When a government issues purchase orders, it records encumbrances to reflect commitments against appropriations. This helps track budgetary commitments and avoid overspending.
The entry is recorded in the budgetary accounts (not proprietary accounts) as follows:
Debit Encumbrances: Recognizes the commitment
Credit Budgetary Fund Balance (or Reserve for Encumbrances): Reflects that part of the fund balance is committed
This is consistent with modified accrual accounting and standard governmental fund practice.
GAO Principles of Appropriation Law – Encumbrance Controls
Answer: D. Debit Encumbrances $427,000; Credit Budgetary Fund Balance $427,000
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