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March 6, 2009

What is the entry when a contract is signed?

Signing a contract will not require a journal entry unless cash, a promissory note, or another asset is exchanged at the time. Signing a contract causes a commitment but does not necessarily create a liability or asset at the time of signing.

For example, an electric utility may sign a contract with a coal producer for 100 million tons of coal to be delivered over a one-year period beginning in three months. On the day the two parties sign the contract, the electric utility does not own any of the coal specified in the contract and does not have a liability to the coal producer. Likewise, on the day of signing the contract, the coal producer does not have a sale of any of the coal specified in the contract  nor does it have an account receivable from the electric utility. In three months, when the first trainload of coal arrives at the electric utility, the utility will record the purchase of that trainload of coal and the related account payable to the producer. Also at that time, the coal producer will record the sale of that trainload of coal and an account receivable.

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Comments

12 Responses to “What is the entry when a contract is signed?”

  1. woot on March 8th, 2009 1:49 pm

    generally there is no entry upon signing of contract, unless the risk and rewards is already transferred upon signing.

  2. shereef dubai on March 9th, 2009 12:17 pm

    thankyou

  3. shereef dubai on March 9th, 2009 12:20 pm

    Respected sir
    thankyou sir
    thankyoufor everything

  4. Rajesh Sharma on March 19th, 2009 8:40 am

    Thak You Sir.

  5. N Venkatesh on April 2nd, 2009 3:46 am

    Thank you very much……….

  6. GM on April 14th, 2009 6:00 am

    Please see the entery System

  7. SUMIT on April 15th, 2009 4:22 pm

    excellent sir
    ]thank u for your worthy material

  8. ALi RAza on April 19th, 2009 10:38 am

    You are right but have you any idea about Sigle entry System, what is mean by this…?

  9. sayyad yunus on April 22nd, 2009 2:03 am

    this website is very helpful for commerce and non commerce student, but provide the format also
    thnx regards.

  10. justin on April 30th, 2009 7:35 am

    What are basic journal entries for long term construction revenue side? From Billing(uncertified)? when certified? when collected? at what date or month, pls state the month. Thank you sir.

  11. praveen kumar on July 22nd, 2009 6:09 am

    Dear sir
    i m very greatful to u for providing this kind of help on the net and good material available

  12. praveen on July 22nd, 2009 6:11 am

    Dear sir
    thanks pls also privide about service tax and tds on this site

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