What is the difference between an obligation and a disbursement?

• A. Obligation creates a legal liability; disbursement pays out funds.
• B. Obligation pays out funds; disbursement creates liability.
• C. Both are the same.
• D. Obligation is a cash item; disbursement is an accounting entry.

Answer: (A)

The key idea is the difference between committing to spend and actually paying. An obligation is a formal promise to spend money; it creates a legal liability for the entity and often involves encumbering funds, signaling that a payment will be made in the future. A disbursement is the actual cash payment that settles that promise—when funds are released to the recipient and the cash balance is reduced.

So the best choice matches that distinction: an obligation creates a legal liability, and a disbursement pays out funds. This reflects how the two steps relate: you first set up the obligation, then you disburse the cash to fulfill it. It’s common to have an obligation without an immediate disbursement, because timing can differ between committing funds and actually paying them.