What Is Encumbrance in Accounting?
Natalie holds an MA in English Education and is working on her PhD in psychology.
Khalid is working for the county government.His job is to keep track of the budget and make sure that the government has enough money to pay for everything.Khalid is confused after one of his colleagues mentioned encumbrances.What are they?
Government budgeting involves a local, state, or federal government spending money.It is similar to when people or private companies create budgets for themselves.
To help Khalid deal with his county's budget, we should take a closer look at encumbrances in government budgeting, including what they are and the formula to determine how much money a government has available.
It's pretty simple when Khalid makes his own budget.He takes the amount of money he's earning and subtracts it.That tells him if he's spending more or less than he makes.
The government budget is the same as the other one.On the other side, there is money coming in from the government.This can come from many different sources.Khalid's county has money coming from local taxes, the state government and the federal government.The county's revenue is made up of these.
The expenditures of the government are different.This is what the government spends.You can remember that because the word ''expenditure'' is in the middle of it.Whether it's repairs to the local roads, money for the school district, or some other expense, it goes into the expenditures side.
A government budget is similar to a personal budget in that you subtract expenditures from revenue.Governments need to know how much money they will have in the future in order to make a budget.Khalid needs to tell his boss if there is enough money in the budget to pay for road repairs.Sometimes budgets have things that are paid for in one quarter but not received until the next quarter.There are items in budgets that have to go somewhere.How does Khalid account for those?
Encumbrances are one of the things that come up in government budgeting.An encumbrance is a condition put on money.In government spending, it's often used to refer to money that has been set aside for something but the goods or services haven't been received yet.
Khalid's budget is important to understand.Let's say that the high school in his county needs to be renovated.They know how much it will cost to remove it.The removal will happen in July because they can't remove it during the school year.They need $330,000 in July's budget in January or February.It hasn't been spent yet, but it has been reserved for the removal of asbestos, so it's an encumbrance.
Government budgeting uses encumbrances to figure out how much money is available.The basic budget is a simple equation.
It's not an expenditure if a government hasn't paid for something.It's not an expenditure if Khalid knows that the county will need $330,000 for the removal of Asbestos in July.If his boss came to him on July 5th and asked how much money was left in the budget, he wouldn't know.Khalid might think there was more money in the budget.
Governments often use encumbrances in their budgeting equation to get a more accurate view of what is available.The equation often looks like this.
Khalid can put the money into the budget before the work is done.The more complete view of the money available in the budget will be given by that.
Government budgeting involves a local, state, or federal government spending money.There are three major things in a government budget.
Governments can get a more accurate picture of their budgets by accounting for money that will need to be spent but hasn't been done yet.The equation is used for governmental budgets.
You must be a Study.com Member to access this lesson.You have to create your account.