According to trade date accounting, a transaction is recorded in the books of an entity as of the date at which an agreement has concluded, though not yet finalized. A trade date is the date that an entity commits itself to purchase or sell an asset or assume or transfer a liability at some certain date in the future.
Trade date accounting involves:
- the recognition of an asset to be received (in a purchase transaction) and the liability to pay for it (i.e., for its price) on the trade date; and
- the derecognition of an asset (in a sale transaction), recognition of any gains or losses on disposal and the recognition of a receivable (on the part of a buyer) for payment on the trade date.
On the trade date, interest does not start to accrue on the asset and corresponding liability. Instead, accrual starts on the date that a transaction is finalized or performance completes- which is known as settlement date (and is subject to settlement date accounting). On settlement date, title passes, marking actual finalization of a transaction- i.e., settlement.
