The air ambulance department for a provincial government uses an encumbrance system. On October 15, 2013, the department manager issues a purchase order for $20,000 for propellers. The propellers were delivered on October 31, 2013, with an invoice for $18,700. What should be recorded on October 15, 2013?

Question

Quizplus · Accepted Answer

An encumbrance represents an amount set aside for future expenditures, so the correct entry would be to record an encumbrance for the full amount of the purchase order ($20,000) on October 15, 2013. When the invoice arrives on October 31, 2013, the accounts payable is recorded for the actual amount of the invoice ($18,700). Therefore, the correct entry on October 31, 2013, would be to reverse the encumbrance previously recorded for $20,000 and record the accounts payable for $18,700.

The Air Ambulance Department for a Provincial Government Uses an Encumbrance