The reserve for encumbrances is an account containing that portion of a fund balance that has been set aside for the payment of an obligation. For example, the reserve could be used to pay for a maintenance contract or an issued purchase order. By using a reserve, a government entity is better able to control its expenditures by avoiding over-commitments of its funds.
A reserve is set up when a commitment is made to pay funds and the funds are available. When a billing is received from a supplier, the reserve is reversed and an account payable is recorded in its place.