How to Write accounting for forward contracts?



The accounting for forward contracts is written as follows −

Here, XXXX and XXX refer to the respective amount.

Recognize

Since the agreement is for a future date, it should be accounted for now (date of signed, date of which physical exchange).


Credit Debit
Asset obligation XXXX
Asset Receivable
XXXX

Recording (seller perspective)

Asset obligation credited for spot rate and asset receivables and contra asset debited/credited for forward rate. Contra asset is the difference between spot rate and forward rate.


Credit Debit
Asset obligation XXXX
Asset Receivable
XXXX
Contra asset XXX XXX

Recording (from buyer perspective)

Payable amount credited at forward rate and contra asset credited/debited at contra asset account. Asset receivable debited.


Credit Debit
Contracts receivable XXXX
Asset obligation
XXXX
Contra asset XXX XXX

Recording on date of exchange (seller perspective)

Asset obligations debited on liability side on spot value on contract date, contracts receivables at forward rate and contra asset debited/credited on asset side.


Credit Debit
Contracts receivable XXXX
Asset obligation
XXXX
Contra asset XXX XXX

Gain/loss (seller perspective)

On the date of physical exchange, gain or loss is recognised by taking the difference between forward rate and current market value. On date of exchange, cash account debited with forward rate and asset account credited with current market value. Final value debited/credited on asset account.


Credit Debit
Cash
XXXX
Cash
XXXX
Asset account XXX XXX

Recording on date of exchange (buyer perspective)

Contract payable debited on liability side on forward rate and contra asset debited/credited on liability side, asset receivable credited on asset side by spot rate.


Credit Debit
Contracts payable
XXXX
Asset receivables XXXX
Contra asset XXX XXX

Gain/loss (buyer perspective)

Cash account credited with forward rate. Difference credited/debited to cash account, asset debited with current market value.

Updated on: 2022-05-17T14:54:49+05:30

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