You can define encumbrance accounting or budgetary control in Financial options window:
Navigation: AP or PO —-> Setup–> Organizations –> Financial Options.

In order to use encumbrance accounting or budgetary control, you must install Payables, Purchasing, and General Ledger modules. You may go to encunbrance region to enable encumbrance accounting and to specify the default encumbrance types which Payables module assigns to your invoices, and Purchasing module assigns to your requisitions and purchase orders.

If you enable encumbrance accounting or budgetary control, Purchasing creates
encumbrances when you reserve funds for a requisition or purchase order. If you use the perpetual accrual method in Purchasing, it reverses the purchase order encumbrances when you inspect, accept, and deliver the units. If you are using the periodic accrual method in Purchasing, Payables reverses the purchase order encumbrances when you create accounting entries for invoices. Payables module creates encumbrances when there is a variance between a matched invoice and the purchase order to which it is matched, and when the invoice encumbrance type is different from the Purchasing encumbrance type.

Oracle EBS provides two predefined encumbrance types that you can use to identify requisition, purchase order, and invoice encumbrances:- Commitment and
Obligation. You can define additional encumbrance types in Oracle General Ledger module in the Encumbrance Types window.

1) Use Requisition Encumbrance
You may enable this option to encumber funds for requisitions. If you enable this option, Purchasing creates journal entries and transfers them to General Ledger to encumber funds for purchase requisitions.

If you enable Use Requisition Encumbrance, you must select an encumbrance type by which you can identify your requisition encumbrance journal entries. Purchasing assigns this encumbrance type to the encumbrance journal entries it creates for purchase requisitions. If you enable Use Requisition Encumbrance, you can indicate whether you want requisition preparer to have the option to reserve funds. If you do not enable this option, only requisition approvers will have the option to reserve funds.

2)Use PO Encumbrance
Enable this option to encumber funds for purchase orders, purchase order and receipt matched invoices, and basic invoices (not matched). If you enable this option, Purchasing encumbers funds for purchase orders and Payables encumbers funds for variances during Payables Invoice Validation for purchase order and receipt matched invoices. If you enable this option and enter a non-purchase order matched invoice, Payables will encumber funds for it during Payables Invoice Validation. All Payables encumbrances are reversed when you create accounting entries. If you enable Use Requisition Encumbrance, you must also enable this option.

If you enable Use Purchase Order Encumbrance, select a purchase order encumbrance type by which you can identify your purchase order encumbrance journal entries. Purchasing assigns this encumbrance type to the encumbrance journal entries it creates for purchase requisitions and purchase orders. If you use purchase order encumbrance, select an invoice encumbrance type by which you can identify your invoice encumbrance journal entries. Payables module assigns this encumbrance type to the encumbrance journal entries that it creates. It is recommended that you use an encumbrance type different from the Purchasing encumbrance type so you can identify invoice encumbrances

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