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Posted by Scott Gesuldi, Standish, June 3, 2010:

Below is a question and answer in regards to accounts payable cutoff and the posting of the expense in the proper fiscal year. I would like other Finance Director's takes on whether this is the proper way of recording the expense as I have learned that the service or item is not an expense until received but others say that once the money is committed i.e. an invoice, the items are expensed. Its my belief encumbrances are not acceptable by GAAP and that they are applied to reserved fund balance but this would be for large projects started but not finished until the next fiscal year (carry forwards) correct? Any items purchased but not received would classified as a prepaid expense, right?

I have a friendly bet with my Town Manager for coffee as to which is the proper accounting method. Thanks to all that participate. Enjoy the summer.

I have some material I need to purchase (gravel) for repairs on roads this summer, I would rather not haul it to the Town garage and then haul it to the site at a later date. I would however like to use the money I have saved for this repair from this year's budget and since we do not have an article to carry these funds into the next fiscal year it would then go to fund balance. Do any of you do a pre-buy and leave the product at the distributors site to be used later? Any other ideas? (Posted to MTCMA List serve via Jay Feyler, Union)

Responses:

In Scarborough, we also use purchase orders (POs).  The staff will prepare POs through the end of the fiscal year (June 30th).  All POs not liquidated, automatically (thru' our Munis software), will be re-encumbered in the new year as a prior year carryforward.  This carryforward is "added" to the new year's budget and also shows as an encumbrance in the new year.  As the PO is spent down (in the new year), the expenditure shows in the new year also.  If the prior year PO totaled $3,000 and that carried into the new year but only $2,000 was actually spent, then the $1,000 would automatically liquidate and not become an additional amount to be spent on new year expenditures.  For example:

                          Start of Year         End of Year

New year budget:    $4,000               $4,000

Prior yr PO             $3,000                $2,000

Available                $7,000                $6,000

Prior yr PO exp           -0-                 $2,000

Cur yr spent                -0-                 $4,000  (total spent $6,000)

As the prior year POs are encumbered (in the prior year), they show as a reserved fund balance (or the assigned fund balance-using the new terminology).

We use the prepaid account (under the balance sheet) for items such as insurance policies that we may have to pay prior to July 1 but whose coverage doesn't start until July 1.  We also use this for training that we sign up for in the current budget (to get the discounted rate) but the training doesn't take place until the new fiscal year.  In those instances in the current year, we debit the prepaid account and credit cash.  In the new year, we credit the prepaid account and charge (or debit) the expense in the new year budget.  In this way, the expenditure shows in the new year.

Hope this helps!