You have VMI or consigned from supplier enabled entries in your operating unit. You cannot use Encumbrance Accounting with VMI.

As per functionality of Oracle Applications, you will not be allowed to use Encumbrance
in the Set of Books or Operating Unit where you have VMI (Vendor Managed Inventory)
enabled. Otherwise, you will get the error message:

"You have VMI or consigned from supplier enabled entries.
You cannot use Encumbrance Accounting. "

In order to disable the VMI and or Consigned, you will have to find all the Item/Supplier combinations.
The simple way to do this is described as follows:

1- Please run the following queries:

Select * from po_asl_attributes where enable_VMI_flag = 'Y';

Select * from po_asl_attributes where consigned_from_supplier_flag = 'Y';

2- This will provide a list of records with the mtl item ids and the ASL ids also.
This will identify all Item - Supplier combinations that have VMI and or Consigned enabled.

3- Navigate to Purchasing - Supply base - Approved Supplier List
Query for the item with Item_id equal to the one in the records above.
Then click on Attributes button in the form.
Here click on Inventory Tab.
Here disable :   the VMI enabled and/or Consigned from Supplier button.

This will disable VMI / Consigned for that Item and Supplier combination.
This must be completed for each record obtained above.

4- Navigate to Setup- Organizations- Financial Options,
and enable Encumbrance Flag.

Note: Following activity is not enough resolve this error.

1. Find out VMI enabled entries from front end using 'Summary Approved Supplier List' 

2. Disble all entries one by one, found by step 1

Because there is no flag provided on 'Summary Approved Supplier List' so that one can find entries and disable it.

So it is necessary to retrieve data using sql queries given above and then disable following flags from all entries one by one.

a. VMI enabled,

b. Consigned from Supplier flag