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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.
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