What is the journal entry for a purchase order or contract issued?

When a purchase order or contract is issued in governmental accounting, it signifies a commitment to spend funds, and this transaction is recorded through the use of encumbrance accounting. The primary purpose of encumbrance accounting is to help track budgetary commitments and ensure that adequate funds are reserved for future expenditures.

The correct journal entry reflects this by debiting the Encumbrances Control Account and crediting the Budgetary Fund Balance-Reserve for Encumbrances Account. By debiting the Encumbrances Control Account, the governmental entity is recognizing that funds have been set aside for the anticipated expenditure, effectively capturing the obligation created by the purchase order. This action reduces the available budgetary fund balance because it signifies that a certain portion of the resources is earmarked for specific purposes.

On the other hand, options like debiting or crediting the Budgetary Fund Balance-Reserve for Encumbrances Account directly through an expenditure control account or liability account do not represent the proper method of reserving funds for future purchases. Expenditures should not be recorded at this stage since the actual goods or services have not yet been received, and a liability account is not where the encumbrance would be reflected with respect to budgeting processes.