Obligation definition

What is an Obligation?

An obligation is a commitment to pay a third party based on an underlying contract, such as a purchase order, mortgage, or bond issuance.

Accounting for an Obligation

If the obligation is probable and the amount can be determined, then it is recorded in an entity's accounting records as a liability. The journal entry used to record this obligation includes a credit for the obligation, while the offsetting debit may be to an expense or asset account. For example, if you incur a $10,000 obligation to pay for a new machine, then the debit would be to the Machinery fixed assets account.

Presentation of an Obligation

If an obligation is due within one year, it is classified as a current liability. If the obligation is due over a longer period, it is classified as a long-term liability. Obligations are typically recorded within a few standard liability accounts, such as trade payables, payroll taxes payable, accrued liabilities, and long-term debt.