As technology continues to evolve, encumbrance accounting systems and software will become more sophisticated, offering organizations increased automation and improved accuracy. These advancements will streamline the encumbrance accounting process, allowing for more efficient tracking of future payments and expenses. Encumbrance accounting primarily allows nonprofits and government organizations to record and monitor all future and planned expenses. Encumbrance accounting acts as a budgeting tool, resulting in more effective planning, allocating, and controlling their budgets. 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.

You can generate a preview report to see the effects of a year-end carry forward before you actually initiate the carry forward process. If you do not carry forward encumbrance balances at the end of the fiscal year, all encumbrances automatically go to zero at the beginning of the next year. The lender, generally a bank, retains an interest in the title to a house until the mortgage is paid off.

Types of Encumbrances

In this document, the IT department can list the equipment they want to purchase and the vendor they intend to use. Paying the expense after the money has been encumbered doesn’t affect the amount of encumbrance accounting the appropriations. We saved more than $1 million on our spend in the first year and just recently identified an opportunity to save about $10,000 every month on recurring expenses with Planergy.

The following figure shows the encumbrance accounting process with the budgetary control flag enabled. In encumbrance accounting, that number is upfront and easy for any budgeting committee or CFO to examine. By carefully and accurately tracking your encumbrance amounts, you also increase spending visibility. It reduces unnecessary spending when tracked this way and can help catch any fraudulent purchases more quickly. Overall, it can assist in making purchasing information more transparent and easily accessible when needed to enable tracking and overspending prevention.

Encumbrance Accounting: The What, How and Why

Encumbrance is performed in three steps – pre-encumbrance, encumbrance and expenditure and is recorded in two journal entries. Effective encumbrance accounting is essential for financial planning and budgeting. It provides businesses with a clear picture of their future financial obligations and helps them make informed decisions regarding resource allocation.