9.3 Budgetary Accounting and Encumbrances

Blueprint Boundary

Detailed state and local government budgetary and encumbrance journal-entry sequences are emphasized in the 2026 BAR Blueprint's State and Local Governments area rather than as FAR representative tasks. FAR still touches the concept because Area I includes governmental measurement focus, fund selection, and budget-to-actual variance ideas. You should know what each budgetary account means and how the encumbrance cycle flows, even if FAR is unlikely to demand a full opening-budget entry.

Why Governments Record Budgets

A business budget is mostly a planning tool. A government budget is frequently a legal authorization to spend, adopted by the governing body. Citizens and oversight bodies need assurance that officials spent within their appropriations and used restricted revenue sources only for intended purposes.

Budgetary accounts are recorded for control only. Recording estimated revenues does not mean taxes have been earned, and recording appropriations does not mean supplies have been purchased. These are memorandum-style control accounts, distinct from the actual modified accrual revenue and expenditure accounts.

Budgetary integration is most common in the general fund and major special revenue funds, where a legally adopted annual budget exists. Capital projects and debt service funds may rely on project-length or bond-ordinance authorizations rather than annual appropriations, so they are not always integrated the same way. The key takeaway for FAR is the purpose: governments record the budget in the accounts so the ledger itself enforces the legal spending ceiling, flagging any attempt to exceed appropriations before money goes out the door.

Budgetary Accounts

The opening entry debits estimated revenues, credits appropriations, and plugs budgetary fund balance. If estimated revenues exceed appropriations, the plug is a credit (planned surplus). If appropriations exceed estimated revenues, the plug is a debit (planned deficit). At year-end these budgetary accounts are reversed.

Encumbrance Cycle

An encumbrance is recorded when a purchase order or contract is issued. It earmarks budget authority so the same dollars cannot be committed twice. An encumbrance is not an expenditure and not a GAAP liability.

The normal sequence is:

1. Record the annual appropriated budget.
2. Issue a purchase order and record an encumbrance.
3. Receive the goods or services.
4. Reverse the encumbrance for the originally estimated amount.
5. Record the actual expenditure and payable for the invoice amount.

Worked example: a city issues a purchase order for $9,800 of road salt. It debits Encumbrances and credits Budgetary fund balance reserved for encumbrances $9,800. When the salt arrives with a $9,900 invoice, the city reverses the $9,800 encumbrance entry, then debits Expenditures $9,900 and credits Vouchers payable $9,900. The actual expenditure is the invoice amount, not the estimate; the $100 difference is simply absorbed in the actual expenditure.

Budgetary Comparison and Lapsing Authority

Governments present budgetary comparison information for the general fund and each major special revenue fund that has a legally adopted annual budget. The schedule shows the original budget, the final amended budget, and actual amounts, with variance columns. That is why exam items distinguish original from final budget: the final budget reflects legally authorized amendments enacted during the year.

Many appropriations lapse at year-end, so unused authority expires. Outstanding encumbrances may be closed and re-established next year, or reported as committed or assigned fund balance, depending on policy and legal authority.

Exam traps: do not call a purchase order an expenditure; do not call an appropriation an expense; do not treat the budget entry as GAAP revenue recognition. The actual modified accrual expenditure occurs only when goods or services are received and a current-resource liability is incurred.

A useful mental model is that budgetary accounting and modified accrual accounting run on two parallel tracks. The budgetary track (estimated revenues, appropriations, encumbrances) measures legal spending authority and is reversed at year-end. The actual track (revenues, expenditures, fund balance) measures real financial-resource flows under GAAP. The same purchase order touches both tracks but in different ways: it creates an encumbrance on the budgetary track and produces no actual entry until the goods arrive.

Variance analysis ties the two together. The budget-to-actual schedule computes a variance for each line by comparing actual results to the final budget. A favorable expenditure variance means actual spending came in under the appropriation; an unfavorable revenue variance means collections fell short of estimated revenues. Because the schedule is prepared on the government's budgetary basis, which may differ from GAAP, GASB permits presentation on the budgetary basis with a reconciliation to GAAP when the two differ.

For FAR, recognize the budgetary basis can diverge from modified accrual (for example, encumbrances may be treated as the equivalent of expenditures on the budgetary basis), and that the comparison's purpose is demonstrating legal compliance, not GAAP measurement.