Encumbrance

In governmental accounting, an encumbrance is the formal means of reserving funds which were appropriated during a fiscal year; however, due to timing differences the funds won't be spent until the following fiscal year.

For example, the City of Schafly Falls (who's fiscal year ends on July 31) appropriates funds so its Police Department can purchase ammunition. Late in July a $2,000 order is placed; however, the ammunition won't arrive until August (after the fiscal year ends). The City will therefore record an encumbrance for $2,000 so the money cannot otherwise be appropriated in the following year.