 Hello and welcome to this session in which we will work CPA exam simulation or just an exercise that deals with governmental accounting, specifically the budgeting, and specifically we're going to be focuses on this account encumbrances. We're going to look at what happened to encumbrances at year end. Now, a prior knowledge to this session is knowing how to set a budget for governmental accounting, how to close a budget, but in this session, I'll go over those steps, but in a form of an exercise rather than an explanation. I'm going to start by looking at the Community College that's going to appropriate 12,000 for employees continuous professional education. Simply put, I'm going to start by setting a budget where the Community College is setting up a site, setting aside 12,000 worth of continuous professional education for their employees. Therefore, we are going to credit appropriation for specifically continuous professional education, and we're going to debit, debit, fund, balance, unassigned 12,000. Simply put, we assigned, we assigned in a sense, we put away $12,000 for in the budget for this continuous professional education expense. The next thing we're going to do, we're going to start to encumbrance those expenditure and process the journal entries. So let's go ahead and get started. Before we proceed any further, I have a public announcement about my company, farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation, as well as your accounting courses. My CPA material is aligned with your CPA review course, such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses, broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today. The next thing happens is the community college signed a contract with an outside consultant to conduct the CPE workshop. So obviously they contacted maybe some company, some educational company, Farhat Lectures, how about that, right? And they asked Farhat Lectures to provide 10,000 worth of continuous professional education. Now, are we within budget? Of course, we signed 12,000. So far, we incurred, we didn't even incurred it yet, we just signed the contract. Once we signed the contract, we have to encumber this amount. We have to take this amount. Remember, appropriation, once we encompass something, it means we are reducing our appropriation, now appropriation down to 2,000. Because remember, what we learned in the prior session, appropriation minus encumbrances minus expenditure, what's left? What's left right now is 2,000. And what we have to do, we have to debit encumbrances, which is a budgetary account and credit, a fund balance committed for encumbrances in some textbook or in some CPA review courses, they call this account budgetary control. Simply put, it's budgetary because we have to close these accounts. Those are budgetary account. This is when we signed the contract. Then guess what? We signed and eventually we paid $10,000 after the service was provided. So once the service was provided, we debit expenditure, CPE 10,000, and obviously we credit cash or voucher payable, if we did not pay immediately, but after the service, we have an expenditure. So if we paid it, we credit cash, if we are going to pay it, we credit voucher payable. Are we done yet? Absolutely not. What do we have to do? We have to reverse the encumbrance. You see this, this encumbrance here to encumber the contract. Now this encumbrance, remember the 10,000? Now we're going to remove it. We're going to have to remove it. Then again deduct an expenditure of 10,000. So what do we have to do? We have to reverse this entry. So notice we reverse this entry, we reverse the encumbrance. Now I just put fund balance committed, but it's committed for encumbrance, 10,000 just to keep it short, and credit encumbrances. So let me highlight it in yellow one more time so you can see it. So this encumbrance and it's, it doesn't matter how much I paid, I have to reverse the encumbrance for that amount, 10,000. We might have, the consultant might have gave us a $500 discount, 9,500. We still reverse the encumbrance for the same amount. Okay, let's see what we did so far. So simply put this account and this account is gone, this account and this account is gone. And remember we started with 10,000. I removed 10,000 of encumbrance. I, I removed the 10,000 of encumbrances here. Then I reverse this plus 10,000. Then I recorded my expenditure, which is minus 10,000. This is for the expenditure. What am I left with from the appropriation budget? 