APPENDIX B ENCUMBRANCE ACCOUNTING This Appendix was written to be read in its entirety and has been broken down into the following sections: 1. Why Encumber? 2. How Does Encumbrance Accounting Work? 3. How Often Should Encumbrances be Posted to the General Ledger? 4. How to Close Purchase Orders Manually? 5. How to Remove a Line Item after it s been Encumbered? 6. What Else Can be Done to Verify Encumbrance Figures? 7. How to Activate Encumbrance Accounting. 8. How do Requisitions affect the Encumbrance process? 1. WH ENCUMBER? The purpose of encumbrance accounting is to track anticipated spending as compared to budgeted amounts; thus allowing for more effective cash planning and control. 2. HOW DOES ENCUMBRANCE ACCOUNTING WORK? Encumbrance Accounting is a two step process. The first step encumbers newly entered/created purchase order line items to the General Ledger, which helps prevent overspending. The second step unencumbers those line items once they have been pulled into an Accounts Payable invoice for payment. Step 1 Encumbering a Purchase Order The steps described here assume that Encumbrance Accounting has been activated. Information on how to turn on Encumbrance Accounting is located at the end of this Appendix. Once a purchase order is entered/created or new line items are added to an existing purchase order, those line items will need to be encumbered. The system knows which lines to encumber by using flags. The flags are set behind-the-scenes and are not visible from within the Purchase Order application (but, can be viewed by using Relativity). The program s logic takes 6 different flags into account: Flag 1 OpenCloseCd which designates whether or not the purchase order is Open or Closed. If it s Open then that field is empty or has spaces, once it s Closed that field will contain a C. Flag 2 EncumberThisPon which basically asks, Should this purchase order be encumbered? es or No? This flag is set by PO Type Codes which are defined in their associated Maintenance screen. If a purchase order is entered without a Type Code, then this flag will automatically set to. Flag 3 EncumberThisItemn which asks, Should this line item be encumbered? es or No? This flag is set by the PO Item Codes as defined in their Maintenance screen. If a purchase order is entered without an Item Code, then this flag will automatically set to. Flag 4 ItemOpenn uses es or No to set whether or not the line item is Open or Closed. es means it is Open (it hasn t been pulled into an Accounts Payable invoice) and No means it is Closed (it has been pulled into an invoice). Flag 5 Encumberedn uses es or No to set whether or not the line has been encumbered. Flag 6 Unencumberedn uses es or No to set whether or not the line has been unencumbered. 1
If Flag 2 is N, then none of the line items (no matter what Flag 3 is set to) will ever be encumbered; and since this Appendix deals with purchase orders that will go through the encumbrance process, none such purchase orders will be addressed in this appendix. Additionally, if Flag 3 is set to N, then that line item will not be encumbered and therefore not addressed in this appendix. With all of the above in mind, a purchase order line item will be encumbered and thus fulfill Step 1 of the Encumbrance process, when the flags are set as such: Table 1 Flags after purchase order is entered Flag Status OpenCloseCd spaces EncumberThisPon EncumberThisItemn ItemOpenn Encumberedn N Unencumberedn N In other words, this purchase order and line item are flagged to be encumbered and both the purchase order and line item is open, but it hasn t yet been encumbered. Below is an example of how Step 1 works. Firstly, the GL accounts that will hold the Encumbrance figures are defined in the System Defaults of the Purchase Order program. Notice that only the Fund portion of the GL number is set as a wild card. This means that each Fund will need to have its own Encumbrance and Reserve for Encumbrance Accounts established in the General Ledger system: 2
Figure B-1 Then a new purchase order is keyed into the system. Notice that neither a Type Code nor an Item Code has been used; therefore, both Flag 2 and Flag 3 are set to. The status on the Line item is O for Open; so, Flag 4 is set to. And, since this is a freshly entered purchase order, both Flags 5 and 6 are set to N. 3
Figure B-2 Next, print an Encumbrance Distribution Journal by taking that option from the Purchase Order Menu (Figure B-3) and filling in the appropriate detail. 4
