In the encumbrance cycle, after the purchase is delivered, the correct action is to:

• A. Increase encumbrances
• B. Record expenditure only
• C. Decrease encumbrances and record expenditure
• D. Ignore the encumbrance

Answer: (C)

Encumbrances reserve budget authority for commitments, and when the goods are delivered that commitment is fulfilled. At that moment you convert the encumbrance into an actual expenditure. The proper action is to decrease the outstanding encumbrances by the amount delivered and to record the expenditure for that same amount. This closes the encumbrance and reflects the actual cost incurred. Increasing encumbrances would create a new commitment for something already satisfied, which isn’t correct. Recording expenditure alone would leave the encumbrance balance unchanged, and ignoring the encumbrance would misstate the budgetary controls.