In accounting, an encumbrance could be viewed as a type of funds hold. When an account has an encumbrance, it means that funds are being set aside to meet financial liability requirements. Although the funds are considered part of the account, they cannot be spent, because they are being held to discharge a bill. Once the bill is paid, the encumbrance is released and the funds are recorded as an expense. Colleges and universities may also use the term “encumbrance” to refer to a block on a student account which will not be lifted until the student gets current with payments.Encumbrance accounting is used in a wide variety of settings. It can be confusing to people who are not familiar with it, because the status of funds may not be immediately clear. It can also be utilized to overinflate the contents of an account, by making it look like the account is filled with funds, when in fact the funds could be restricted and already designated for use elsewhere.
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