An Encumbrance is a university accounting method that reserves funds for an anticipated expense. The encumbrance transaction shows an outstanding commitment by the institution. Funds are encumbered when an individual is appointed, or a purchase order is issued. When an encumbrance is established, the PI should ensure funds will be available for payment of the transaction, in accordance with the overall lifecycle of the grant or contract.

The purpose and main benefit of encumbrance accounting is to avoid budget overspending by showing open commitments as part of projected expenses and free balances. Encumbrances are an important tool in determining funding availability on projects.

Encumbrances vs. Actual Expenses

Encumbrances are open commitments to a transaction. Encumbrances are not considered actual expenses and are not included in cumulative expenditure balances on financial statements. With encumbrances, no payments are issued, and no actual expenses are posted to the general ledger since it is an expectation of a future actual transaction.

Encumbrances can be established for multi-year awards, where not all budget/funding is available or received in the first year. The PI and department should ensure funds are available for the payments (actuals) expected to hit the general ledger during the current budget period. The remaining outstanding amount of each encumbrance during Fiscal Year End Close will carry over from one year to the next.

Managing Encumbrances

For payroll and purchase order encumbrances, when the vendor or employee is paid, part or all of the encumbrance is released in accordance with that payment. The transaction will appear as an actual expense and the encumbrance will be reduced accordingly.

Last Updated 12/07/2023