Performance Obligation

A performance obligation is a commitment in a contract to deliver specific goods or services to a customer. In simpler terms, it’s what a company promises to do in exchange for payment. For example, if you buy a car, the seller’s performance obligation is to provide you with that car in good condition. Companies must clearly identify and fulfill these obligations to ensure customer satisfaction and comply with accounting standards, which requires them to recognize revenue as they meet these commitments. Essentially, it ensures clarity and accountability in business transactions.