Which statement differentiates encumbrances from expenditures in governmental accounting?

• A. Encumbrances are revenue sources; expenditures are not.
• B. Encumbrances are cash on hand; expenditures are future commitments.
• C. Encumbrances are commitments to spend (purchases ordered) and held to prevent overspending; expenditures are actual outflows and recorded when incurred.
• D. Encumbrances are the same as expenditures; both are actual outflows.

Answer: (C)

Encumbrances represent commitments to spend rather than actual spending. When a purchase order or contract is issued, a portion of the budget is reserved to cover that future payment, preventing overspending and giving a clear picture of committed but not yet disbursed funds. They don’t involve an actual cash outlay or a liability yet; they simply earmark part of the appropriation. Expenditures, by contrast, are the real outflows of resources and are recorded when the obligation becomes an actual liability and the goods or services are received. For example, issuing a purchase order creates an encumbrance to reserve funds; when the goods arrive and the invoice is approved, the encumbrance is cleared and an expenditure is recorded, reflecting the actual spending. This distinction—encumbrances as commitments to spend and expenditures as actual outflows—is what differentiates them.