222

$show=home

Welcome to Accounting Education

The Free Online University with 3400+ Accounting contents as study material which can watch, read and learn anyone, anywhere.

Start your studies

Latest Contents$type=three$count=6$author=hide$comment=hide$label=hide$s=hide$show=home$date=hide

$show=home

Why Accounting Education Important


Free
Simple
Have Quality Study Material
Taught by Expert

Connect Vinod Kumar (Educator)

Why Accounting Education Volunteer


Free training
It's educational
It's fun
It helps others

Become Volunteer Teacher

Journal Entries for Forward Contracts


I have already explained in previous lecture about forward contracts. Here before explaining its journal entries, I will explain again. Forward contract is the contract between two private parties in which one party buys and other sells at current price but asset's payment and delivery will be in future specified date.


It provides the hedge against the fluctuation in the price in future date. Seller secures the sale of products and buyer secures the risk due to inflation in the prices.

Features of Forward Contract 

There are three features of forward contract.

a) Spot Price

This is today market rate. For example, I went to market of labors and today labor one day cost is Rs. 300.

b) Forward Price 

Forward price is the future price of any product or service. For example, it is the chance of shortage of labor after one year. So, factory owner has forward contracted today for supply of labor at the end of year with forward price Rs. 400 per day labor cost.

c) Forward Asset Exchanged 

Now, at the end of year, laborers will provide service at Rs. 400 whether labor cost will more or less than Rs. 400 because they have gained at current time. Factory owner has hedged of any loss due to shortage of laborers.

Following journal entries for forward contracts will be passed.

1.  In the Books of Buyer of Assets 

(A) on the Forward Contract Date

Asset Receivable Account Debit ( At Spot Price )

Premium on Forward Contact Account Debit ( Difference between forward price and spot price)


Creditor ( for Forward Contract) Account Credit


Logic behind the journal entry : - 

a) Asset has come in the books if owner will cheat us on the maturity date, we can get same asset from court. So, this asset account will debit by writing asset receivable account.

b) Buyer will surely face loss current time but it will surely gain in future. So, premium on forward contract will debit because loss will always be debit.

c) Creditor account for forward contract is our liability which we have to pay in future date. So, liability account will credit.



(B) On the Maturity of Forward Contract Date


On the maturity date, current market price will be calculated. It will compare with future price. Difference will either loss or gain on forward contract. 


Asset (Purchase) Account Debit

Creditor Account Debit

Loss on Forward Contract Account Debit

Asset Receivable Account Credit

Gain on Forward Contract Account Credit

Premium on Forward Contract Credit

Cash/ Bank Account Credit

Logic of this journal entry : 

a) We have received asset in physical form.

b) We have paid our creditors which has decreased our liabilities. So, creditor account will debit

c) If we have loss in this contract, it will debit

d) If we have gain in this contract, it will credit.

e) Account receivable account will credit because we are closing this account

f) Premium on forward contract will credit because we are closing this account.

g) We have paid the money. With this, our cash balance has been decreased. So, it will credit as decrease in asset will credit always.



2. In the Books of Seller of Assets 


(A) on the Forward Contract Date


Debtor Account Debit

Asset Obligations Account Credit

Premium on Forward Contract Credit


(B) On the Maturity of Forward Contract Date

On the maturity date, current market price will be calculated. It will compare with future price. Difference will either loss or gain on forward contract. 


Cash/ Bank Account Debit

Asset Obligation  Account Debit

Loss on  Forward Contract Account Debit

Premium on Forward Contract Debit

Debtor  Account Credit

Gain on Forward Contract Account Credit

Asset Account (Sale) Credit

Example

Mr. A seller of seeds. On 26th Aug. 2015, its one kg. price is Rs. 100. Mr. B is the buyer. He want to buy 100 kgs of same seed in 31st Dec. 2015 but he does not want to get loss of increasing its price. So, he did forward contract of 100 kgs buying in 31st dec. 2015 at the forward price of Rs. 120 today. Mr. A is gaining Rs. 20 per kg sale today on 26th aug. 2015. Pass the journal entries

In the books of Mr. B buyer

(A) on the Forward Contract Date

Asset Receivable Account Debit ( At Spot Price ) 10000

Premium on Forward Contact Account Debit ( Difference between forward price and spot price) 2000


Mr. A Creditor ( for Forward Contract) Account Credit 12000

(B) On the Maturity of Forward Contract Date


On the maturity date 31st dec. 2015, current market price is Rs. 130 per kg seed . It will compare with future price. Difference will either loss or gain on forward contract. 


