Commitment Accounting

Commitment accounting is an integral part of budgetary control. By establishing and tracking commitments to spend and receive amounts—and by checking these amounts against budgets—an organization can readily report on and control future spending and revenue.

In Commitment Control, three expenditure commitment amount types and one revenue commitment amount type are provided:

  • Planned: A free-form non-actuals amount.

    Can be used as a memo entry or an entry to estimate future spending. Can also be used to record third-party source transactions that precede pre-encumbrance documents. The latter usage requires defining a new source transaction type.

  • Pre-encumbrance: Amount that you expect to spend, but which you have no legal obligation to spend.

    A requisition is a typical pre-encumbrance transaction.

  • Encumbrance: Amount that you have a legal obligation to spend in the future.

    Issuance of a purchase order to a supplier is a typical encumbrance transaction.

  • Recognized Revenue: Revenue that you have booked and expect to receive.

Except in the case of federal government accounting, your actuals ledger does not store planned, pre-encumbrance, and encumbrance amounts, and it might or might not store recognized revenue amounts. (Federal accounting also records encumbrances in the actuals ledger and treats them as actual transactions.)

The Commitment Control ledgers and activity logs store pre-encumbrance amounts, encumbrance amounts, and recognized revenue amounts.

When you use Commitment Control, you can check both commitments and actual transactions, or expenditures, against control budgets. The following procedure from the procurement life cycle is a typical example of budget checking from commitment through actual transaction:

  1. When you generate a requisition, use Commitment Control to check it against the appropriate budgets and post it as a pre-encumbrance in the Commitment Control ledger.

  2. When a requisition becomes a purchase order, use Commitment Control to liquidate the pre-encumbrance and post the purchase order amount as an encumbrance (subject to liquidation rules you define).

  3. When the purchased goods or services are delivered and the purchase order becomes a voucher, use Commitment Control to liquidate the encumbrance and post the expenditure.