Which of the following statements is true about budget encumbrances?

Budget encumbrances represent commitments for future expenditures and serve as a way to reserve funds within the budget for anticipated expenses. When a budget is established, encumbrances help prevent overspending by ensuring that the funds allocated are not fully available for other uses.

The statement that budget encumbrances may lapse at the end of the budget period is true because many organizations operate on an annual budget cycle. If funds were not tied to actual expenditures by the end of that period, any remaining encumbrances could expire or lapse, requiring reallocation or renewal in the next budget cycle. This mechanism promotes fiscal responsibility, as it ensures that only committed funds are carried forward, and unutilized appropriations can be reassigned for other priorities.

Understanding that encumbrances relate to anticipated expenses and not being fixed to any specific category, such as fixed expenses, highlights their flexibility in budgeting. They are also not automatically closed at the beginning of each period; rather, the timing of closing encumbrances depends on the organization’s specific accounting policies and practices.