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 .