The Encumbrances account is properly termed a:

• A. Revenue account
• B. Expenditure account
• C. Asset account
• D. Budgetary account

Answer: (D)

In governmental accounting, encumbrances are about commitments to spend, not the actual spending yet. They’re a budgetary control tool used to show how much of an appropriation has been reserved for outstanding purchase orders or contracts. Because of that, the encumbrances account is classified with budgetary accounts, not as an asset, revenue, or an actual expenditure account. When a purchase order is issued, the encumbrances are recorded to indicate the commitment and to reduce the available appropriations. When the goods or services are received and the obligation becomes an actual expenditure, the encumbrance is cleared against the appropriate expenditure, and the budgetary balance is updated accordingly. If the order is canceled, the encumbrance is reversed so the budget is restored. This budgeting purpose is why it’s categorized as a budgetary account.