As the first of your kneading you shall set aside a loaf as a portion. (Bamidbar 15:20)
The above verse is the source for separating taking challah. The correct way to perform this mitzvah is to separate part of the raw dough before baking bread or cakes. According to Rabbi Yisrael Meir HaKohen (known as the Chofetz Chaim, d. 1933), if challah had not been taken before baking, it must be separated afterwards (Mishnah Berurah 457:5).
According to Rabbi Moshe Isserlis (known as the Rama, d. 1572) the piece should be at least the size of a kezayit (olive’s amount), approximately 2.7 cubic centimetres (Rama Y.D. 322:5). The Chofetz Chaim (Mishnah Berurah 206:18) also noted that the piece should be held in the strongest hand while the bracha (blessing) is recited (see Chief Rabbi’s green siddur page 780).
The separated piece must not be eaten and has the status of non-kosher food. It should be burned until it is no longer edible and then discarded. It is permissible to burn it in the oven while other food is being cooked, provided it is wrapped completely in foil.
According to Rabbi Chaim Naeh (d. 1954) dough which is less than 1.23 kg of flour is entirely exempt from the commandment to take challah. A blessing may only be recited when the original dough contains more than 1.67 kg of flour. If the weight is between these values, challah should be separated without a blessing.
Rabbi Akiva Eiger (d. 1837) notes that after the separation and blessing, one should say (in any language) ‘this piece is separated for challah’ (Yoreh Deah 328:1).
The Sefer HaChinuch (attributed to Rabbi Aharon ben Yosef HaLevi, d. 1290) explains that since bread is a staple food, God wanted to give us a regular opportunity to recite a blessing so that it would satisfy both body and soul.
The Rama notes that the tradition of baking challot (plural of challah) on Friday afternoon is a way of honouring Shabbat (Orach Chaim 242:1). The word challah (חלה) comes from the same root (חלל) meaning ordinary, everyday or routine. By removing this, we symbolically detach the mundane to leave over the spiritual, a paradigm for the essence of Shabbat.