In short
An encumbrance is a commitment, such as a purchase order or contract, that reserves part of a governmental fund's budgeted appropriation until the goods or services are received.
Key takeaways
- When goods arrive, the encumbrance is reversed and an expenditure is recorded at the actual amount.
- Encumbrances outstanding at year-end are not expenditures or liabilities.
- They help prevent spending beyond appropriations.
Where it's tested
BAR: Governmental Fund Accounting — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A city's general fund issues a $50,000 purchase order for supplies. Later the supplies arrive with an invoice for $49,000. Which describes the accounting?