Expenditure Cycle Notes

Expenditure Cycle

  • Illustration 3-4 depicts the expenditure cycle and corresponding journal entries for the General Fund or a special revenue fund with a legally adopted budget.
  • Journal entries use control accounts for activity (Revenues and Expenditures) and budgetary accounts (Estimated Revenues, Appropriations, and Encumbrances).
  • Entries to control accounts are supported with detailed entries in subsidiary accounts.
  • Many accounting systems have discontinued the use of control accounts.

Expenditure Cycle Steps

  1. Budget Approval: The governing board or legislature approves the budget.

    • Budgetary accounts (Estimated Revenues, Appropriations) may appear to have balances opposite what is expected.
    • Estimated Revenues have debit balances, and Appropriations have credit balances.
    • The entry reflects the anticipated effect on the fund's net resources (Budgetary Fund Balance).
    • If budgeted revenues and other financing sources exceed budgeted expenditures and other uses, fund balance is expected to increase (credit).
    • If budgeted expenditures and other uses exceed budgeted revenues and other financing sources, Budgetary Fund Balance would be debited in the entry.

  2. Commitment of Resources: Departments can commit resources by placing purchase orders or signing contracts after receiving budgetary authority through appropriations.

  3. Recording Encumbrances: Commitments are reflected in budgetary accounts by recording Encumbrances and the corresponding Budgetary Fund Balance-Reserve for Encumbrances.

    • GASB requires that significant encumbrances be disclosed in the notes.
    • Encumbered resources should be reported within the restricted, committed, or assigned categories.
    • Encumbrances suggest the government intends to use resources for a particular purpose, so these resources should not be classified as unassigned.
    • Encumbrance accounting may also be used in the case of contractual obligations, such as construction contracts.

  4. Goods or Services Received: Once goods or services are received, the government has a liability.

    • Two journal entries are necessary:
      1. Reverse the encumbrance at its original amount.
      2. Record the liability (Accounts Payable) and an Expenditure in the invoice amount.

  5. Expenditure Recording: Governments may choose not to record encumbrances for some expenditures, particularly those that are relatively predictable in amount (e.g., salaries).

  6. Lapsing of Appropriations: At the end of the budget period, unencumbered, unexpended appropriations lapse.

    • Administrators no longer have the authority to incur liabilities under the expired appropriations.
    • Administrators continue to have the authority to disburse cash in payment of liabilities legally incurred in a prior period, which were recorded as expenditures.
    • Appropriations that are encumbered may or may not carry forward to the next accounting period, depending on the government's policy.
    • If encumbrances do not carry forward and must be appropriated again in the following year, the encumbrances are said to lapse.
    • The entry to record a lapsed encumbrance is the same as the reversal entry when a good or service is received (debit Budgetary Fund Balance-Reserve for Encumbrances and credit Encumbrances-Control).

Journal Entries

  • Budgetary Accounts:

    • Record the budget:
    Estimated Revenues.... Dr
Financing Sources.... Dr
Estimated Other
Appropriations .......... Cr
Estimated Other
Financing Uses ................ Cr
Budgetary Fund Balance... Cr

  • To establish the encumbrance:

    Encumbrances Control .... Dr
Budgetary Fund Balance-
Reserve for Encumbrances... Cr

  • To reverse the encumbrance:

    Budgetary Fund Balance-
Reserve for Encumbrances... Dr
Encumbrances Control ...... Cr

  • Financial Statement Accounts:

    • To record the liability:
    Expenditures (Current) ... Dr
Accounts Payable........... Cr