What is the entry when a contract is signed?

The act of signing a contract does not necessarily trigger a journal entry. An accounting entry is only needed when there is a change in one’s assets or liabilities at the time of signing. For example, signing a contract with a public relations firm does not require a journal entry, but also paying the firm an advance at the time of signing will require a journal entry to record the outflow of cash and the creation of a prepaid expense.

Contract Disclosures

When a contract is signed, the entity signing the contract may need to disclose selected portions of the contract in the footnotes accompanying its financial statements. Generally, if the commitment made by the company is significant, the terms of the arrangement should be disclosed in the notes accompanying its financial statements, even if no transactions have yet been recorded. For example, if a contract requires the signing party to guarantee a loan, then the terms of the arrangement should be disclosed. This does not require a journal entry at the time of signing, but does require disclosure of the firm’s new obligation.

Example of Entries When Signing a Contract

Here are several examples of the journal entries associated with contracts:

• Employment contract. A company enters into an employment contract with a new CFO. No journal entry is required at this time, but the firm will need to start recording compensation payments as of the first payroll in which the CFO is included.
• Purchase order. A company signs a contract to purchase a minimum number of widgets from a manufacturer over the next few years, in order to obtain a volume discount. When the contract is signed, the company has not yet bought any widgets, so there is no journal entry at that time. A month later, the company receives the first delivery of widgets, at which point it records an inventory asset and a trade payable liability.
• Shipped goods. A manufacturer has not sipped anything to the buyer of its goods as of the contract signing date, and so cannot record a journal entry. However, when it ships the first load of widgets a month later, it can record a sale and a trade receivable asset.