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Explain Encumbrance

Encumbrance: The commitment of all or portion of an appropriation for future expenses. The Encumbrances symbolize commitments associated to unfilled purchase orders or unfulfilled contracts. Exceptional encumbrances are recognized as budgetary expenses in the department’s budget documents and annual financial reports. For budgeting aims, the Department of Finance builds a statewide adjustment to eradicate encumbrances from overall General Fund expenditures and exhibit the amount as a reserve in the fund balance, in accordance with Government Code section 13307. For another funds, like encumbrance adjustments are not made, and encumbrances are treated as budgetary expenditures which reduce the fund balance.

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