Accounting : Recording Encumbrances

Subject: Business    / Accounting
Question

3–5. Recording Encumbrances. During July 2010, the first month of the 2011 fiscal year, the City of Marion issued the following purchase orders and contracts (see Problem 3–4):

General government $ 50,000 Public safety 200,000 Public works 75,000 Health and welfare 65,000 Miscellaneous 4,000 Total purchase orders and contracts $394,000

Required

a. Show the general journal entry to record the issuance of the purchase orders and contracts. Show entries in subsidiary ledger accounts as well as general ledger accounts.

b. Explain why state and local governments generally record the estimated amounts of purchase orders and contracts in the accounts of budgeted governmental funds, whereas business entities generally do not prepare formal entries for purchase orders.