Figure B-3 When the Encumbrance Distribution Journal is printed and there are purchase orders to be encumbered, it will look as below: 5
Figure B-4 The last thing to do is to post the Encumbrance Distribution Journal (Purchase Orders > Post Encumbrances to General Ledger). When the Journal is posted an Encumbrance Posted Journal report prints, the figures in GL are updated, and Flag 5 Encumberedn is changed to. So, at the end of Step 1 the Flags will be as below: Table 2 After purchase order is encumbered Flag Status OpenCloseCd spaces EncumberThisPon EncumberThisItemn ItemOpenn Encumberedn Unencumberedn N 6
Step 2 Unencumbering a Purchase Order The system uses the same 6 flags as defined in Step 1 to determine when to unencumber line items for Step 2. A purchase order line item will be unencumbered and thus complete the Encumbrance process, when the flags are set as such: Table 3 After purchase order is brought into an Accounts Payable invoice Flag Status OpenCloseCd spaces EncumberThisPon EncumberThisItemn ItemOpenn N Encumberedn Unencumberedn N In other words, this purchase order and line item are flagged to be encumbered, the purchase order is open, and the line item is closed. The line item has been encumbered, but it hasn t yet been unencumbered. Below is an example of how Step 2 works. Continuing with the purchase order example that was created and encumbered in Step 1, the first action in Step 2 is to pull that PO into an Accounts Payable invoice. By doing so, Flag 4 ItemOpenn flips to N : 7
Figure B-5 Therefore, at this point, all the Flags are set so that if the user goes back into the Purchase Order system and runs the Encumbrance Distribution Journal again, the example PO is set to be unencumbered: 8
Figure B-6 When this Encumbrance Distribution Journal is posted, then Step 2 will be complete and the Flags will be concluded as: Table 4 After purchase order is unencumbered Flag Status OpenCloseCd C EncumberThisPon EncumberThisItemn ItemOpenn N Encumberedn Unencumberedn 3. HOW OFTEN SHOULD ENCUMBRANCES BE POSTED TO THE GENERAL LEDGER? It is the recommendation of MSI that an Encumbrance Distribution Journal should be run and posted daily in order to insure the most accurate cash planning. 9
One thing to keep in mind, though, is that once a purchase order line item is unencumbered, that is the end of the process. Meaning, if the AP invoice that a PO has been pulled into is deleted (which re-opens that purchase order) after that PO has been unencumbered, then the PO will not be re-encumbered. Another thing to keep in mind is that if a purchase order is keyed into the system and then immediately pulled into an AP invoice (without encumbering it first), then that purchase order will not show up on any Encumbrance Distribution Journal to be either encumbered or unencumbered since the cash is already spent and is not just pending spending. 4. HOW TO CLOSE PURCHASE ORDERS MANUALL? If a purchase order is entered, but will not be used in AP Invoice Entry, then the PO needs to be closed manually. There are two possible scenarios where this may happen: 1) The amounts have been encumbered; the flags are set as Table 2 (page 6). To unencumber the amounts: a. Go into Purchase Order Entry b. Double-click on each (O)pen status line item, and select es to the below message. This will automatically set the flags as in Table 3 (page 7). c. Double-click on each (X) status line item and change the status to (C)losed. d. Print the Distribution Journal and Post it to the General Ledger. Once this is done, then the flags are set as in Table 4 (page 9) and the purchase order is closed. 2) The amounts have not been encumbered then simply delete the purchase order. If for some reason that is not appropriate, then encumber it first and follow the instructions for scenario #1 above. 5. HOW TO REMOVE A LINE ITEM AFTER IT S BEEN ENCUMBERED? If a purchase order is keyed incorrectly into the system and the error is not discovered until after the line item has been encumbered to the GL, follow the below steps to remove it from the Purchase Order system: 1) Manually close the wrong line item by double-clicking on it and selecting "es" from the popup message (see detail in section 4. How to Close Purchase Orders Manually). 2) Key in a second line item exactly the same as the wrong line item, but with a negative unit price (the Description field may also be changed, depending on how the user prefers for this line item to be displayed). 3) Key in the correct line item. 4) Print and post encumbrances. 5) Manually close the second line item with the negative unit price. 6) Print and post encumbrances. 10
