An encumbrance is a pending expenditure which has not been made yet. For example, if a purchase order for supplies has been issued, but the supplies have not been received, the purchase order creates an encumbrance for supplies.
In opentaps, encumbrances are calculated from both outstanding purchase orders and from posted ledger transactions of the type "encumbrance." The encumbered amount of a purchase order is the outstanding amount of the purchase order's items, minus the amount that have already been invoiced. We can think of encumbrance to expense as a process similar to order to cash: when a purchase order is created, there is an encumbrance. When an invoice is received from the purchase order, either because inventory has been received or because the supplies or services have been billed, there will be a debit entry to expense and credit entry to Accounts Payable. At this point, the encumbrance has become an expense. The purchase order item will no longer show up as encumbrance.
Encumbrances from general ledger accounting transactions of the type "encumbrance" are summed up during each reporting period. The encumbered amounts in expense accounts are added to the encumbrance total. The encumbered amounts in non-expense accounts (ie, accounts payable) are ignored.
Note that encumbrances are created as a snapshot, so they can be generated from purchase orders, posted encumbrance ledger transactions, and potentially other sources. These snapshots are generated periodically and used in reports. Encumbrance snapshots are by default scheduled to run daily for the organization "Company". You can modify the scheduled encumbrances by editing hot-deploy/financials/data/ScheduledJobs.xml. You can also refresh them as needed by updating the encumbrance snapshot.