We report here a study that obtained reliable effects of emotional modulation of a well-known index of memory encoding--the electrophysiological "Dm" effect--using a recognition memory paradigm followed by a source memory task. In this study, participants performed an old-new recognition test of emotionally negative and neutral pictures encoded 1 day before the test, and a source memory task involving the retrieval of the temporal context in which pictures had been encoded. Our results showed that Dm activity was enhanced for all emotional items on a late positivity starting at ~400 ms post-stimulus onset, although Dm activity for high arousal items was also enhanced at an earlier stage (200-400 ms). Our results also showed that emotion enhanced Dm activity for items that were both recognised with or without correct source information. Further, when only high arousal items were considered, larger Dm amplitudes were observed if source memory was accurate. Three main conclusions are drawn from these findings. First, negative emotion can enhance encoding processes predicting the subsequent recognition of central item information. Second, if emotion reaches high levels of arousal, the encoding of contextual details can also be enhanced over and above the effects of emotion on central item encoding. Third, the morphology of our ERPs is consistent with a hybrid model of the role of attention in emotion-enhanced memory (Pottage and Schaefer, 2012).