2,000. Now the department ordered books and training material, which is, which it estimated would cost 1,800. Now we did not consult someone or wanted to do as part of the CPE, order some books and training material for the employees. And at year end, we did not receive that material. So we ordered it, but we did not receive it. What do we need to do when we ordered? Well, when we ordered something, we need to encumbrance, encumber this account. Because once we order it, we have to remove it from the 2,000 to indicate we only have 2,000 of, 2,000 other in appropriation that we can use. Well, and we're going to assume that this encumbrance do not lapse. So if we did not receive it this year, we expect to receive it next year. Well, therefore we have to, we have to debit encumbrance 1,800 credit fund balance committed, which is budgetary control 1,800. So what did we do here? We encumbered 1,800. Just like when we encumbered the original 10,000 here for the consultant. Now we are buying material. And by year end, what happened is these goods, which is the books, the training material, we did not receive. What do we have to do at year end? And we're going to assume that these encumbrances do not lapse. It means they're going to be with us next year. Next year, once we receive them, we're going to accept them from this year, from year 1. The first thing I'm going to do, I'm going to do the closing entries for year 1. So let's focus on the closing entries. What do we have to do with the closing entries? The first thing we have to do, we have to close the original budget. So this has to go away. Debit fund balance and assigned 12,000, credit appropriation. Remember the budget is closed exactly for the same amount. Therefore, I'm going to debit appropriation, CPE, credit fund balance, unassigned 12,000. So let me go back here. So this is gone. And remember, this is gone. This is gone. This is gone. And this is gone. Cash will stay on the balance sheet. Cash is on the balance sheet or the statement of position or fund balance. The expenditure, 10,000, this need to be closed. I need to close my expenditure. I have 10,000 of expenditure. How do I close expenditure? Expenditure would reduce my fund balance. My fund balance is debit 10,000, the unassigned, and I credit expenditure. And what did I do? I reduced basically my equity because of the expenditure and the expenditure is gone. Let me go back and take out the expenditure. Expenditure is gone as well. So notice all these budgetary accounts are closed. Also, the expenditure, which is a temporary account, is closed. What else am I dealing with? I'm dealing with this encumbrance. Also, I have to close this encumbrance. You're saying that it's not going to lapse. I'm going to close it and I can reopen it next year. Not a problem at all. So the last thing I have to do is close this encumbrance. Credit the encumbrance, debit fund balance committed. Let's go to year two. And year two, the Community College appropriated $13,500 for employee's CPE. They raised the money. Well, let's journalize the budget. Fund balance unassigned $13,500. Credit appropriation. This is the original budget. The Community College received the end paid $1,800 for the books and training material that it ordered from the prior year. Remember from the prior year, we had $1,800 of encumbrance. Now, the first thing we could have done too, we could have reopened it. But what I'm going to do first, I did the budget and I'm going to reopen that encumbrance. So I'm going to restore the re-encumbrance. So I'm going to debit encumbrance, credit fund balance. So I reopened it. I restored the encumbrance from year one. Remember we said it did not lapse. We're not going to lose it. Once we receive it, we're going to go ahead and pay for it. Then we're going to record the expenditure for year one. We're going to debit expenditure, CPE material, $1,800. Credit cash or voucher payable $1,800. Then we're going to go ahead and close again the encumbrance and the fund balance. We're going to close the encumbrance and the fund balance that we reopened. And this is what we do. Now, what happened if the encumbrance did lapse? What happened if the encumbrance did lapse? If the encumbrance lapse, what would happen is this. When we receive the material, when we receive the material, we would have debited expenditure and credit cash. Why are we saying this? We are saying this to make the illustration that when it did not lapse, we record the expenditure in year two, but this expenditure is from year one. So we're saying this expenditure, although reported in year two, but it's in year one. So when we list the expenditure, we indicate that this expenditure from year one. When we are preparing our budgetary schedules, we will say this is from year one. However, if the encumbrance lapse and we did not reopen, basically we said we received those material and we charged expenditure $1,800 and we paid for them. Those $1,800, they go against the year two appropriation. Simply put, year two appropriation is $13,500 minus $1,800 and whatever is left will be available for year two. However, when the encumbrance did not lapse, this expenditure technically went against the expenses in year one. It did not use the appropriation in year two. That's the point I am trying to make. I hope this exercise gave you a better idea about how the encumbrance account work. What should you do now? You're going to go to Farhat Lectures, look at additional resources, MCQs, lectures. That's going to help you whether you are studying for your CPA exam or taking a governmental accounting course. Invest in your career, invest in yourself. It's worth it. Good luck, study hard and of course, stay safe.