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An Encumbrance is the name given to funds that have been reserved when a purchase requisition is finalized and encumbered. When a requisition is processed, funds are placed aside for that transaction. Those funds are no longer available for use in other transactions, but also have not been included in the Actual Funds balance because a payment has not yet been generated and the funds have not physically left the university. The purpose and main benefit of encumbrance accounting is avoiding budget overspending.
Encumbrances can also be used to predict cash outflow and as a general planning tool. Encumbrances are important in determining how much funds are available. The formula used to determine funds available is:
- Funds Available = Budget - Actuals - Encumbrances
When the vendor is paid, the encumbrance is reversed and the funds will appear under the Actual funds balance instead of as an Encumbrance balance.
From University of California, Riverside
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