Fund Accounting

Fund accounting comprises the set of accounting practices and standards used to organize and track the finances of not-for-profit organizations. These practices and standards differ in significant ways from those used by for-profit organizations. The driving force behind these differences is the need to be able to strictly segregate and track monies received and expended to accomplish specific purposes. To achieve this strict segregation, accounting methods are established that utilize funds to track financial activities.

Compiere has the ability to track and report all the associated functions of fund accounting. Common accounting and financial terms that appear on reports are not defined.

  • Controlled: Funds available within the appropriate budgetary boundaries governed by the As Of date.
  • Accounted: Funds available within the appropriate budgetary boundaries based on the standard accounting periods.
  • Available: Unexpended, uncommitted funds included in an organization’s or project’s budget. Public sector organizations report periodically on budgets, as well as on realized and midstream expenses (encumbrances).

Compiere Accounting for encumbrances: these are a contingent liability, contract, purchase order, payroll commitment, tax payable, or legal penalty that is chargeable to an account. It ceases to be an encumbrance when paid-out or when the actual liability amount is determined and recorded as an expense.

An Encumbrance is the name given to funds that have been reserved when a purchase requisition is finalized and encumbered. When a requisition is processed, funds are placed aside for that transaction. Those funds are no longer available for use in other transactions, but also have not been included in the Actual Funds balance because a payment has not yet been generated and the funds have not physically left the university. The purpose and main benefit of encumbrance accounting is avoiding budget overspending.

In Compiere Fund accounting, commitments related to unfilled contracts for goods and services including purchase orders. The purpose of encumbrance accounting is to prevent further expenditure of funds in light of commitments already made. At year-end, encumbrances still open are not accounted for as expenditures and liabilities but, rather,as reservations of fund balance. When an estimated or contractual liability is entered into, the entry is to debit encumbrances for the estimated amount and credit reserve for encumbrances. When the actual expenditure of an amount previously encumbered is known, there are two entries. The first entry is to reverse the original encumbrance. The second entry is to record the expenditure by debiting expenditures and crediting voucher payable. At year-end, the encumbrance account is closed out against fund balance.

Encumbrances can also be used to predict cash outflow and as a general planning tool. Encumbrances are important in determining how much funds are available. The formula used to determine funds available is:

    Funds Available = Budget - Actuals - Encumbrances

When the vendor is paid, the encumbrance is reversed and the funds will appear under the Actual funds balance instead of as an Encumbrance balance.

PO Reconciliation is an on-going process of validating encumbrance balances on the department ledgers. To better determine all outstanding PO encumbrances, reporting tools can be used that show encumbrance amounts by PO:

  •     Encumbrance Query
  •     Encumbrance Balance Reports

Another method to determine the current outstanding encumbrance balance for a particular PO is to use the PO Encumbrance Activity.

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