Asset (Purchase) Account Debit 13000

Mr. A Creditor Account Debit 12000


Asset Receivable Account Credit 10,000

Premium on Forward Contract Credit 2000

Cash/ Bank Account Credit 12,000

Gain on forward contract  { ( 130-120 ) * 1000}Credit 1000

2. In the Books of Seller of Assets 


(A) on the Forward Contract Date


Debtor Account Debit 12000

Asset Obligations Account Credit 10000

Premium on Forward Contract Credit 2000


(B) On the Maturity of Forward Contract Date

On the maturity date, current market price will be calculated. It will compare with future price. Difference will either loss or gain on forward contract. 


Cash/ Bank Account Debit 12000

Asset Obligation  Account Debit 10000

Loss on  Forward Contract Account Debit 1000

Premium on Forward Contract Debit 2000

Debtor  Account Credit 12000


Asset Account (Sale) Credit 13000


Read above content  in Your Own Language 





Related Resource 




Reference of Book for Reading 




COMMENTS

$hide=page


Name

access,2,account,87,accountant,92,Accounting,679,accounting definitions,99,accounting ebook,3,Accounting education,85,accounting procedure,2,accounting process outsourcing,2,Accounting Software,54,advance,3,advertising,6,africa,7,Amalgamation,6,amendments,16,announcements,61,Annuity,2,assets,51,audit,46,auditing,41,Australia,2,B.Com.,22,balance sheet,81,bank,111,Bank reconciliation,12,banking,33,basic accounting,110,BBA,1,benefits,13,best,50,bill,12,black money,3,blog,12,bloggers,7,book keeping,4,bookkeeping,2,Branch Accounting - full tutorial,8,budget,35,Budget variance,13,business,65,businessman,9,CA,29,calculator,4,canada,3,capital,72,capital budgeting,27,career,20,cash,40,cash book,8,cash flow statement,8,Chiense,1,children,13,china,6,class,3,coaching,2,coins,2,college,6,commerce,10,commerce students,7,company,36,computer,9,computer accounting,1,conference,4,Contact vinod kumar,1,Control Your Spending,27,corporate accounting,69,cost,159,cost accounting,194,cost center,8,cost centre,1,CPA,2,credit,18,credit card,11,cs,10,currency,35,data,11,Debit and credit,16,debit cards,1,debt,62,debtor,21,degree,6,depletion,2,depreciation,38,Diwali Messages,12,documents,4,dollar,5,domain,3,Downloads,3,Dubai,1,e-accounting,17,earning,17,education,246,Education Loans,6,email,15,employee,4,EPF,2,ERP,7,euromoney,1,examination,7,excel,17,excise duty,6,expenses,65,facebook,7,factor of loan,1,fans,2,feature,32,fifo,5,FII,4,fiji,1,finacle,1,finance,822,Finance Journal Entries,4,Financial,134,financial accounting,144,fire insurance,3,flickr,2,flow,4,forensic,4,forex,21,formula,8,france,1,fraud,6,free,2,fun,34,function,1,fund,48,GAAP,36,GDP,1,gdr,5,germany,1,gold,7,goodwill,4,goodwill accounting,3,google,34,google apps,3,google apps,1,google base,1,google buzz,1,google calendar,1,Google docs,38,google finance,3,google fusion tables,1,google talk,5,govt.,5,GST,33,guide,85,health,6,Hindi,2,Hindi Language,3,history,3,holding company,3,How to treat FBT in Tally 9,1,HRA,3,ICAI,11,ICAWI,3,ICICI Bank,1,IFRS,10,income,17,income statement,16,Income Tax,7,India,57,indian railway,1,Indonesia,1,inflation,4,inflation accounting,3,infographics,8,information,7,inspiration,175,insurance,14,insurance accounting,2,Intangible,3,interest,26,international,7,Internet,41,Introduction of Tally 9,1,inventory,41,investment,135,investment in Shares,6,invoice,3,IT,1,Japan,1,Job costing,4,journal entries,136,Journal