A City's General Fund orders a new police car for $40,000 on Nov 1. The car is delivered on Jan 15 of the next year. The City uses encumbrance accounting. What is the journal entry on Dec 31 (Year-End)?

Answer options:

DR Expenditures $40,000; CR Vouchers Payable $40,000

DR Encumbrances $40,000; CR Budgetary Fund Balance $40,000

No journal entry is required to record expenditure; the Encumbrance remains on the books (or is closed to Fund Balance depending on policy).

DR Expenses $40,000; CR Accounts Payable $40,000

How to approach this question

Encumbrance = Commitment (Order). Expenditure = Liability (Delivery). No delivery = No expenditure.

Full Answer

C.No journal entry is required to record expenditure; the Encumbrance remains on the books (or is closed to Fund Balance depending on policy).✓ Correct

Since the car was not received by year-end, no expenditure or liability exists. The encumbrance remains outstanding (or is reclassified to Fund Balance) to reflect the commitment.

Common mistakes

Recording expenditure at order date.

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