Definition
Exaggeration was introduced by animation experts Frank Thomas and Ollie Johnston. It talks about how an idea is displayed on-screen to portray a particular emotion. Accentuating the essence of an idea via the design and the action is what exaggeration is all about. By exaggerating a character’s movements, you essentially add more life and meaning to the character’s actions. For example, when a character punches someone on screen, the victim instead of falling down can be shown to fly back and then fall. This although sounds and seems unrealistic but can actually make actions on screen more convincing.
Uses of Exaggeration in Animation
Exaggeration in animation can make any action look more appealing and entertaining to the audience. In reality, it is less of a tool and more of the degree to which other transitions and features are applied to animation. For e.g., the timing of a character, how much a scene is stretched, the way a pose is shaped and executed, etc., are all dependent on exaggeration. It is an important aspect of animation because a perfect display of reality can be hard to portray and execute on screen. Additionally, an animation with exaggeration can leave more impact on the audience than one without it. 
Exaggeration can be the most enjoyable experience of your work as it allows you to push boundaries while designing a character. You get to decide if your characters will seem more natural or realistic to the audience by reducing exaggeration or if they will feel more cartoony by increasing exaggeration.
Additional information
Exaggeration is widely used in the current animation world. The Walt Disney production house defined exaggeration as, “remaining true to reality, and just presenting it in a wilder, more extreme form”. Exaggeration can also be executed by altering the physical features of the character, especially if you are creating a supernatural experience.
However, experts recommend balancing out the several aspects of a scene, so that any confusion can be avoided by the viewers. This is why animation artists, even when changing features of a character in a supernatural film, leave the unique features untouched, so the audience doesn’t have a hard time recognizing them and still enjoy them to the fullest.
