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.

Free Debits and Credits Cheat Sheet

You are already subscribed. This offer is not available to existing subscribers.
Error: You have unsubscribed from this list.
Step 2: Please check your email.