In budgetary accounting, what are encumbrances?

Encumbrances in budgetary accounting refer to obligations for commitments that have been made but not yet fulfilled. This concept is vital in the budgetary process of governmental entities as it helps to ensure that funds are set aside for specific purposes, thereby preventing overspending.

When an organization encumbers funds, it recognizes that a portion of its budget is already committed to future expenditures, such as purchase orders or contracts for goods and services. This practice enables governments to manage their budgets more effectively by providing a clearer picture of available resources after accounting for these commitments. It serves as a mechanism to control spending and ensures that funds are allocated efficiently to meet planned activities.

Thus, understanding encumbrances is essential for effective budget management in a governmental context, as they play a critical role in tracking financial commitments against actual expenditure.