What is an Unencumbered Balance?

An unencumbered balance is that portion of an appropriation that has not yet been spent or tagged for use. Thus, it is the amount of money remaining that is available for use. The unencumbered balance tends to be quite small towards the end of a budget period, so managers tend to pay more attention to it at that time, to keep from spending an excessive amount of funds. The concept is most commonly employed in governmental accounting.

Example of an Unencumbered Balance

A city parks department is allocated $500,000 for park maintenance for the fiscal year. During the first six months, it spends $150,000 on labor and materials and issues purchase orders totaling $200,000 for upcoming projects, creating encumbrances. The remaining $150,000 has not been spent or committed to specific contracts or purchases. This unallocated $150,000 is considered the unencumbered balance, available for any new maintenance needs, emergencies, or enhancements that arise later in the year. Monitoring the unencumbered balance allows the department to make informed decisions and ensures that funds are properly managed before the fiscal year ends.