Purpose

This article explains best practices for managing minor purchase order (PO) changes when encumbrance accounting is used, with emphasis on budget control, audit integrity, and operational efficiency.

📘 Background: Encumbrance Basics

An encumbrance represents a reservation of budget at the time a purchase order is issued. Its purpose is to:

• Prevent overspending of available budget

• Provide visibility into committed but unspent funds

• Be relieved (liquidated) when the actual expense is recorded

Encumbrances are budgetary estimates, not final accounting amounts. Variances between the PO and invoice are expected and acceptable under standard encumbrance accounting practices.

🧾 Scenario

A purchase order is created and encumbered as follows:

After the PO is issued, the vendor reports a long lead time for the chair. A substitute chair is selected at $199.99, reducing the final invoice total.

❓ Key Question

What is the correct way to handle this change?

1. Leave the encumbrance unchanged, process the invoice, and allow the system to liquidate and release the remaining balance, or

2. Modify the encumbrance to match the revised amount before creating the invoice?

✔ Best Practice Recommendation

Do not modify the encumbrance for minor price or quantity changes.
Process the invoice as received and allow the system to liquidate the encumbrance automatically. 

Note:

• If the invoice amount exceeds the encumbered amount, the system will liquidate the full encumbrance.

• If the invoice amount is less than the encumbered amount and no additional invoices are expected, select the “Liquidate Balance” option when processing or transferring the invoice for payment so the remaining encumbrance is released back to available budget.

🧠 Rationale

Encumbrances Are Estimates

Encumbrance accounting assumes that the original PO represents the best-known commitment at the time of approval, not a guaranteed final cost. Substitutions, discounts, and minor pricing differences are normal.

Operational Efficiency

Modifying posted encumbrances for small changes:

• Requires additional approvals and system steps

• Increases manual effort with minimal financial benefit

• Slows down invoice processing

Audit and Compliance Clarity

Leaving the original encumbrance intact preserves a clean audit trail:

• PO reflects the approved commitment

• Invoice reflects the actual expenditure

• The variance is transparent and system-controlled

Auditors generally expect to see: Original encumbrance → Actual expense → System-released variance

Budget Impact Is Correctly Handled

When the invoice is posted:

• The encumbrance is liquidated up to the invoice amount

• Any unused encumbrance is released back to available budget

This achieves proper budget control without manual intervention.

⚠ Important Policy Consideration

If internal policy requires encumbrances to exactly match invoice amounts, be aware of the following impacts:

• Each PO change requires a formal encumbrance amendment

• Invoice creation must wait until the encumbrance is updated

• Additional approvals and processing steps are required

• Invoice payments will be delayed

• Accounts Payable workload increases significantly

Organizations that enforce this policy should do so knowingly, as it prioritizes encumbrance precision over processing efficiency and is more restrictive than standard encumbrance accounting practice.

🛠 When You Should Edit an Encumbrance

Editing or reissuing an encumbrance is appropriate when:

• The change is material and impacts budget forecasting

• The scope of the purchase changes significantly

• The PO spans multiple periods or fiscal years

• Capital or grant-funded purchases require strict alignment

• Internal policy explicitly mandates PO amendments

• Contracts changed or funding and will need to re-encumber under different cost centers

In these cases, update the PO and encumbrance before invoicing.

📋 Summary Table

✅ Key Takeaway

Encumbrances are budget control mechanisms, not precision accounting tools. Best practice is to tolerate minor variances and allow the system to manage liquidation. Requiring encumbrance-to-invoice matching increases administrative burden and delays payments and should be reserved for exceptional or policy-driven cases.