What Is an Encumbrance if It Is Not an Expense?
An encumbrance tracks a commitment against budget before the underlying expenditure is recognized.
Purchase order stage
When a qualifying purchase order is issued, the government may record an encumbrance under its budgetary accounting system.
Goods received
When goods arrive, the encumbrance is reversed and the actual expenditure and liability are recognized under applicable governmental accounting rules.
Why use encumbrances
They help prevent departments from spending the same appropriated budget twice.
Budgetary vs GAAP records
Budgetary accounts support control and legal compliance and are not ordinary GAAP assets or expenses.
The takeaway
Encumbrance means committed budget. Expenditure means actual governmental spending recognition.
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FAQ
Is an encumbrance a liability?
Not merely because the purchase order was issued.
When is it reversed?
Typically when the underlying purchase is recognized.
Why do governments use encumbrances?
Budgetary control.