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Understanding Encumbrance Accounting & Its Process

define encumbrance accounting

It allows government entities, nonprofits, and some businesses to more effectively monitor and control how much they spend. They’re better able to keep their expenditures within the allocated budget and more accurately predict cash flow. Encumbrance accounting marks the encumbrance in the organization’s accounts once the money is reserved. define encumbrance accounting When it’s actually paid out, the bookkeeper zeroes out the encumbrance account and reports the money as a paid expense. A lien is the most common type of encumbrance, and it can be placed on a property to receive a financial obligation from the homeowner, i.e., a mortgage. The lien remains on the property until the mortgage is fully paid.

A mechanic’s lien is generally filed by a contractor or subcontractor for work or materials that remain unpaid. All involuntary liens must be paid off for a title company to issue a title policy without naming the encumbrances as exceptions to the title insurance. When a mortgage or deed of trust has been paid off, the encumbrance is then removed from the property in the public records. One common document to remove an encumbrance is called a «reconveyance deed,» which gives a clear title to the property owner.


The creditor or the lending party gets the authority to take over the property set as collateral until the whole debt or loan is paid. The creditor can recover at least some part of the unpaid amount by selling the collateral security or property. A tax lien refers to a lien that the government enforces so that individuals can make tax payments. The federal tax lien imposes claims on the assets of the borrower or debtor. A mechanics lien covers claim on the real or individuals own property where the mechanic has offered services. For instance, if you don’t make due payments for the services performed on property, then it is the right of the contractor to reserve a claim until you pay the bills.

  • An easement gives a person or entity the right to use the property even though they don’t own it.
  • Which one of the following items would never appear on a cash budget?
  • A lease is an agreement to rent a property for an agreed-upon rate and period of time.
  • Other encumbrances, such aszoning lawsand environmental regulations, do not affect a property’s marketability but do prohibit specific uses for and improvements to the land.
  • She is a licensed Realtor and broker with more than 40 years of experience in titles and escrow.
  • Because the annual reporting requirement encompasses the fourth quarter of the previous appropriation year, there is no requirement for separate fourth quarter reporting.
  • Once both the purchase requisition and the vendor approve the pricing and order details, the pre-encumbrance phase evolves into the encumbrance phase.

Liquidation of encumbrances resulting from year-end accruals of expenditures, and reimbursements will be posted to the applicable appropriations. The purpose of accounting for encumbrances is to prevent the overspending of an appropriation. Encumbrances reserve a portion of an appropriation representing an obligation that has not been paid, or commitments related to unperformed contracts for goods and services. The real estate agent will provide the buyer with a land search document that will have a list of any encumbrances.

Accounting Topics

Accountants define an encumbrance as a restriction placed on how an organization uses money. Suppose your city government votes to spend $100,000 on sidewalk repair in three months. Placing the money in an encumbrance account tells city staff the money is committed to the sidewalk project and can’t be spent on anything else. Others, like zoning laws, have minimal impact when you buy or sell property. When a property no longer has any encumbrances, it’s considered «unencumbered.»

How do you calculate unencumbered cash?

Unencumbered Cash means the total cash on hand in any fund, less the amount belonging to the fund in closed banks and less the amount of outstanding warrants, bills, accounts, and contracts which are chargeable against the fund.