An encumbrance is the commitment of funds to pay for a specific good or service. Encumbered amounts are indicated on the AM090 (Account Statement in Whole Dollars), and are paid out when the goods are received or the service is rendered.
Encumbrances reduce the budget balance available for the account, but they do not reduce the fund balance. This is because an encumbrance is a commitment to pay, but it is not yet a liability. To understand the distinction between these terms, think of the "life cycle" of an expenditure as follows:
When an administrator estimates future expenses at the beginning of the fiscal year, he or she establishes a budget. The budget is general in the sense that it does not yet have details of the transactions that will occur during the coming year.
When the administrator orders specific goods or services during the year, he or she establishes an encumbrance for the amount that will be required to pay for the goods or services. The encumbrance is specific in the sense that it does represent an actual transaction that will occur.
When the goods or services are delivered, the encumbrance becomes a
liability, because the University accepts a contractual obligation to pay
once the transaction has taken place.
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