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Esigning accounting contract template

[Music] here we're gonna look at forward contracts now a forward contract is a contract between a seller and a buyer where the seller agrees to sell an asset like a commodity to a buyer in the future at a price that's specified now now the seller agrees to deliver this asset in the future where the buyer agrees to purchase the asset in the future and when the contract signed no physical exchange takes place until the specified date I'll go through an example of how to record a forward contract on a balance sheet from both the sellers perspective in the buyers perspective and we'll look at the contract date when the asset is exchanged and revaluation or amortization of any discount or premium required for the contract and when we're referring to an asset on this contract we're going to really be looking here at a commodity such as oil green or any other commodity okay to record this forward contract on the contract date looking from the sellers perspective here this is where we created an a liability here is an asset obligation for the and let's say the commodity we're going to have to supply in the future here so we would increase it or credit it here for the spot rate or the current price of that commodity and then on the asset side of the equation we have a contract receivable that's what we're going to receive in the future here so we debit it or increase it for the forward rate or the future price of that commodity and then we needed balancing amount here because we sold it for $10,000 and we're going to receive $12,000 for it in this example so we receiving a premium amount here so we set that up as a contra asset account so we would credit it and that would be the premium for this forward contract so we credit it for $2000 and then our credit here for our asset obligation year of $10,000 balances with this contract receivable here of $12,000 from the buyers perspective we have a liability here as a contract payable for that commodity that we purchased so we credit it or increase it here for the forward rate or the future price of the commodity and then on the asset side of the equation we have an asset receivable for the commodity that we purchased here so we debit it or increase it here for the spot rate or the current price of that commodity and then we need a balancing entry here between our contract payable which we're going to have to pay here at $12,000 and the asset we received here for that we're going to receive here for the value of $10,000 so we set up here as a contra liability account and that would be the premium on a forward contract in this case so we debit it here for $2,000 so the debits here for $2,000 plus our debit here and our asset receivable for $10,000 balances with our credit here on a contract payable of $12,000 all right let's look at this forward contract when it matures in the asset is exchanged and would be looking at it here from the sellers perspective now here's we're gonna recognize any late gain or loss on the contract so we have to determine what the market value of this asset or this commodity is at the contracts maturity date and in this case you determine it to be $11,000 so the first thing we do is we go and we close out our contracts receivable accounts this liability account here is our asset obligation and also any discount or premiums that we recognized on that contract and then the next thing we have to do here is we have to increase our cash based on the contract that amount or the actual amount that we've received in this case the contracted amount was $12,000 here so we debit our cash for $12,000 and then we do producing our asset account or this commodity account here and we would do that by the current market value of what this asset now is worth its current market value so in this case it was $11,000 so we'd credit or reduce our asset account for $11,000 and then we have to recognize any gain or loss on this forward contract in this case and that would be based on the current market value of the commodity here less the contract spot spot rate in that contract spot where 8 was the current rate when the contract was entered so in this case the current market value was $11,000 minus the $10,000 spot rate and the difference here would be $1,000 or a credit amount you know be recognized as a gain in this case a $1000 so our credit here of $1,000 plus our credit balance here in our asset account $11,000 balances with the cash that we received here for $12,000 all right let's look at this forward contract when it matures in the asset exchange from the buyers perspective so we'd have to close out our asset receivable account our contract payable account and any premium or discount recognized on the contract and then for our cash account we decrease it here based on the contracted amount or the actual amount that we have to pay on that contract in this case it was for $12,000 so we'd credit it for $12,000 here our cash account and then we increase our asset account here and that would be based on the current market value of this asset in this case it was commodity and his current market value was $11,000 so we debit our asset account here for $11,000 and then we'd have to recognize any gain or loss here internet income for that forward contract and that's based on the contract that spot rate marked - the market value of the commodity in this case in this contract spot rate that would have been the current rate when the contract was entered so in this case we had a 10,000 dollar spot raised - the $11,000 market value of the commodity so we had a debit here or a decrease here of $1000 so that would have been a loss that we recognized on the contract so the debit amount here of $1,000 plus the debit amount here in our increase in our asset of 11,000 balances with the amount of cash that we had to pay here for $12,000 alright when you're dealing with forward contracts for accounting purposes you have to reevaluate these kind exid's period that's his you have to go back and reevaluate your receivables your payables based on any changes here in the forward rates or the spot rates and then that would adjust your premium or discount on the contract but what I'm going to do here is just we just want to look at how we'd handle these premiums or discounts here on our contracts and what we'd have to do is we'd have to amortize them at the end of each balance sheet date so let's look at the case here from our sellers perspective here we had a credit premium amount here of $2000 so let's say each balance each day we recognize five hundred dollars here or amortize five hundred dollars worth of this asset here for the premium then we'd recognize it here as a increase or credit our revenue account for that amount here of five hundred dollars each period now we also here would recognize our sales here in a forward contract and that would be when this asset is sold okay from the buyers perspective we'd have to amortize any premium or discount which would be a contra liability account to this contract and we'd have to do that at each balance sheet date as well so in this case we had a two thousand dollar of premium here so we'd be crediting or reducing it by that amortized amount each period and then we'd recognize it here as an expense or debit or increase our expense for that amortized amount each period all right to summarize our forward contracts at the contract date from the sellers perspective you'd set up a contract receivable for this asset sold as an asset account here and then as a liability you'd have this asset obligation here and then any premium or discount would be a contra asset account and then from the buyers perspective you set up here as an asset receivable for this asset purchased and then your liability here would be a contract payable and then any premium or discount would be a contra liability account and when the contract matures and the assets are exchanged we'd recognize any gain or loss here in our income statement and that's based on the market value in the contract spot rate at each balance sheet date any premium or discount on the contract would have to be amortized and recognized as either revenue or expense as part of net income so that summarizes our forward contracts in how we'd account for them