Encumbrance

In fund accounting, an encumbrance is the formal means of reserving funds which were appropriated so they are not spent on other purposes.

An encumbrance and its reversal can take place during a fiscal year; however, they are most commonly used near the end of a fiscal year (for purchases which, due to timing differences, won't be paid until the following fiscal year). This is because fund accounting, especially in the government sector, is more formally tied to budgets than is traditional business accounting.

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.