What is the primary purpose of encumbrance accounting?

Encumbrance accounting is primarily utilized to prevent overspending by accounting for commitments that may not yet have resulted in actual expenditures. When funds are encumbered, they are set aside for specific purposes, allowing an organization to track obligations before the cash is officially spent. This process is vital, as it provides a clearer picture of available financial resources by recognizing anticipated expenses. By doing so, schools and organizations can avoid financial deficits arising from unanticipated expenditures or delayed transactions. Thus, understanding and implementing encumbrance accounting ensures more accurate budgeting and financial planning, contributing to effective fiscal management.