An encumbrance is a portion of a budget set aside for spending required by law or contract, but is not actually physically paid out yet, reports Accounting Tools. ... If business conditions continue as they are when you set the budget, then the encumbrance will become an expense.

What does encumbrance amount mean?

1. In accounting, an amount of money that one is required to spend on a stated thing in the future. For example, a portion of the proceeds of a sale may be encumbered to pay for the cost of goods sold. 2.

What does it mean when money is encumbered?

An encumbrance refers to restricted funds inside an account that are reserved for a specific debt or liability in the future. Your organization can encumber funds in multiple ways and for multiple reasons, such as: Creating a purchase order to buy goods or service. Signing a contract that commits to purchase something.