Question

Elm City issued a purchase order for supplies with an estimated cost of $5,000. When the supplies were received, the accompanying invoice indicated an actual price of $4,950. What amount should Elm debit (credit) to encumbrances outstanding in its general fund after the supplies and invoice were received?

Answer 1

Answer:

$5000

Explanation:

Since Elm City issued a purchase order for supplies with an estimated cost of $5,000, although when the supplies were received, the accompanying invoice indicated an actual price of $4,950, the amount that Elm should credit to encumbrances outstanding in its general fund after the supplies and invoice were received; is $5000

Notice that encumbrances are set aside funds for a purpose, therefore upon ordering, encumbrances balance would increase, and Elm would have passed the following entry

Dr. Encumbrances...$5000

Cr. Fund Balance.....................$5000

Therefore even if the supply came with a shortfall in amount, in order for Elm City to show that the purpose for making that encumbrance has been met, it has to be liquidated by crediting the Encumbrance account by the full amount of $5000

Answer 2

Answer:

Encumbrances outstanding must be debited by $5,000

Explanation:

The original transaction included a credit to encumbrances outstanding for $5,000, but since the invoice varied, that transaction must be reversed by a $5,000 debit in order to record the appropriate transaction for $4,950.

In public accounts, encumbrances are used to prevent overspending, but when underspending happens, they must be reversed, you cannot record a purchase discount. You must do the whole accounting process over.