It is controversially discussed whether or not mood-congruent recall (i.e., superior recall for mood-congruent material) reflects memory encoding processes or reduces to processes during retrieval. We therefore investigated the neurophysiological correlates of mood-dependent memory during emotional word encoding. Event-related potentials (ERPs) were recorded while participants in good or bad mood states encoded words of positive and negative valence. Words were either complete or had to be generated from fragments. Participants had to memorize words for subsequent recall. Mood-congruent recall tended to be largest in good mood for generated words. Starting at 200 ms, mood-congruent ERP effects of word valence were obtained in good, but not in bad mood. Only for good mood, source analysis revealed valence-related activity in ventral temporal cortex and for generated words also in prefrontal cortex. These areas are known to be involved in semantic processing. Our findings are consistent with the view that mood-congruent recall depends on the activation of mood-congruent semantic knowledge during encoding. Incoming stimuli are more readily transformed according to stored knowledge structures in good mood particularly during generative encoding tasks. The present results therefore show that mood-congruent memory originates already during encoding and cannot be reduced to strategic processes during retrieval.