the municipal secretary desktop reference manual - Southwestern ...

NOTES
AN ENCUMBRANCE SYSTEM
If the annual budget is to be a meaningful policy tool, it is critical that a municipality adopt an
encumbrance system which facilitates the control of expenditures and which deters the overspending
of appropriations. These are legal mandates setting forth the maximum expenditure levels allowed
by law, unless changed by subsequent actions of the local governing body.
An encumbrance system effectively allows a municipality to reserve or encumber part of the
annual budget appropriation for a certain anticipated expenditure. By recording an encumbrance in
the general journal and in the expenditure account, it is less likely that a municipality will
inadvertently overspend a particular budget line item. What is required to accomplish the basic
objective is a monthly reporting system which shows these types of transactions.
- those reporting actual expenditures to date
- those reporting possible future claims against the municipality, to date.
The amount of the appropriation to be spent is the last reported balance minus actual
expenditures and potential claims or encumbrances incurred in the reporting period.
If the reporting system is to show these types of proposed expenditure data, the municipality
must have in place an encumbrance system. Encumbrance represents a potential liability involving
unperformed, or unfilled purchase orders or contracts for goods or services. If and when these
transactions are fulfilled or paid, encumbrances cease to exist. Any differences between
encumbrance and actual payments are reflected in adjustments to the appropriate accounts.
A municipal encumbrance system can be in effect throughout the fiscal year, even though it is
most unlikely that appropriations will be exceeded in the early parts of a fiscal period. Alternative
approaches to the budget control issue are to begin to recognize encumbrances later in the period
when most appropriations are likely to be spent or to initiate the process for only selected
appropriations which have reached a predetermined financial level. These alternatives reduce time,
costs and work loads. On the other hand, a continuous year-round encumbrance system establishes a
uniform routine which may be more reliable than the part-time or selective approaches to the
encumbrance of accounts.
An encumbrance system is not generally applied to payroll accounts, particularly those which
are for fixed salaries where actual yearly costs are known. However, for those payroll accounts
which are for hourly paid personnel and/or subject to overtime charges, an encumbrance system may
be most appropriate, particularly if overspending is a problem.
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