What does it mean when expenditures do not equal the amount of the related encumbrance?

When expenditures do not equal the amount of the related encumbrance, it indicates that encumbrances are fundamentally based on estimates. In the context of governmental accounting, encumbrances represent commitments to pay for goods or services that have not yet been delivered. These commitments are recorded to ensure that funds are earmarked for specific purposes, allowing for better budgetary control.

The use of estimates arises because encumbrances are recorded when a purchase order is issued, not necessarily when the goods or services are received. As a result, the estimated amount can differ from the actual expenditure incurred when the goods or services are ultimately received and paid for. This discrepancy highlights that encumbrances serve as a budgeting tool rather than an exact measure of future cash outflows.

Understanding this concept is crucial for managing public sector budgets effectively, as it allows for planning and tracking of financial commitments.