An Encumbrance is a type of transaction created on the General Ledger when a Purchase Order (PO), Travel Authorization (TA), or Pre-Encumbrance (PE) document is finalized. The encumbrance transaction shows an outstanding commitment by an organization. When an encumbrance is established, the organization’s financial manager should ensure funds will be available for payment of the transaction, in accordance with the overall life-cycle of the contract.

The purpose and main benefit of encumbrance accounting is avoiding budget overspending, by showing open commitments as part of projected expenses. Encumbrances are important in determining how much funds are available as a projected expense planning tool.

In Balance Reports, encumbrances can be toggled on or off to reflect available balances. Report users can use this encumbrance indicator to evaluate their available balances and solvency concerns, at budget or fiscal year end.

Encumbrances vs. Actual Expenses

Encumbrances are open commitments to a transaction. Encumbrances are not considered actual expenses and are not included in actual-expense balances. With Encumbrances, no payments leave the University and no actual expense would be generated on a ledger, since it is an expectation of a future actual transaction.

This distinction is particularly important during Fiscal Year-End Close because the Accounting Department and the UCI Budget Office only look at ‘Budget minus Actuals’ to determine if an account or fund is solvent. Encumbrances are not included in the calculation.

Encumbrances can be established for multi-year contracts, where not all budget is available/received in the first year. For multi-year contracts, an Organization should at least ensure funds are available for the payments (actuals) that are expected to hit the General Ledger during the current budgetary period. The remaining outstanding amount of each encumbrance during Fiscal Year End Close will carry over from one year to the next, as a separate process from Budgetary Carryforward procedures. (Plant funds may be an exception in that they require sufficient unencumbered funds available for a project, to cover the encumbrance up-front.)

Managing Encumbrances

It is up to departments to include their encumbrance transactions in their projected expense planning (the Encumbrance Report shows all current open commitments), and adjust their actual expense planning based on expected budget vs. expected Actuals.

For Purchase Order and Travel Authorization encumbrances, when the vendor or employee is paid, part or all of the encumbrance is released in accordance with that payment. The department will see a transaction that will appear under their Actuals (AC), separate from their Encumbrance (EX/IE/CE) debit/credit transactions.

Types of Encumbrances

Name Balance Type Code Description
External Encumbrance EX Commitment of funds generated by purchase orders are recorded using the EX balance type.
Cost Share Encumbrances CE Contract & Grant Cost Share Encumbrances are created for purchase orders that are cost share funded.
Internal Encumbrance IE Internal Encumbrances represent the commitment of funds generated by a Travel Authorization document.
Pre-Encumbrance PE Pre-encumbrances, created and relieved using the Pre-encumbrance e-doc, allow departments to further commit funds to facilitate financial management.

Reporting Tools for Encumbrances:

Financial managers can use the following reports to analyze their encumbrances.