CHAPTER 3: COMMITMENT ACCOUNTING - AXUG

Chapter 3: Commitment Accounting

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CHAPTER 3: COMMITMENT ACCOUNTING Objectives

The objectives are:

• Define an encumbrance. • Create a purchase order encumbrance. • Analyze a purchase order encumbrance transaction. • Process year-end commitments.

Introduction Commitment accounting is also known as Encumbrance Accounting. Commitment Accounting allows the recording of a commitment in the general ledger for future or planned expenses before the creation or collection of the underlying documents. Examples of these documents could be purchase requisitions or purchase orders before committed funds are paid out. 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.

Financials II in Microsoft Dynamics® AX 2012

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Defining Purchase Order Encumbrances An encumbrance is a reservation of budget funds that are set aside to make sure that actual expenditures do not exceed the available budget. If the encumbrance process is enabled, you can create purchase order encumbrances that are recorded in the general ledger when a purchase order is confirmed. Encumbered amounts can then be spent when vendor invoices that reference a purchase order are confirmed. Encumbered amounts on a purchase order are relieved when a vendor invoice is confirmed to spend all or part of the encumbered amount. Relieved amounts are subtracted from the amount of the purchase order encumbrance.

Budget Controls

Budget controls can be used to verify budget funds availability and to create reservations of budget funds against the budget balances.

Commitment accounting only records the commitment of funds in the form of a sub-ledger journal entry and subsequently in the general ledger.

For more information on budget controls, see the Use and Manage Budgets training material in the Finance 2 collection.

Pre-Encumbrances

A pre-encumbrance is a request to reserve budget funds for planned expenditures. The funds have been requested, but have not yet been approved for a purchase order. If the pre-encumbrance process is enabled, you can create purchase requisitions with a pre-encumbered amount for the planned expenditure. The pre-encumbered amounts are then recorded in the general ledger.

When purchase requisitions are approved, you can create purchase orders for the requested amounts. When you create and confirm a purchase order for the pre-encumbered amount on a purchase requisition, a purchase order encumbrance is created for that amount. The pre-encumbered amount is then automatically relieved. This avoids having a budget reservation be counted two times in the general ledger, as both a pre-encumbrance and an encumbrance.


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Setting Up Encumbrances Posting definitions and Posting profiles are used when creating Encumbrances. This allows the system to create sub ledger journal lines. To enable the encumbrances or pre-encumbrances the General ledger parameter form is used.

Scenario: Purchase Order Encumbrances

A department manager in your organization creates a purchase requisition for expected purchases for the department. One of the lines in the purchase requisition is for 12,000.00 U.S. dollars (USD) in new office furniture. The request is later approved and a purchase order is created that has a line to cover the 12,000.00 USD cost. The 12,000.00 USD pre-encumbrance on the purchase requisition is automatically relieved when the new purchase order is confirmed. The relieved amount on the purchase requisition line is then replaced by a 12,000.00 (USD) encumbrance on the purchase order.

Creating Posting Definitions

Posting definitions and Posting profiles are used when creating Purchase Order Encumbrances. This allows the system to create sub-ledger journal lines for originating transactions that meet selected criteria. Posting definitions contain the accounts or dimensions to generate when a posting definition is used.

After creating posting definitions, you must assign them to transaction posting types. Transaction posting definitions identify which posting definitions to use with a specific posting type.

NOTE: It is recommend to test all your posting definitions before you select any Use posting definitions check boxes in the Microsoft Dynamics AX system (For Encumbrances, posting definitions are found in the General Ledger Parameters form in Accounting Rules section). When you select this check box in any module, all posting definitions are active immediately. Posting definitions can be used only for the transaction posting types that are shown in the Transaction posting definitions form. Transaction posting types that are not shown in this form always use posting profiles.

Procedure: Set Up Posting Definitions

To set up a posting definition, follow these steps:

1. Click General ledger, then Setup, then Posting, and then Posting definition.

2. Click the New button to create a new posting definition. 3. Enter a name and description for the posting definition. You can

enter a longer description on the Memo tab. 4. Select the module for which the posting definition applies.


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5. Under Match criteria, click Add, and then enter the account number that must be in the originating entry.

6. Optional: If you have multiple match account numbers, in the Priority field, select a number to indicate the order in which the transactions should be processed. Accounts marked 1 are processed first.

