Expenditure-Cycle Journal Entries

Expenditure-cycle journal entries are presented in Illustration 3-4 in your textbook.

Budget Approval

As shown in Illustration 3-4, the first step is the recording of the legally adopted budget. Estimated revenues and estimated other financing sources are represented as debits. Appropriations and other financing uses are represented as credits. Budgetary fund balance can be debited or credited and is determined by the excess (or deficiency) of debits over credits in the other accounts. A credit to the budgetary-fund-balance account represents an anticipated increase in the fund balance of the fund, while a debit to the account represents an anticipated decrease in the fund balance of the fund.

 

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Purchase Order Issued

When an item or service is ordered, an encumbrance is journalized to indicate that a commitment to expend resources has been made. An encumbrance is debited, while the budgetary fund balance (reserve) for encumbrances is credited.

Example

The city of Sunbury, Pennsylvania, placed a purchase order for a new police car. The expected cost of the car is $75,000. Prepare the appropriate entry to record the purchase order for the new police car.

 

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Goods and Services Received

Once the item or service has been received, the corresponding encumbrance is reversed, with the appropriate expenditure and liability recorded.

Example

The new police car was delivered to the city. The final invoice price of the car was $76,250. Prepare the appropriate entries to record the expenditure.