The Blues have been in the market for a new left-back after selling Filipe Luis back to Atletico Madrid earlier in the summer.
The 21-year-old, who reportedly passed a medical last week, is believed to have agreed a five-year deal at the Premier League champions.
Rahman, who cost a reported £21.7million, said: "I am very happy to sign for Chelsea, one of the biggest clubs in the world.
"I can't wait to train with my new team-mates and very much looking forward to working with them and Mr (Jose) Mourinho."
Augsburg Commercial Manager Stefan Reuter said on the deal: "Baba Rahman has developed tremendously with us for a year and made a great leap.
"It's not just a reward for his achievements, but also for our work, if international giants like Chelsea are interested in signing him. We wish him well in England."
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