7. Under Generated entries, click Add, and then enter the account number where the system will generate a ledger line when a match exists.

8. In the Generated debit/credit field, select the way to generate the debit or credit.

9. Optional: To link to an existing posting definition, select the definition on the Linked definitions tab. Linked posting definitions must be associated with the same module. This tab is visible only if the current posting definition is not linked to another posting definition. If it is already linked to another definition, the Test tab is visible.

10. Optional: To test the posting definition, click Test. A test allows you to enter sample transaction data and then view the system-generated ledger lines that will result when the posting definition is used.

11. Close the form.

FIGURE 3.1 POSTING DEFINITION

Procedure: Enable Purchase Order Encumbrances

To enable encumbrances or pre-encumbrances for purchase orders, follow these steps:

1. Open General ledger, click Setup, and then select General ledger parameters.

2. Click Ledger, and then click the Accounting rules fast tab. 3. Select the Use posting definitions check box. Click Yes if you are

asked to confirm the selection.


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4. Select one or both of the following check boxes: a. Select Enable encumbrance process to create encumbrances

only. b. Select Enable pre-encumbrance process to create both pre-

encumbrances and encumbrances. If you select this check box, the Enable encumbrance process check box is automatically selected.

5. Close the General ledger parameters form.

Purchase Order Encumbrance Transactions A purchase order is a typical encumbrance transaction. It is a expenditure amount for which there has been an expenditure of funds.

Verify Purchase Order Transactions

You can view encumbrances by ledger account for a selected purchase order, and view any amounts that have been relieved. Encumbered amounts on a purchase order are relieved when a vendor invoice is confirmed to spend all or part of the encumbered amount. The relieved amount can include any invoice credits or price adjustments to the encumbered amount. You can also view the remaining amount of any encumbered amounts for a purchase order, if the whole encumbered amount was not relieved.

Procedure: Viewing Encumbrance Transactions

To view encumbrances for a purchase order, follow these steps:

1. Select Accounts payable, then Common, then, Purchase orders, and then All purchase orders.

2. Double-click a purchase order. 3. On the Action Pane, click the Purchase tab, and then click

Accounting, View subledger journal.


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Encumbrance Year-End Process The purpose of this lesson is to establish policy and procedures to ensure that year-end encumbrances are processed appropriately.

Encumbrance Year-End Overview

If you record encumbrances for purchase orders in the general ledger or have budget control enabled for recording reservation of budget funds, you can generate closing transactions to the general ledger and against budget reservations at the end of each fiscal year.

NOTE: Use this process if using budget control only, commitment accounting only, or both budget control and commitment accounting. If budget control is not enabled, then this process does not impact budget reservations. Instead it only creates general journal entries in accordance with the accounting rules (posting definitions) for commitment accounting.

At the start of the new fiscal year, you can create opening transactions to correctly record the encumbrances and budget reservations. These transactions help make sure that the reservations for purchase order encumbrances are correctly recorded on the year-end financial statements and in budget control.

Year-End Options

Closing purchase order encumbrances is a separate process from closing a fiscal year, and is usually performed before a fiscal year is closed. There are two year-end processing options to close purchase order encumbrances in the fiscal year that is ending and re-encumber them in the new fiscal year.

The following table shows options and results for year-end close:

Option Process

Process and Do Not carry forward budget year-end

Closing Steps: 1. The remaining encumbrances in the general ledger and outstanding budget reservations for encumbrances are reversed. 2. Year-end closing transactions are generated in the general ledger. Opening Steps: 1. Closing transactions are reversed. 2. Encumbrances are re-established in the general ledger. 3. Budget reservations for encumbrances are created for the purchase orders that are being processed against next year's budget. NOTE: This step can only occur if Budget Control is activated.


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Option Process

Process and carry forward budget year-end

IMPORTANT: This option is only available if budget control is enabled. Closing steps: 1. The remaining encumbrances in the general ledger and outstanding budget reservations for encumbrances are reversed. 2. Year-end closing transactions are generated in the general ledger. 3. Budget adjustments are created to reduce the budget in the fiscal year that is being closed. 4. Budget adjustments are created in the new fiscal year to re-establish the budget register entries that were carried forward from the previous fiscal year and classified as carry forward budget.

