Departments enter into multi-payment contracts for many reasons, such as equipment maintenance, rent, supplies, or other services. The Purchasing Office encumbers the account for the estimated full annual usage and the encumbrance is liquidated based on invoices received from the vendor.
By monitoring the monthly departmental accounting reports, account managers can determine the current status of the contract. The report shows each payment and the remaining balance of the contract is shown as an outstanding purchase order. It is important to monitor contract activity to ensure charges are appropriate and to ensure adequate funds have been encumbered against the contract to match the account's annual needs. This is particularly true for contracts that provide for different periodic payments. It is also important to review contract activity to ensure excess encumbrances are not outstanding at the end of the year, as this would result in account funds being unnecessarily committed when the contract encumbrance level could have been reduced and funds made available for other account needs.