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What is an Encumbrance?

August 17, 2021by admin

encumbrance definition in accounting

A purchase order encumbrance, which is recorded as 83XXXX, is increased when a purchase order is created and is decreased or reversed when an invoice is matched to the purchase order. An accounts payable encumbrance, which is recorded as 03XXXX, is increased when an invoice is entered and is decreased or reversed when an invoice is paid. The encumbrance accounting rules may be used to record adjustments and make corrections to the encumbrance accounts and the reserve for encumbrance accounts.

A property becomes encumbered once it has a lien on it, or when there are zoning restrictions. An Encumbrance is a type of transaction created on the General Ledger when a Purchase Order (PO), Travel Authorization (TA), or Pre-Encumbrance (PE) document is finalized. The encumbrance transaction shows an outstanding commitment by an organization. When an encumbrance is established, the organization’s financial manager should ensure funds will be available for payment of the transaction, in accordance with the overall life-cycle of the contract. A fringe benefit is an additional cost the University incurs on behalf of its employees to enhance their well-being. Depending on the nature of the item, fringe benefits may be nontaxable or taxable.


Some localities have templates or agreements that you can fill in with the relevant information. That is when a third-party has a structure that crosses the property line onto your land. An easement is a legal right for a third party to use a property in some way. For example, a utility company may have a utility easement so that it can place and maintain power lines on your land. A deed restriction is a restrictive covenant or agreement that the seller writes into the deed of a property. It restricts the use of the property or prevents the homeowner from making certain changes to the home.

  • The available appropriation is determined by subtracting actual expenditures and outstanding commitments from the appropriated amount.
  • An encumbrance is a legal restriction on an asset, such as a piece of property in real estate, that may affect the transfer of the asset or restrict usage.
  • Your company has received the goods or services that were initially ordered and now must pay back the vendor’s invoice.
  • Customers must read and understand the Characteristics and Risks of Standardized Options before engaging in any options trading strategies.
  • There are also some situations where legal actions against the property owner are considered encumbrances.

The lender, generally a bank, retains an interest in the title to a house until the mortgage is paid off. If the borrower cannot repay the mortgage, the lender may foreclose, seizing the house as collateral and evicting the inhabitants. In Hong Kong, for example, the seller of a property is legally required to inform the real estate agent about any encumbrances against the property in order to avoid any problems later encumbrance accounting on in the sales process. The real estate agent will provide the buyer with a land search document that will have a list of any encumbrances. In government accounting, for instance, encumbrances are leveled against the relevant appropriation account and are often used when there are multi-year contracts in place. Paying the expense after the money has been encumbered doesn’t affect the amount of the appropriations.

Example of an Encumbrance

This is known in accounting as “pre-encumbrance,” meaning a projected but uncertain cost. Some businesses also have to project commission costs paid to representatives and independent contractors, which will vary with the amount of sales. An encumbrance is an accounting term that refers to the funds that have been reserved for, but not yet spent on, specific expenses or obligations. In other words, it’s a claim against funds that have been set aside to cover future payments or liabilities. An encumbrance is a claim against a property by a party that is not the owner.

encumbrance definition in accounting

For example, if your neighbor’s shed is over the lot line, it is an encumbrance on both parties until they fix the issue. It is an encumbrance for you because the structure prevents your free use of your land. It also encumbers your neighbor because he doesn’t have the title to the land that he built his shed on. Encumbrances are for internal planning and monitoring only and will NOT be reflected on invoices or reports to the sponsor.

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A lien is a common type of encumbrance, but not all encumbrances are liens. Of all the encumbrance types, a lien refers explicitly to a monetary claim against property and can decrease the value of the property. An available appropriation represents the amount of the appropriation that can still be obligated or spent within the availability period allow in the Budget Act. The available appropriation is determined by subtracting actual expenditures and outstanding commitments from the appropriated amount. The term encumbrance covers a wide range of financial and non-financial claims on a property by parties other than the title-holder. Property owners may be encumbered some from exercising full—that is, unencumbered—control over their property.

(a) An anticipated expenditure, evidenced by a contract or purchase order, or determined by administrative action. Let’s say that his county’s high school needs to have asbestos removed from the building. But they can’t remove it during the school year, so they decide the removal will happen in July. They know in January or February that they need $330,000 in July’s budget.