When computers are ordered by the mayor's office, the purchase order should be recorded in the General Fund as a debit to which account?

• A. Expenditures
• B. Accounts Payable
• C. Encumbrances
• D. Revenues

Answer: (B)

In governmental fund accounting, issuing a purchase order creates a commitment to spend rather than an actual debt. That’s why the entry at the time of ordering is to debit Encumbrances and credit a budgetary reserved balance (often titled Budgetary Fund Balance - Encumbrances or a similar encumbrance reserve). This encumbrance shows that part of the appropriation is set aside for the computers and cannot be used for other purposes, without recognizing an actual expenditure or a payable yet.

Expenditures are recognized later, when goods are received or an invoice is received and processed, at which point the encumbrance is released and a liability to pay is recorded (often through Accounts Payable) and the corresponding expenditure is recognized. Revenues are not involved in this transaction, and recording a liability or expenditure at the purchase-order stage would misstate the timing of the actual obligation.

So, at the purchase-order stage, the appropriate debit is Encumbrances.