Because placing an order does not create an asset or a liability, accounting standards do not require a company to increase Inventory or Accounts Payable when entering into a purchase contract (commitment). Instead, the purchase transaction is recorded only upon the delivery of the coffee. However, because the purchase commitment provides relevant information to users, Starbucks Corporation (SBUX) is required to disclose commitments in the notes to its financial statements. For the commitments where the price is to be determined, Starbucks is required to provide its best estimate of the amount that will be paid once the coffee is delivered.
For purchase contracts (commitments) in which the market price falls below the fixed purchase price, Starbucks is required to make an adjusting entry to record an accrued loss. The recording of the loss prior to the purchase (delivery) of the coffee is consistent with accrual accounting in that the loss is recorded in the period that it occurs. That is, the loss is recorded in the period that the price declined.
For purchase contracts (commitments) in which the market price rises above the fixed purchase price, Starbucks would not record a gain. Instead, it would record the delivery of the inventory at the lower fixed purchase price.