What is defined as an "encumbrance" in governmental accounting?

In governmental accounting, an "encumbrance" refers to an obligation to pay for anticipated goods or services. This concept serves as a funding mechanism to prevent overspending by ensuring that a portion of the budget is reserved for future expenses. When an encumbrance is recorded, it reflects a commitment to fulfill an obligation, even if payment has not yet been made. This helps governments track their financial commitments and manage their resources more effectively.

The distinction made by encumbrances is important for creating accurate budgets and financial statements. It allows government entities to maintain control over their expenditures and provides a clearer picture of financial health by showing potential future liabilities. This approach aligns with the principles of fiscal responsibility and transparency in the management of public funds.