How are year-end encumbrances shown on the balance sheet?

How are year-end encumbrances shown on the balance sheet?

• A. They are recorded as a current liability.
• B. They are shown as a reservation of fund balance (or a portion of assigned fund balance) and not as a liability.
• C. They are recorded as long-term liabilities.
• D. They are not shown on the balance sheet.

Answer: (B)

Encumbrances are budgetary commitments, not actual obligations yet. At year-end they don’t represent a payable, so they aren’t reported as a liability on the balance sheet. Instead, they reserve part of the fund balance (often shown as a reservation or as assigned fund balance) to indicate funds are set aside to cover those future purchases. This keeps the fund balance clear about what is already committed while leaving the rest available for other needs.

Encumbrances are budgetary commitments, not actual obligations yet. At year-end they don’t represent a payable, so they aren’t reported as a liability on the balance sheet. Instead, they reserve part of the fund balance (often shown as a reservation or as assigned fund balance) to indicate funds are set aside to cover those future purchases. This keeps the fund balance clear about what is already committed while leaving the rest available for other needs.