What are commitments?

Definition

Commitments are amounts the business has already agreed to spend that are not yet recorded as expense or as a vendor bill. A signed purchase order, an approved contract, or another binding buy can be a commitment long before the books move.

They are promises, not postings. The later receipt or bill is what turns a commitment into inventory, expense, and accounts payable.

Teams track them so a budget still has room for what is already spoken for. Looking only at posted bills will make remaining spend look bigger than it is.

Where it shows up

Balance sheet: Related to nothing sitting as an account until the bill or receipt is recorded.

P&L: Related to nothing extra until the purchase is received or billed.

Cash flow: Related to cash that will leave later.

See also: Open Purchase Order Report · Purchase Order · Budget Versus Actual

You will not find a caption called commitments on the Balance Sheet. Until receiving or billing happens, those dollars usually sit off the statements.

They are not current liabilities yet, and they are not current assets. They are authorized future spend.

The Income Statement waits as well. Revenue is untouched, and expense waits for the goods or services to be received or billed.

Cash on the Statement of Cash Flows will leave later, when those promised buys are billed and paid. The commitment itself is not the cash event.

How it works

A buyer issues a purchase order or signs a contract for a known amount. That amount becomes a commitment even though no journal has been booked.

How commitments usually work:

• Issue a purchase order or sign a contract for a known amount
• Track the remaining promise even though no bill is booked yet
• Subtract open commitments from remaining budget
• Relieve the commitment when goods arrive or a vendor bill posts
• Do not treat the promise as accounts payable until receiving or billing

Operations may track commitments in an open purchase order report or in a separate log. The point is the same: remaining budget should subtract what is already promised.

When goods arrive or a vendor bill is recorded, the commitment is relieved. The books then pick up inventory or expense and a payable, and the promise is no longer just a promise.

Some commitments are for services that will unfold over months. Each month's billed slice leaves the commitment and becomes an actual.

Period-end review often compares open commitments to the accrual cutoff. If work was done and no bill came in, you may need an accrual even though the original promise was never a journal.

Cash planning uses the same list. A commitment tells you cash will leave later, once the bill is approved and paid in a check run.

Example

A cafe issues a $1,200 bakery purchase order that has not been billed. That $1,200 is a commitment, not a payable.

The bread has not arrived, so inventory has not moved. The bakery has not sent a vendor bill, so accounts payable has not moved either.

If the cafe's bread budget for the month is $4,000 and this order is the first buy, remaining room is $2,800, not $4,000. The commitment has already claimed part of the plan.

When the loaves arrive and the $1,200 bill is recorded, the commitment is gone. The cafe now has inventory or expense and a payable, which is a different fact from the original promise.

Common mix-ups

People treat commitments as recorded accounts payable. A payable needs a bill or an accrual; a commitment is the agreement that came first.

People also treat every open purchase order as the whole story. A multi-year contract can be a commitment even when no purchase order row exists yet.

Another mix-up is putting commitments on the Balance Sheet as if they were liabilities. Notes to the statements may mention them, but the accounts themselves wait for receiving or billing.

Related terms

• Open Purchase Order Report: The list of issued purchase orders not yet received or billed.
• Purchase Order: The document authorizing a purchase from a vendor at agreed terms.
• Budget Versus Actual: The comparison of planned amounts to what actually happened.
• Contract: The binding agreement that sets what will be delivered and what will be paid.
• Cash Flow Forecast: A forward projection of cash receipts and payments.
• Capital Expenditures: Spending to buy or improve long-lived assets.
• Accrual Cutoff: The period-end sweep to capture unbilled expenses in the period they belong to.
• Forecast: An updated projection of where the numbers are actually heading.