Explain the concept of encumbrances in budgeting and how they affect spending control.

• A. Encumbrances are budgetary commitments recorded to reserve funds for approved purchases; they reduce available budget and prevent overspending.
• B. Encumbrances are actual cash outlays.
• C. Encumbrances increase the total budget.
• D. Encumbrances are taxes assessed on expenses.

Answer: (A)

Encumbrances are budgetary commitments that set aside part of the budget for approved purchases. When a department issues a purchase order or signs a contract, an encumbrance records the estimated amount, which reduces the available budget. This creates a visible signal that those funds are spoken for and cannot be used for other purposes, helping to prevent overspending.

They are not actual cash outlays; the encumbrance represents an obligation, and the cash is disbursed later when the goods or services are received and invoiced. Encumbrances also do not change the total budget—they simply reduce the remaining unspent budget authority to reflect committed funds. They are not taxes either.

By reserving funds for commitments, encumbrances improve spending control by aligning budget authority with anticipated obligations and providing a clearer picture of true, uncommitted resources. For example, a hospital issuing a purchase order for supplies will encumber the amount, ensuring that money is available when the order is fulfilled and paid.