The normal probability density function (PDF) is widely used in parameter estimation in the modeling of dynamic systems, assuming that the random variables are distributed at infinite intervals. However, in practice, these random variables are usually distributed in a finite region confined by the physical process and engineering practice. In this study, we address this issue through the application of truncated normal PDF. This method avoids a non-differentiable problem inherited in the truncated normal PDF at the truncation points, a limitation that can limit the use of analytical methods (e.g., Gaussian approximation). A data assimilation method with the derived formula is proposed to describe the probability of parameter and measurement noise in the truncated space. In application to a water distribution system (WDS), the proposed method leads to estimating nodal water demand and hydraulic pressure key to hydraulic and water quality model simulations. Application results to a hypothetical and a large field WDS clearly show the superiority of the proposed method in parameter estimation for WDS simulations. This improvement is essential for developing real-time hydraulic and water quality simulation and process control in field applications when the parameter and measurement noise are distributed in the finite region.