Accounting
ERP
Financial Management
Encumbrance Accounting: How Governments and Schools Track Commitments
Last updated: October 8, 2026 · Independent guide · We do not sell rankings or coverage.
Encumbrance accounting records a commitment against a budget appropriation when a purchase order or contract is approved, before any goods arrive or any invoice is received. The encumbrance reduces available budget, so nobody commits the same dollars twice. When the invoice arrives, you reverse the encumbrance and record the actual expenditure. At year-end, open encumbrances are not expenditures or liabilities under GAAP, and GASB Statement No. 54 decides where the encumbered amount sits in fund balance.
The rule and the journal entries
The rule: available appropriation = adopted budget − expenditures to date − open encumbrances. An appropriation is the authority to spend that your board or council adopts in the budget, and the New York Office of the State Comptroller (OSC) training on encumbrances states that a claim cannot arise without an available appropriation (New York OSC, Accounting for Encumbrances, no date shown).
The entries below follow the account structure in that OSC training, which uses a budgetary “Encumbrances” account and an offsetting “Reserve for Encumbrances”. Your state chart of accounts may use different names.
| Account | Debit | Credit | Note |
|---|---|---|---|
| 1. PO approved: Encumbrances (by expenditure line) | PO amount | Budgetary entry. Reduces available appropriation. | |
| Reserve for Encumbrances | PO amount | Offsetting budgetary account. No liability yet. | |
| 2. Invoice received: Reserve for Encumbrances | Original encumbered amount | Reverse at the amount originally encumbered, not the invoice amount. | |
| Encumbrances | Original encumbered amount | Liquidates the encumbrance. | |
| Expenditures (by expenditure line) | Invoice amount | Actual cost. Any difference from the PO frees or uses appropriation. | |
| Accounts Payable (or Cash) | Invoice amount | OSC shows a credit to cash where payment is immediate. | |
| 3. Year-end, PO still open: Fund Balance | Open amount | Closes the budgetary Encumbrances account. | |
| Encumbrances | Open amount | The reserve stays and is reported within fund balance. | |
| 4. New year, carried forward: Encumbrances | Open amount | Re-establishes the commitment. | |
| Fund Balance | Open amount | Reverses entry 3. | |
| Appropriated Fund Balance | Open amount | Budget entry, where your rules reappropriate prior-year commitments. | |
| Appropriations | Open amount | Adds spending authority for the carried PO. |
Some organizations also record a pre-encumbrance when a requisition is approved. The Oregon Accounting Manual describes it as intent to purchase, and notes that either type may be recorded at an estimated amount (Oregon OAM 20.20.00, effective July 1, 2012).
Worked example: a school district from purchase order to carryover
Illustration only. The district and all figures below are invented to show the mechanics.
A school district’s fiscal year ends June 30, 2026. The general fund appropriation for instructional furniture and supplies is $120,000. By April 1 the district has spent $62,000 on that line and has no open purchase orders, so $58,000 is available.
Step 1. April 10: purchase order for classroom desks, $25,000. Funds are available, so the PO is approved.
Debit Encumbrances $25,000. Credit Reserve for Encumbrances $25,000. Available appropriation falls to $33,000.
Step 2. May 20: desks delivered, invoice for $24,300. The vendor applied a $700 freight credit.
Debit Reserve for Encumbrances $25,000. Credit Encumbrances $25,000. Debit Expenditures $24,300. Credit Accounts Payable $24,300. Available appropriation rises to $33,700, because the $700 difference returns to the line.
Step 3. June 5: purchase order for science kits, $9,800. The vendor confirms delivery in August.
Debit Encumbrances $9,800. Credit Reserve for Encumbrances $9,800. Available appropriation falls to $23,900.
Step 4. June 30: year-end close. The science kit PO is a valid order for goods not yet received, and board policy carries valid open POs into the next year.
Debit Fund Balance $9,800. Credit Encumbrances $9,800. On the GAAP statements, expenditures on this line are $86,300 ($62,000 plus $24,300). The $9,800 is not an expenditure and not a liability. Because these are unrestricted general fund resources, the $9,800 is reported as assigned fund balance. The remaining $23,900 of unused appropriation lapses and stays in unassigned fund balance.
Step 5. July 1: new year opens.
Debit Encumbrances $9,800. Credit Fund Balance $9,800. If your budget rules require it, also debit Appropriated Fund Balance $9,800 and credit Appropriations $9,800 so the carried PO has spending authority in the new year.
