Welcome to this section on commitment accounting. We consider accounting for commitments to be a key tool in monitoring budgets. accounting for committed expenditure is one of the differences between management accounting, used internally for budget monitoring and financial accounting used in the preparation of the financial accounts. expenditures committed when an organization raises a purchase order for goods and services, or has a contractual arrangement to make regular payments to a supplier over a period of time. Most accounting systems can facilitate and record commitments and will display them on management reports. Remember that knowing the value of commitment is important to establishing the actual expenditure of a budget, ie, accurately enabling the budget holder to calculate the remaining budget available to spend in the future.
To get the actual right, we said we need to include the cash paid. The creditors IE payables accrues when relevant. And finally, commitments. These are the goods and services ordered, but not yet received or used. Most organizations will have some form of purchase ordering system Raising a purchase order in advance of making expenditure. These purchase orders can be in paper form or generated online via the accounting system.
They're usually sequentially numbered and each purchase order will have a unique number. This Purchase Order Number is given to a supplier, you should ensure it is quoted on their invoice when the goods or services have been supplied. Some organizations will not pay a supplier without a purchase order number. It is important that purchase orders are regularly monitored as with all other items of expenditure. That is, we need to ensure that the part Order is still required and current. For example, if a purchase order is no longer needed, it should be cancelled with the supplier and removed from the accounting system.
This will then release the budget for use elsewhere. a purchase order review is particularly important at the end of the financial year if works or supplies have been started, but not completed and across should be made at the end of the year. If not, the purchase orders should be cancelled. If the purchase order has been fulfilled, the supplier should be encouraged to raise their invoice so that the payment can be made or a credit check established. Wow, that all seems easy so far. Commitment account is straightforward.
However, in order to consolidate your knowledge, we recommend that you undertake the commitment accounting exercise that forms part of this material. When you're really happy that you understand everything we've covered so far, move on to the next section.