How does an 'obligation by contract' appear in the ledger?

• A. Journal entry for revenue
• B. Entry that records a liability against an appropriation
• C. Record of asset transfer
• D. Depreciation entry

Answer: (B)

When a contract creates a legal obligation to pay in the future, the ledger reflects that by recording an obligation against the available appropriation. This means you’re recognizing a liability tied to a specific spending authority, so the fund reserves part of its budget to cover the contract. In practical terms, the entry increases the liability (the obligation) and decreases the unobligated portion of the appropriation (the budget authority), signaling that these funds are now committed and cannot be used for something else. This is how the system controls spending and ensures funds are reserved for legally binding contracts.

Revenue entries would affect income, not obligations. Recording an asset transfer reflects moving assets between accounts. Depreciation entries pertain to usage of fixed assets and expense matching, not to committing funds under a contract.