The City of Walnut Creek uses encumbrance accounting and its fiscal year ends on June 30. On May 6, a purchase order was approved and issued for supplies in the amount of $6,000. Walnut Creek received these supplies on June 2, and the $6,000 invoice was approved for payment. What General Fund journal entry or entries should Walnut Creek make on June 2, upon receipt of the supplies and approval of the invoice?

• A. Encumbrances Outstanding 6,000; Encumbrances 6,000; Expenditures 6,000; Vouchers Payable 6,000
• B. Encumbrances 6,000; Appropriations 6,000; Fund Balance—Unassigned 6,000; Vouchers Payable 6,000
• C. Supplies 6,000; Vouchers Payable 6,000
• D. Appropriations 6,000; Encumbrances 6,000; Supplies 6,000; Vouchers Payable 6,000

Answer: (A)

Encumbrance accounting separates budgetary commitments from actual expenditures. When the purchase order is issued, an encumbrance is created to show the committed budget authority, and the budgetary control reduces available appropriations by recording the encumbrance and a corresponding budgetary balance.

On June 2, after receiving the supplies and approving the invoice, the encumbrance is released and the government records the actual expenditure and the payable liability. This is done with two entries: first, reverse the encumbrance by transferring the encumbrance amount out of encumbrances outstanding and back into the encumbrances control; and second, recognize the expenditure and establish the liability to pay the supplier.

The correct entries are:

• Debit Encumbrances Outstanding 6,000; Credit Encumbrances 6,000

• Debit Expenditures—Supplies 6,000; Credit Vouchers Payable 6,000

This sequence reflects removing the budgetary encumbrance and recording the actual expense and payable, which aligns with the encumbrance method used in the General Fund.