Procedure: Run Year-End Encumbrance

Perform the following steps to run a year-end encumbrance:

1. Open General ledger, select Periodic, select Fiscal year close, and then click Purchase order year-end process.

2. Click Retrieve purchase orders in the lower pane to select purchase orders for the year-end process. This opens a query form where you can select purchase orders by criteria such as date, date range, vendor account, purchase order type, purchase order balance, or financial dimensions.

3. Click OK in the Inquiry form. 4. The results of the query are displayed in the lower pane of the

Purchase order year-end process form. Select the Include check box for each purchase order to include in the year-end processing.

5. Encumbrances for those purchase orders will be reversed in the fiscal year that is ending and the encumbered amounts will be made available in the new fiscal year. You can click Include all to select all of the purchase orders in the list or click Exclude all to clear your selections.

6. In the Year-end option field, select how to process purchase order encumbrances.

7. Select an original budget code, if you selected the Process and carry forward budget year-end option. This code will be used for budget adjustments that are made in the closing fiscal year. The code that you select must not have a workflow selected, because the year-end processing would stop for workflow approvals.


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8. Select a carry forward budget code, if you selected the Process and carry forward budget year-end option. This code will be used for budget adjustments that are made in the new fiscal year. The code that you select must not have a workflow selected, because the year-end processing would stop for workflow approvals.

9. Verify the default values in the Calendar and Fiscal year fields and make any changes.

10. Verify the default values for the Closing parameters fields and make any changes. a. The default value for the Accounting date field is the last day of

the selected fiscal year. b. The Type field is typically set to Operating for a period that can

be used to record accounting transactions. You can select Closing if you are using a closing period to separate the closing transactions.

c. If you selected a type of Closing, select the closing period that you want to use.

11. Verify the default values for the Opening parameters fields and

make any changes. a. The default value for the Accounting date field is the first day

of the opening fiscal year. b. The default value for the Period field is the first period that has a

type of Operating in the opening fiscal year. This type of period is used to record accounting transactions. You can select a different period, but it must have a type of Operating.

12. Click Process when you are ready to run the purchase order year-end

process. 13. If any messages are displayed, make the necessary corrections and

run the process again for the affected purchase orders.


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Encumbrance Reconciliation Report

The Encumbrance Reconciliation Report identifies imbalances between budget reservations for encumbrances and the corresponding encumbrances tracked in the general ledger. It is possible to view a detailed version of the report, or view only the differences. The detailed version shows totals by transaction or document number for all encumbrances. The differences-only version shows only instances where the budget reservation for encumbrances does not balance with the corresponding encumbrance accounts in the general ledger.

To view the Encumbrance Reconciliation report open General ledger, select Reports, select Reconciliation Vendor, and then click Encumbrance to access the report.

NOTE: The commitment accounting ledger accounts need to be setup to use the appropriate account category either pre-encumbrance or encumbrance for the amounts to be reflected on the report.

Summary This section described the setup and review of Commitment Accounting and how it allows for future or planned expenses before the creation or collection of the underlying documents.

Anyone who decides to use the functionality discussed in this section may help his or her company in planning ahead to meet budgeted expenses.


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Test Your Knowledge Test your knowledge with the following questions.

1. Define the term encumbrance

2. Can a purchase order be used as a encumbrance transaction?

( ) Yes ( ) No ( ) It depends on the setup in the general ledger parameters form

3. Is closing purchase order encumbrances part of the closing a fiscal year process?

( ) Yes ( ) No ( ) It depends on the setup in the general ledger parameters form


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Quick Interaction: Lessons Learned Take a moment and write down three key points you have learned from this chapter

1.

2.

3.


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Solutions Test Your Knowledge

1. Define the term encumbrance

MODEL ANSWER:

Encumbrances allow the recording of a commitment in the general ledger for future or planned expenses before the creation or collection of the underlying documents.

2. Can a purchase order be used as a encumbrance transaction?

(•) Yes ( ) No ( ) It depends on the setup in the general ledger parameters form

3. Is closing purchase order encumbrances part of the closing a fiscal year process?

( ) Yes (•) No ( ) It depends on the setup in the general ledger parameters form

Documents

CHAPTER 3: COMMITMENT ACCOUNTING - AXUG