Step 6. August 14: kits arrive, invoice for $9,950. The vendor raised the price by $150.
Debit Reserve for Encumbrances $9,800. Credit Encumbrances $9,800. Debit Expenditures $9,950. Credit Accounts Payable $9,950. The extra $150 must come from available appropriation on the new year’s line, so your system should check funds before the invoice is approved.
The standard behind it: GAAP and GASB 54
Encumbrance accounting is a budgetary control, not a GAAP recognition event. The Oregon Accounting Manual states that “for GAAP financial reporting purposes, outstanding encumbrances are not expenditures,” and that encumbrance accounting applies to all fund types for control purposes (Oregon OAM 20.20.00, effective July 1, 2012).
GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, was issued in February 2009 and replaced the old reserved and unreserved fund balance categories with five classifications: nonspendable, restricted, committed, assigned and unassigned (New York OSC GASB 54 bulletin, updated April 2011). The “reserve for encumbrances” line was eliminated for reporting purposes but may still be used for accounting purposes.
GASB 54 does not make encumbrances a separate classification. The North Carolina Office of the State Controller summarizes the rule this way: encumbrances such as outstanding purchase orders “are included within restricted or committed classifications when applicable,” and otherwise “are typically reported as assigned fund balance” (NCOSC, last updated May 6, 2026). The New York OSC bulletin adds that encumbered amounts should not be displayed separately within those classifications.
How to report encumbrances at year-end
- Classify the encumbered amount. If the resources are already restricted (for example, a federal grant in a special revenue fund) or committed by formal board action, leave them in that classification. If they are general fund resources with no other constraint, move the encumbered amount from unassigned to assigned. New York OSC training puts it directly: unassigned resources are reclassified as assigned when encumbered, and resources already assigned, restricted or committed are not reclassified (New York OSC, no date shown).
- Disclose significant encumbrances in the notes. GASB 54 requires disclosure of significant encumbrances together with other significant commitments (Journal of Accountancy, November 1, 2009). Oregon’s manual requires them by major and nonmajor funds.
- Reconcile the budgetary schedule. If your budget basis charges encumbrances against appropriations, your budget-to-actual schedule will show different totals from your GAAP expenditures. Explain the difference in the reconciliation between budgetary and GAAP bases.
Whether open encumbrances carry forward or lapse is a matter of state law and local policy, not GASB. If they lapse, you cancel the PO or re-issue it against the new year’s budget. If they carry forward, you use entries 3 and 4 from the table above. Tennessee’s County Technical Assistance Service describes the common practice: the year-end encumbrance reserve is reversed at the start of the next year and carried forward as a prior-year encumbrance reserve for budgetary purposes (CTAS, no date shown).
Common mistakes
Carrying forward POs that are not real commitments. A New York State Comptroller audit of the Central Square Central School District found that the district carried forward $1.3 million to $1.7 million in year-end encumbrances each year, and that 30% to 62% of those amounts were overstated, including $1,091,250 (62%) in 2020-21. Auditors cited large, rounded “blanket” POs created on June 30 and POs carried for multiple years, which understated surplus fund balance (New York OSC Report 2022M-196, March 2023).
Liquidating at the invoice amount. If you reverse only $24,300 of a $25,000 encumbrance, $700 stays encumbered indefinitely.
Leaving partial or cancelled POs open before the year-end process. Tyler Technologies’ knowledge base describes a Munis case in which a PO with open encumbrance amounts was left open before year-end and carried into the new year, and the fix was to restore the environment, close the PO and rerun year-end (Tyler Technologies, September 2, 2022).
Leaving received goods as encumbrances. If goods arrive on June 28 and the invoice comes in July, record an expenditure and a payable at June 30, not an encumbrance.
How we researched this
We read the pages that currently rank for “encumbrance accounting”, including explainers from Tipalti, Routable and Hyperbots, all of which sell finance automation software. None showed debit and credit entries with amounts or covered GASB 54. We then used state government guidance, a published state audit, the Journal of Accountancy summary of GASB 54, and vendor documentation. The worked example is our own illustration. We checked all sources on October 8, 2026.
How ERP and fund accounting systems automate encumbrances
Our guide to nonprofit accounting software and our page on church fund accounting software cover fund-based systems for smaller organizations. For capital projects, see construction accounting for public works projects, and for period-end work, see accrual accounting automation.
Tyler Technologies Munis. Munis creates encumbrances from purchase orders and carries open POs into the new fiscal year as part of its year-end process. The limitation, shown in the mistake above, is that unwanted POs must be closed before you run “Close Current Fiscal Year”.
