- in government accounting, commitments related to unfilled contracts for goods and services including purchase orders. The purpose of encumbrance accounting is to prevent further expenditure of funds in light of commitments already made. At year-end, encumbrances stillopen are not accounted for as expenditures and liabilities but, rather,as reservations of fund balance. When an estimated or contractual liability is entered into, the entry is to debit encumbrances for the estimated amount and credit reserve for encumbrances. When the actual expenditure of an amount previously encumbered is known, there are two entries. The first entry is to reverse the original encumbrance. The second entry is to record the expenditure by debiting expenditures and crediting voucherpayable. At year-end, the encumbrance account is closed out against fund balance.
- debt secured by a lien on assets.
right or claim to real property that passes with title, for example, easements, judgment liens, and mortgages. An encumbrance does not hinder transfer of ownership, though it may reduce the market value of the property.
any right to, interest in, or legal liability upon real property that does not prohibit passing title to the land but that diminishes its value. Encumbrances include easements, licenses, leases, timber privileges, homestead privileges, mortgages, and judgment liens. Property is said to be encumbered if restricted in such a way.
claim, such as a worker's lien, to property under the care, custody, and control of another. This situation occurs when a worker is not paid for labor provided. For example, a carpenter unable to collect payment for installing wood finishings seeks an encumbrance on the owner's property.
any right to or interest in land that affects its value. Includes outstanding mortgage loans, unpaid taxes, easements, deed restrictions.
Example: Encumbrances on Blackacres include 3 mortgages, 4 leases, a mechanic's lien, and a deed restriction preventing the sale of alcoholic beverages on the land.
