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In: Accounting

How to prepare a closing-entry of encumbrance ? Please give a example. Note: This is not...

How to prepare a closing-entry of encumbrance ?

Please give a example.

Note: This is not a financial accounting.

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Expert Solution

At the end of the year, any encumbrances that are going to be carried over to the following year are closed out as part of the fund balance entry.

** debit encumbrances for the estimated amount and credit reserve for encumbrances.

Let’s use the following information as an example:

Revenue = $100,000
Expenditures = $75,000
Encumbrances = $10,000

The encumbrances existed as of the end of the year and the government intended to spend the money in the next year.

When the encumbrances were recorded, the government would have debited encumbrances and credited reserved for encumbrances.

At the end of the year, the government would close out revenue, expenditures and encumbrances by debiting revenue for $100,000, crediting expenditures for $75,000, crediting encumbrances for $10,000 and crediting fund balance for $15,000.

For the balance sheet, this leaves reserved for encumbrances of $10,000 from the original encumbrances entry (we only reversed the debit as part of the year end entry) and the fund balance we just booked of $15,000.

The reserved for encumbrances account would likely be reported as fund balance – assigned and the fund balance of $15,000 would likely be reported as fund balance – unassigned.

Note that without the encumbrances, the fund balance would have been $25,000, but closing encumbrances out as part of the year end fund balance entry effectively reduces the amount that gets reported as fund balance – unassigned.


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