Question

Explain the differences between encumbrances and expenditures and how they are accounted for. Also, what is the difference between an encumbrance and an accrual?

Answer 1

Encumbrance in general can be referred to as reserving or keeping aside certain funds in order to be used for some specific purposes or we can say its an appropriation.

Expenditure is a charge for the actual amount at the time of making payment for related purpose.

Generally, encumbrances are like reserves and not actual flow of cash and hence can be used to predict future cash flows of an entity , it will be treated as an asset because it is a reserve to meet future liabilities.

Expenditures actually impact the cash position of the concern and are entered in all the records which have felt the result of such transactions and it is treated as an asset and is shown in assets side of balance sheet.

As per the concept of accrual the expenses and revenues are recorded in the period in only which they occur and it may or may not involve cash , where as encumbrance is a cash item and will involve cash , it may or maynot be related to the current period.