Understanding the Commitment Accounting Business Process

Commitment accounting enables you to lay a claim (encumber) against budgeted funds. Encumbered funds are spoken for, so to speak, and can't be used for any other purposes. By budgeting for anticipated expenses and setting money aside, you ensure that your spending is within your budget.

The first step in employing commitment accounting is determining your budget. Budgets are a cap on expenditures and don't need to reflect what you'll spend but rather the most you can spend. This means that you can allow room in your budget for future expenses, such as hiring new employees or possible salary increases.

After you've defined your budget, you can encumber funds to cover your expenses for the fiscal year, as you know them to be at this time. For human resources, you need to encumber sufficient funds to cover the salaries and employer paid taxes and benefits of current employees. You can also pre-encumber funds for positions you expect to fill during the fiscal year.

When you run your payroll, you pay out those funds for which you are responsible. The funds that make up your payroll are liquidated and become actuals.

Just because you've encumbered funds doesn't mean that you'll spend them. If an employee leaves part way through the fiscal year, you are certainly not committed to spending the remainder of her salary. You can update encumbrance calculations throughout the year to account for changes. As staff and budget information change, you can update your encumbrance calculations to reflect these changes.