Film Accounting Glossary
Encumbrance
What is an encumbrance?
Also called encumbered funds.
An encumbrance is an amount of budget formally set aside against a known future obligation, so the money cannot be spent twice.
It functions as a reservation rather than a cost: when the invoice arrives, the encumbrance is released and the actual cost posts. Studio and public-funded productions use encumbrance accounting heavily; independent productions usually achieve the same thing through the purchase order log.
Example
A $60,000 stage rental is encumbered against the facilities account the day the deal is agreed. The money cannot be spent twice. When the invoice arrives the encumbrance is released and the $60,000 posts as actual cost.
Figures are illustrative, chosen to show the mechanics rather than to quote market rates.
Where you'll see it
Studio and publicly funded productions. Independent shows achieve the same discipline through the purchase order log instead.
Common mistake
Encumbering a commitment and then also accruing it, which counts the same obligation twice until someone reconciles the two.
Related questions
- What is the difference between an encumbrance and a cost?
- An encumbrance reserves budget against a future obligation. It is not yet a cost, and it is released when the actual invoice posts.
- Do independent films use encumbrance accounting?
- Rarely by that name. They achieve the same control through the purchase order log, which reserves budget the moment a PO is approved.