Understanding Manage Commitment Accounting

This section provides an overview of the Commitment Accounting business process and example of the Commitment Accounting business process.

Understanding the Commitment Accounting Business Process

Commitment accounting enables you to lay a claim (encumber) against budgeted funds. Encumbered funds are spoken for, so to speak, and can't be used for any other purposes. By budgeting for anticipated expenses and setting money aside, you ensure that your spending is within your budget.

The first step in employing commitment accounting is determining your budget. Budgets are a cap on expenditures and don't need to reflect what you’ll spend but rather the most you can spend. This means that you can allow room in your budget for future expenses, such as hiring new employees or possible salary increases.

After you've defined your budget, you can encumber funds to cover your expenses for the fiscal year, as you know them to be at this time. For human resources, you need to encumber sufficient funds to cover the salaries and employer paid taxes and benefits of current employees. You can also pre-encumber funds for positions you expect to fill during the fiscal year.

When you run your payroll, you pay out those funds for which you are responsible. The funds that make up your payroll are liquidated and become actuals.

Just because you've encumbered funds doesn't mean that you’ll spend them. If an employee leaves part way through the fiscal year, you are certainly not committed to spending the remainder of her salary. You can update encumbrance calculations throughout the year to account for changes. As staff and budget information change, you can update your encumbrance calculations to reflect these changes.

Common Terms Used in Commitment Accounting

Example of Commitment Accounting

Following is an example to illustrate the terms we’ve defined. All of the calculations described in this example are performed by the system.

Example

Sue, the manager in charge of human resources (HR) at the Acme Corporation, has to decide on a human resources budget for the upcoming fiscal year. She defines the budget, capping salary expenses at $200,000 and employer paid benefits and expenses at $40,000.

The Acme Corporation has 10 employees. Each employee earns $15,000 a year, and the employer paid taxes and benefits for each employee totals $3,000, for a total employee-related expense of $18,000 per employee. To ensure that there will be enough money to make payroll and cover the employee-related costs for the fiscal year, Acme’s HR department must encumber $18,000 per employee, for a total of $180,000. By encumbering this money, this money is no longer a part of Acme's general operating budget and can't be spent on anything other than staffing-related expenses.

Sue would like to hire a new employee within six months (half way through the fiscal year), also with a $15,000 annual salary and $3,000 employer-paid expenses. To make sure that the new employee's salary is also encumbered, Sue decides to create the position and future date it for the date at which she anticipates filling the position. The total amount to be pre-encumbered for this yet-to-be-hired employee is $9,000 (because the new employee will be hired half way through the fiscal year, only half of the annual salary and expenses need to be pre-encumbered).

Acme's human resources budget is $240,000, and Sue has encumbered $189,000 of that amount.

At the end of the first month of the fiscal year, Acme pays out a month's worth of earnings and employer paid expenses per current employee, totaling $15,000. When the payroll is run, the encumbrance is liquefied and becomes an expense, or actual. The HR department now has expenses of $15,000 and encumbrances of $174,000.

As defined above, an encumbrance is a projection of future expenses based on the present situation. Staffing situations can, and often do change, as most HR managers know. Two months later (three months into the fiscal year), two of Acme’s employees resign.

Sue decides that one position must be filled immediately but that the other isn't as crucial. Sue wants to keep the staffing funds for position A encumbered, but not for position B. When Sue updates the HR encumbrances, the remaining funds that were encumbered (but not yet spent) for positions A and B is reversed. Because Sue wants to keep the funds for position A encumbered, she needs to pre-encumber the remaining funds related to the position.

Of the $18,000 in salary and related expenses encumbered for each employee for the fiscal year, $4,500 had been liquefied at the time the employees resigned. The remaining salary and expenses for each position is $13,500. Before reversing the encumbrances, Acme's HR expenses were $45,000 and its encumbrances were $144,000. When updating the encumbrances, the balance of the employee related expenses for the two positions will be reversed and the value of one position pre-encumbered. Acme's encumbered amount is now $130,500.

After a month (four months into the fiscal year) of searching for a candidate to fill position A, Sue determines that the offered salary is too low. She decides to offer $24,000 and updates her encumbrances to reflect the salary change and the attendant change in tax and benefits expenses.

When Sue updates the encumbrances, only two-thirds of the salary and employer-paid expenses have to be encumbered to have sufficient funds encumbered for the year, for a total amount of $19,200. Money is already encumbered for position A at the old salary, so Sue has the system reverse the old pre-encumbrance and update with the new pre-encumbrance value. The total encumbered amount for HR expenses at Acme is 122, 700.

PeopleSoft Enterprise Human Resources Manage Commitment Accounting Business Processes

PeopleSoft Enterprise Human Resources: Managing Commitment Accounting supports the following business processes:

• Calculate and post encumbrance data.

  Create pre-encumbrance and encumbrance transactions for the fiscal year. The Fiscal Year Encumbrance process calculates salaries and fringe expenditures (employer-paid deductions and expenses) for encumbrances and pre-encumbrances based on the defaults you specified in your encumbrance definitions.

  As your employment data changes, update encumbrance calculations using the Nightly Updates Encumbrances process. Update your encumbrances as often as your organization requires.

  Post encumbrance information to the general ledger each time you calculate fiscal year encumbrances or update encumbrances. This ensures that the proper communication occurs and that the appropriate funds are encumbered. You'll use the Encumbrance GL Interface process to prepare encumbrance information for posting to the general ledger.

  See Creating and Posting Encumbrance Data to PeopleSoft Enterprise Financials.

• Create and post actuals data.

  When processing payroll, your budgets are automatically updated. When updating budgets, you liquidate your encumbrances with actual earnings, benefits, and tax expenses, and then you post them to your general ledger. The Payroll Distribution process distributes actual earnings and employer-paid deductions and taxes across the funding sources you established earlier and notifies you when you've exceeded any budgeted amounts.

  Note. The Actuals GL Interface process prepares actuals transactions, liquidates encumbered amounts for that pay period, and sends that information to the general ledger. Run the Actuals GL Interface process once per pay period.

  See Creating and Posting Actuals Data to PeopleSoft Enterprise Financials.

• Distribute funding retroactively.

  If you discover funding errors or simply want to modify transactions that have already been processed and posted to general ledger, use the retroactive distribution feature to modify a transaction’s distribution among funding sources.

  See Distributing Funding Sources Retroactively.