Encumbrance Law and Legal Definition

Encumbrance means a lien or claim on property. It is a burden or claim over a property that is binding on the property. An encumbrance can affect the clarity of a good title, or diminish the value of property. However, it will not prevent transfer of title.

Under accounting, an encumbrance is contingent liability, contract, purchases order, payroll commitment, tax payable, or legal penalty that is chargeable to an appropriation account. Encumbrance prevents further expenditure of funds in light of commitments already made. In the end of an accounting year, encumbrances still open are not accounted for as expenditures and liabilities but, rather, as reservations of fund balance. It ceases to be an encumbrance when paid-out or when the actual liability amount is determined and recorded as an expense.