What is Encumbrance?
Investor Trading Academy
Published at : 09 Jan 2021
Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our word of the day is “Encumbrance”
Encumbrance” includes a mortgage, charge, lien, pledge, right of pre-emption, option, covenant, restriction, lease, trust, order, decree, title defect or any other security interest or conflicting claim of ownership or right to use or any other third party right and any agreement to create any of the foregoing.
An Encumbrance is the name given to funds that have been reserved when a purchase requisition is finalized and encumbered. When a requisition is processed, funds are placed aside for that transaction. Those funds are no longer available for use in other transactions, but also have not been included in the Actual Funds balance because a payment has not yet been generated and the funds have not physically left the university. The purpose and main benefit of encumbrance accounting is avoiding budget overspending.
Encumbrances can also be used to predict cash outflow and as a general planning tool. Encumbrances are important in determining how much funds are available.
The term encumbrance covers a wide range of financial and non-financial claims on property by parties other than the title-holder. Encumbrances prevent the property owner from exercising full – that is, unencumbered – control over his or her property. In some cases, the property can be repossessed by a creditor or seized by a government.
By Barry Norman, Investors Trading Academy
Barry NormanITAFinance Education