A performance obligation is an agreement between a company and a customer to perform a service or sell a product. Upon satisfaction of the performance obligation, revenue is recognized. Basically the revenue recognition principle requires that a company recognizes revenues during the accounting period in which the performance obligation is satisfied. Let's use a real world example. I worked as a contractor for six years. My bosses company, Prime Colors LLC. would bid on jobs. if he won the bid... Step 1: My boss and either the general contractor or home owner would engage in an agreement in the form of a contract in November.