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Encumbrances in Payables

If you enable the Use PO Encumbrance Financials option, Purchasing and Payables create encumbrances and encumbrance reversals against the budgets you define in General Ledger.
The system calculates funds available using the following equation:
Funds Available = Budget - Actuals - Encumbrances
Encumbrance with Accrual Basis Accounting
If you use accrual basis accounting as your primary accounting method, the system encumbers nonrecoverable tax.
Note: Payables create encumbrances for prepayment type matched invoices but not for prepayment applications.
The encumbrances Purchasing and Payables create depend on whether the invoice is purchase order matched and whether On Receipt (Perpetual) or Period End Accrual method is used.
1->Unmatched Invoice: If you enable the Use PO Encumbrance Financials option and enter an unmatched invoice, Payables creates an expense encumbrance during invoice validation and reverses this encumbrance during creation of invoice accounting entries.
2->Matched Invoice, On Receipt (Perpetual) Accrual: If you use the On Receipt Accrual method for expense items in Purchasing, Purchasing creates an encumbrance for the goods when the purchase order is approved, then reverses that encumbrance when it records the actual expense at the time of delivery of goods. When the invoice is matched to a purchase order and validated in Payables, it is not necessary for Payables to record an encumbrance for the expense. However, Payables will create an encumbrance for any invoice price variance or exchange rate variance. Payables does not currently create encumbrances for quantity variances when you accrue on receipt
3-> Matched Invoice, Period End Accrual: If you use the Period End Accrual method for your expense items in Purchasing, Payables reverses the PO encumbrances. When the invoice is matched to a purchase order and validated in Payables, Payables records an encumbrance for the expense only if the PO Encumbrance Type and the Invoice Encumbrance Type in the Financial Options window are the same. Payables creates an encumbrance for any quantity variance, invoice price variance, or exchange rate variance even if the PO Encumbrance Type and the Invoice Encumbrance Type are the same.
Cancelling a matched invoice reestablishes the PO encumbrance if the purchase order is not in closed status.
Encumbrance with Cash Basis Accounting
If you use the cash basis accounting method, Payables creates encumbrances during Invoice Validation and relieves them during create payment accounting entries. Payables prorates your encumbrance reversal based on the invoice payment amount. Payables reinstates the invoice encumbrance when payment is cancelled.
Encumbrance with Combined Basis Accounting
If you use the combined basis accounting method, Payables creates encumbrances for your primary accrual set of books only.

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