Microsoft Dynamics 365 Finance (public sector features). You set a year-end processing option for purchase order encumbrances on the Purchase order year-end process page and can override it on a specific fund if the general ledger parameters allow overrides (Microsoft Learn, June 22, 2026). Each fund can either preserve carry-forward budget or reduce it automatically when a carried PO is cancelled or reduced (Microsoft Learn, December 30, 2025).
Oracle Fusion Cloud Financials. Oracle separates encumbrance accounting, which creates encumbrance journal entries for requisitions and purchase orders, from Budgetary Control, which checks funds available. Oracle states that encumbrance accounting does not automatically maintain the funds-available balance in General Ledger, which only the Budgetary Control module does (Oracle, October 10, 2025). Encumbrance balances for income statement accounts reset to zero in the general ledger when the next accounting year begins, and the Encumbrance Year-End Carry Forward task moves the accounting balances only, with no effect on budgetary control balances (Oracle, October 10, 2025).
Workday Financial Management. Workday calls these amounts obligations. The University of Virginia’s finance glossary, written for its Workday users, defines purchasing obligations as encumbrances due to issued purchase orders (UVA Finance, no date shown). Workday’s documentation requires a customer login, so confirm year-end behavior in a demo.
Related guides
- GASB 87 Lease Accounting: Entries, Example and Software
- Schedule of Expenditures of Federal Awards (SEFA) Guide
- De Minimis Indirect Cost Rate (15%): Nonprofit Setup Guide
Frequently asked questions
Is an encumbrance a liability?
No. An encumbrance is a budgetary commitment for goods or services that have not been received. A liability arises only when the vendor delivers, at which point you record an expenditure and a payable.
What is the journal entry to record an encumbrance?
Debit Encumbrances and credit Reserve for Encumbrances (some systems call it Budgetary Fund Balance Reserved for Encumbrances) for the purchase order amount. When the invoice arrives, reverse that entry at the original amount and record the expenditure at the invoice amount.
Where do encumbrances go in fund balance under GASB 54?
They stay in restricted or committed fund balance if the resources are already constrained that way. Otherwise the encumbered amount is reported as assigned. GASB 54 does not allow a separate encumbrance classification.
Do encumbrances carry over to the next fiscal year?
That depends on your state law and local policy. Some governments carry valid open purchase orders forward and reappropriate them, as New York’s guidance describes, while others let them lapse and require new POs against the new budget.
Sources
- New York Office of the State Comptroller, Accounting for Encumbrances (training presentation), no date shown. osc.ny.gov
- New York Office of the State Comptroller, Fund Balance Reporting and Governmental Fund Type Definitions (GASB 54 bulletin), updated April 2011. osc.ny.gov
- New York Office of the State Comptroller, Central Square Central School District, Fund Balance, Report 2022M-196, March 2023. osc.ny.gov
- North Carolina Office of the State Controller, GASB 54: Fund Balance Reporting and Governmental Fund Type Definitions, last updated May 6, 2026. ncosc.gov
- Oregon Department of Administrative Services, Oregon Accounting Manual 20.20.00 Encumbrances, effective July 1, 2012. oregon.gov
- University of Tennessee County Technical Assistance Service, GASB 54, no date shown. ctas.tennessee.edu
- Bruce W. Chase and John B. Montoro, Balancing Governmental Budgets Under GASB 54, Journal of Accountancy, November 1, 2009. journalofaccountancy.com
- Tyler Technologies knowledge base, Carry Forward PO in new fiscal year after year end close (vendor documentation), September 2, 2022. tylernow.atlassian.net
- Microsoft Learn, Year-end processing in the public sector (vendor documentation), June 22, 2026. learn.microsoft.com
- Microsoft Learn, Determine carry-forward budget (vendor documentation), December 30, 2025. learn.microsoft.com
- Oracle, Difference Between Budgetary Control and Encumbrance Accounting, Fusion Cloud Financials 25D (vendor documentation), October 10, 2025. docs.oracle.com
- Oracle, Other Obligation Balances Cross Accounting Year Control Budgets, Fusion Cloud Financials 25D (vendor documentation), October 10, 2025. docs.oracle.com
- University of Virginia Finance, Workday Obligations (glossary), no date shown. uvafinance.virginia.edu
- Tipalti, An Introduction to Encumbrance Accounting (vendor that sells AP software), updated December 14, 2024. tipalti.com
Sherman Hsieh
Independent analysis of enterprise software — ERP, CRM and more
