A predefined amount in the picture to control the companies expenses like what we do budgetting at home.We allocate some defined amount to spend so we target to not to exceed this.This is called Budgetting.
Encumbrance:
Eventhough we define a budget some unpredicted expenses will come and affect the budgetting.This is called Encumbrance
Budgets are used for better planning and control expenditures. A Budget is a collection of (1) PERIODS (2) ACCOUNTS (3) AMOUNTS
Balance Types are of 3(Three) types... 1. Actuals 2. Budgets 3. Encumbrance
(1) Actuals: Actuals are the journals which are reported from Payables Receivables Cash Management etc. These are the balances which are used to prepare our financial statements.
(2) Budgets: Budget balances are the funds are allocated to the various accounts.
(3) Encumbrance: Encumbrance balances are the funds reserved for the budgets for future expenses.
A budget is a forecast (estimate) of cost expenditure or /and revenue for a specified period of time. it may include one or mare accounting years. It is used to major the achievement of the company's goal or objectives.
An encumbrance is part of the budgeted amount that prevents the user from exhausting their budget amounts. when a user's expense is extending into the encumbrance amount an alert will be generated so that management can adjust the budgeted amount.
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