What does 'Obligation' mean in the context of budget authority?

In the context of budget authority, 'Obligation' specifically refers to the commitment to pay for goods and services that an agency or organization is acquiring. When a government entity obligates funds, it is entering into a legally binding agreement that signifies its intention to spend money on specific items or services. This includes contracts and purchase orders that establish a promise to pay vendors or providers upon delivery of agreed-upon goods and services.

Understanding this definition is crucial because it highlights the distinction between the mere decision to spend money and the formal commitment that obligates the entity to that expenditure. Budgeting and financial management rely heavily on recognizing obligations as they impact the financial planning and forecasting processes. This commitment represents a critical step that precedes actual cash outflow, ensuring that planned expenditures align with authorized budgetary constraints.