
Funds reservation:
Runs during invoice validation, along with other budgetary control validations.
Performs the same comparison as funds checking, but then:
Consumes funds from the budget.
Reduces available funds.