These steps will leave the PO with the correct dollar amount and ensure that it is properly handled through the encumbrance process. 6. WHAT ELSE CAN BE DONE TO VERIF ENCUMBRANCE FIGURES? It is recommended that the Open Encumbrance Report in the Purchase Order system and the Revenue and Expense Report Month and TD Actual with Outstanding Encumbrances in the General Ledger system are run weekly, at least. The total amounts on each report should tie out to one another. When running each report it is not necessary to modify any of the report defaults, just click OK. When asked which printer to print to, it is recommended that these reports are sent to FinePrint as the GL report can be quite lengthy. NOTE: If you do not currently have FinePrint installed, contact your MSI sales representative. Items that appear on these reports have been encumbered to the General Ledger, but have not yet been unencumbered. Below are examples of each report. Notice that the Fund Total from the Open Encumbrance Report matches the Total Fund Expenses under the Outstanding Encumbrances column of the Revenue and Expense Report Month and TD Actual with Outstanding Encumbrances: Open Encumbrance Report Figure B-7 11
Revenue and Expense Report Month and TD Actual with Outstanding Encumbrances Figure B-8 7. HOW TO ACTIVATE ENCUMBRANCE ACCOUNTING Activating Encumbrance Accounting requires efforts from both the customer and from Municipal Software. Steps for the customer to complete In the General Ledger system: 1) Establish an Encumbrance Account and Reserve for Encumbrance Account number in each fund. 2) The Department, Class, Sub-class, and Object all need to be the same. Only the fund number will differ. In the Purchase Order system: 1) Make sure there are no open purchase orders or purchase order items. This can be done by running a Purchase Order Report that is set to include only open PO items. 2) Enter the Encumbrance accounts just established in the GL into the PO System Defaults with the fund portion substituted by pluses (see Figure B-1 for an example). 3) Look at each Item Code in Item Code Maintenance to insure that the Encumber? flag is properly set (Figure B-9). 12
Figure B-9 4) Look at all the Type Codes in Type Code Maintenance to ensure that the Encumber? flag is properly set. Note that the Type Code encumbrance setup overrides the Item Code setup. Meaning that whatever the Type Code that s used when entering a PO is set to will override the Item Code flag (Figure B-10). 13
Figure B-10 5) After Municipal Software completes their steps, then encumbrancing will need to be tested. This can be done by: a. Enter in a sample purchase order using a type code that is set to Encumber? es and a line item for each fund. b. Print the Encumbrance Distribution Journal to insure that each of the line items show up correctly. c. Post the Journal to the GL. d. Open the Accounts Payable system and pull that PO into an AP invoice. e. Go back into the Purchase Order system and print the Encumbrance Distribution Journal again. Did the line items unencumber correctly? If so, then Post the Journal to the GL to offset step c above. f. At this point, the setup is complete. Simply go back into the AP system and delete the invoice. That will re-open the Purchase Order and allow it to be deleted too. Steps for MSI to complete MSI will need to dial into the modem machine and check the box for Encumbrance Accounting? in the POINSTAL program: 14
Figure B-11 8. HOW DO REQUISITIONS AFFECT THE ENCUMBRANCE PROCESS? Requisitions contain 4 of the 6 Flags that affect the Encumbrance process. Flags #1 4 are all set in Requisition Entry per the data that s keyed. When a purchase order is created from a requisition the settings on these 4 Flags transfer their over to the PO. So, if the requisition uses a P.O. Type Code that set to Encumber? es (see Figure B-10) or no P.O. Type Code at all, then Flag 2 EncumberThisPon will be set to and that setting will transfer to the purchase order once it is created from the requisition. The same is true of the other Flags whatever the Flag is set to in the requisition will be the same setting in the purchase order created from that requisition. See the example below: Table 5 Flag Requisition Status Purchase Order Status OpenCloseCd spaces spaces EncumberThisPon EncumberThisItemn N N ItemOpenn 15