BACKGROUND

The appropriation of resources by a governing board represents the legal right to incur expenditures for its activities. Encumbrance accounting is designed to improve the control over government expenditures and to ensure that total actual expenditures do not exceed budgeted amounts.

Encumbrances are purchase orders or other commitments for goods or services that have not yet been received and which become expenditures only upon receipt of those goods and services. Encumbrances are formally recorded in the general ledger as budgetary control accounts. The budget line is reduced by that amount so the line item is not overspent. When the goods are received, the encumbrance is removed and the true expense is recorded.

Encumbrances on the books at the end of the year present a problem. Legally, appropriations lapse at year end; however, we have ordered goods or entered into contracts that we have not yet paid for. If we intend to honor those contracts-in-progress at year-end, we must “rebudget” for them. Generally accepted accounting principles do not allow us to include these items as expenses in the old fiscal year. Therefore, within our accounting system we will remove the encumbrance from last fiscal year and reserve the fund balance for the amount of the encumbrances. Since we did not “spend” this amount last year even though it was budgeted and purchase orders were issued, the cash is available to be rebudgeted. We increase the amount of the new year budget by the amount of the encumbrances using the reserved fund balance as the source of funds. In effect, we have rebudgeted for items that were properly budgeted and ordered in the old year, but will be paid for in the new year. By increasing the new year budget to cover these expenditures, we maintain our budget controls and try to ensure that the new year budget will not be exceeded.

Attached is a schedule listing the account numbers and the amount of the encumbrances that need to be carried over to 2015. The encumbrances total $4,746,933 and the majority of that amount is for capital projects. Major projects include road projects ($1,472,465), parkway ash tree removal/replacement ($631,927) and vehicle equipment ($2,111,305). All other capital improvements and equipment from the prior year total $302,444. The balance of $228,792 is for regular operating expenses.

RECOMMENDATION

It is recommended that the Village Board amend the 2015 Budget to include prior year encumbrances in the amount of $4,746,933.