What is the correct action when several old purchase orders remain open and tie up funds?

What is the correct action when several old purchase orders remain open and tie up funds?

• A. Reclassify the remaining encumbrance as an expense
• B. Disencumber the remaining funds and close out the PO
• C. Carry the PO forward to the next fiscal year
• D. Record the funds as a budget variance

Answer: (B)

Encumbrances reserve funds for pending purchases. When several old purchase orders remain open and tie up funds, the funds should be disencumbered and the POs closed to release the unused money and keep the budget accurate. This reflects that the commitments are no longer active and prevents funds from remaining tied up unnecessarily. Turning the remaining encumbrance into an expense would misstate the timing of costs, because an encumbrance is a reservation, not an actual expense until goods or services are received and invoiced. Carrying the PO forward to the next fiscal year keeps the funds blocked and does not address the inefficiency. Recording the funds as a budget variance would not actually clear the encumbrance or restore the funds for use elsewhere.

Encumbrances reserve funds for pending purchases. When several old purchase orders remain open and tie up funds, the funds should be disencumbered and the POs closed to release the unused money and keep the budget accurate. This reflects that the commitments are no longer active and prevents funds from remaining tied up unnecessarily. Turning the remaining encumbrance into an expense would misstate the timing of costs, because an encumbrance is a reservation, not an actual expense until goods or services are received and invoiced. Carrying the PO forward to the next fiscal year keeps the funds blocked and does not address the inefficiency. Recording the funds as a budget variance would not actually clear the encumbrance or restore the funds for use elsewhere.