Question

what is the accounting associated with commitments? What does the auditor need to look for when reviewing the commitments of their clients?

Answer 1

financial commitment

An undertaking to commit substantial expenditure at a future date. Such pledges are deemed liabilities and must be shown as such in the firm's balance sheet (as accompanying notes or footnotes) even if the expense has not yet been incurred to have become an actual liability. See also capital commitment.

This allows the financial records to reflect the allocation of budgetary resources when they are committed instead of when the actual expenditure is recorded, providing financial information earlier than “budget to actual” reports.  

Examples of commitments might include internal purchases or monthly utility

payments. Commitment accounting records the reservation of funds for future

payment obligations in the general ledger.

In Commitment accounting the accounting entries are made and the appropriation is charged when a contract is started or when an order is placed for goods or services. The entries record the amount to be reserved out of the unencumbered balance that is remaining in an appropriation to honor the commitment.