What does encumbrance accounting refer to?

Encumbrance accounting is a technique used in government accounting and budgeting to track financial commitments that are expected but not yet realized as expenditures. This approach involves documenting future purchase commitments, which helps in ensuring that funds are allocated and reserved for these anticipated expenses. By doing so, it provides a clearer financial picture and allows organizations to manage their budgets more effectively, preventing overspending and ensuring that there are sufficient funds available when purchases are made.

This practice is crucial in public sector financial management as it assists in monitoring budget performance and aids in the overall fiscal discipline of an organization. It serves as a proactive measure to enhance accountability and transparency in managing public resources. Thus, the correct choice reflects the primary purpose of encumbrance accounting in managing and forecasting future financial obligations.