Entries eBook Help,4,Kalculate,1,keyboard,3,kuwait,2,laptop,2,law,4,LBT,1,learning,36,lease,5,lecture,11,ledger,15,leducation,1,Leverage Analysis,7,liabilities,16,lifo,3,linkedin,1,loan,74,logical point,1,loss,5,loss of profit,1,M.Com.,5,m.phil,2,malaysia,3,management accounting,129,manual accounting,4,manufacturing account,1,market,11,marketing,3,mastercard,2,material,13,MBA,14,MCA,1,media,4,migration,2,mobile,9,money,61,ms word,3,ms. excel,14,multi currency in tally 9,1,Multicurrency Accounting,3,mutual fund,30,national security,1,new and sacrifice ratio,1,new york times,1,new zealand,1,news,1,NGO,5,nonprofit-accounting,6,North Georgia Mountains,1,Notification,1,NPV,17,NSE,1,odbc,2,office,10,oman,1,online application,2,online accounting,11,Online Accounting Course,4,otcei,1,pakistan,3,parents,3,Partnership,1,pay pal,3,pdf,4,Personal Finance,6,pie chart,1,pie chart of income,2,pnb,5,podcast,1,ppf,1,presentation,10,price,7,privacy policy,2,prof. vinod kumar,13,profit,24,profit and loss account,12,project management,11,provision,13,purchase,9,puzzles,2,quickbooks,2,Quote,22,quotes,42,quotes of svtuition,1,rating agency,2,ratio analysis,34,RBI,7,readers,13,real estate,13,rectification of errors,11,remote control,2,reports,10,reserves,8,responsibility accounting,4,retirement,2,revenue,3,Revenue reserves,2,review,7,risk,11,rupees,9,salary,5,sale,12,saudi arabia,1,saving,19,sbi,9,scholarship,2,school,1,SEBI,13,security,30,service tax,23,share,20,share trading,15,Shares,16,shri lanka,3,singapore,2,sms,6,social accounting,7,society,5,solution,214,South Africa,1,stock,24,stock exchange,22,structure,6,student,39,students,69,study,21,subsidiary company,2,svtuition,13,swiss bank,2,tally,99,tally 9,8,Tally 7.2,8,Tally 9,42,Tally.ERP 9,59,tanzania,2,tax,94,Tax Accounting,30,TDS,15,teacher,62,teaching,112,technology,33,test,40,testimonial,15,testimonials,15,thailand,1,tips,60,trading,5,trading on equity,2,transaction,7,trend,12,trial balance,13,truthfulness,1,tuition,3,twitter,10,UAE,5,UGC - NET Commerce,13,UK,11,United Arab Emirates,1,university,9,usa,25,valuation,8,VAT,22,Video,35,Voucher and vouching,4,Wealth,8,wikipedia,25,working capital,29,youtube,14,
ltr
item
Accounting Education: Journal Entries for Forward Contracts
Journal Entries for Forward Contracts
Accounting Education
http://www.svtuition.org/2015/08/journal-entries-for-forward-contracts.html
http://www.svtuition.org/
http://www.svtuition.org/
http://www.svtuition.org/2015/08/journal-entries-for-forward-contracts.html
true
2410664366776677676
UTF-8
Loaded All Posts Not found any posts VIEW ALL Reply Cancel reply Delete By Home PAGES Contents View All RELATED CONTENTS FOR YOUR LEARNING Topic ARCHIVE SEARCH ALL POSTS Not found any post match with your request Back Home Sunday Monday Tuesday Wednesday Thursday Friday Saturday Sun Mon Tue Wed Thu Fri Sat January February March April May June July August September October November December Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec just now 1 minute ago $$1$$ minutes ago 1 hour ago $$1$$ hours ago Yesterday $$1$$ days ago $$1$$ weeks ago more than 5 weeks ago Followers Follow THIS PREMIUM CONTENT IS LOCKED STEP 1: Share to a social network STEP 2: Click the link on your social network Copy All Code Select All Code All codes were copied to your clipboard Can not copy the codes / texts, please press [CTRL]+[C] (or CMD+C with Mac) to copy