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?

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Business

Camren Chandler

28 April, 08:44

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?

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Answers (1)

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Desmond Moody · Answer 1

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.