In eButterfly, species are individual taxonomic units. In general, they are reproductively isolated from other butterflies, although not always. Our species are determined by experts in taxonomic research such as John Pelham (http://butterfliesofamerica.com/US-Can-Cat.htm) .
An observation is a record of a species in space and time. An example of a single observation would be when you record seeing 6 Painted Ladies at Frog Lake, Mokelumne Wilderness, California on July 7th, 2013 on a 1 km hike. If you also report seeing 1 Mourning Cloak, you would have two observations and so on.
A checklist represents the entire butterflying event including your location, a measure of the effort you expended, the list of all species seen, and estimate counts of individuals for each species (e.g., 10 Cabbage Whites, 5 Monarchs, 1 Regal Fritillary). Each combination of species and count in a unique checklist is considered an observation.