What is the purpose of encumbrance accounting in government funds?

• A. To control spending and indicate commitments until the actual expenditure occurs.
• B. To record actual expenditures when they occur.
• C. To record liabilities from debt issuance.
• D. To depreciate capital assets.

Answer: (A)

Encumbrance accounting is a budgetary control tool used in government funds to reserve part of appropriations for anticipated liabilities. It records commitments such as purchase orders and contracts, so managers can see that funds have been set aside and are not available for other spending. This helps prevent overspending by reducing the available appropriations as soon as a commitment is made. The actual outlay is not recorded as an expenditure until the goods or services are received and an invoice is processed; at that point the encumbrance is cleared and the expenditure is recorded. If the order is canceled, the encumbrance is reversed, restoring the funds.

The other concepts don’t fit because recording actual expenditures as they occur is expenditure accounting, not the purpose of encumbrances; recording liabilities from debt issuance pertains to debt, not purchase commitments; and depreciating capital assets deals with allocating cost over time, not reserving funds for obligations.