Lesson: Encumbrances

In this lesson, Nick Palazzolo, CPA, demystifies the concept of encumbrances in government accounting through a practical example involving the budgeting and purchasing process for sanitation trucks by Jackman County. He clarifies the difference between budgeted and actual costs, demonstrating the recording of encumbrances when issuing a purchase order and the subsequent steps when invoices are received. He walks through the journal entries needed to reverse the encumbrances and record actual expenditures, using language and terms specific to governmental fund accounting. Nick makes sure to highlight the nuances between corporate and governmental accounting terminology and emphasizes the importance of becoming comfortable with these terms in practice.