Initial Margin Account

Paying initial margin is a risk-management requirement. But it is also something a client has to record in their own books — and the workbook gives a specific way to do that.

The Initial Margin Account is the ledger head a client debits every time margin is paid on an equity index or stock futures contract, and credits when that margin is refunded. It is not the margin itself; it is the accounting record of it.

Chapter 9, section 9.1 (Accounting for Initial Margin), sets out the treatment:

• Initial margin paid or payable is debited to "Initial Margin – Equity Index/Equity Stock Futures Account." Additional margins are recorded the same way.
• No entry is passed for the futures contract itself at inception — only the margin payment is recorded, because no other money changes hands when the contract is entered into.
• At the balance sheet date, the balance in this account is shown separately under "Current Assets."
• Amounts paid in excess of the required initial or additional margin are shown separately as a deposit under Current Assets.
• Where margin is met by a bank guarantee or lodged securities instead of cash, only a disclosure in the notes is needed — no accounting entry.
• On settlement of the contract, the initial margin is released and this account is credited, with a corresponding debit to bank or the deposit account.

The journal entries are: Initial Margin a/c Dr, To Bank a/c (margin paid); Bank a/c Dr, To Initial Margin a/c (margin refunded).

Mr X buys a futures contract on 5 March 2023. SPAN computes his initial margin at Rs 50,000 that day, and it moves on subsequent days.

5 Mar: Initial Margin - Equity Futures a/c Dr 50,000
           To Bank a/c                            50,000
     (Initial margin paid)

6 Mar: Initial Margin - Equity Futures a/c Dr  5,000
           To Bank a/c                             5,000
     (Additional margin required: balance now Rs 55,000)

7 Mar: Bank a/c                            Dr 10,000
           To Initial Margin - Equity Futures a/c  10,000
     (Margin refunded: balance now Rs 45,000)

8 Mar: Initial Margin - Equity Futures a/c Dr  2,000
           To Bank a/c                             2,000
     (Further margin paid: balance now Rs 47,000)

At each date, the debit balance in the Initial Margin Account exactly matches the SPAN-computed margin for that day — Rs 50,000, then Rs 55,000, Rs 45,000, and Rs 47,000.

Chapter 9, section 9.1, works through this exact Mr X example with four consecutive days of journal entries, immediately after setting out the accounting rules for the Initial Margin Account. Expect a question asking for the correct journal entry for a margin payment, refund or the balance-sheet treatment.

• No entry is passed for the futures contract itself at inception — only the margin payment is recorded. Candidates sometimes assume the full contract value must be booked.
• Shown under Current Assets, not Current Liabilities — the client has paid this money out and expects it back.
• Bank guarantees and pledged securities need only a disclosure, not a ledger entry, when used instead of cash margin.
• Do not confuse this ledger account with the Mark-to-Market Margin Account — that records the running daily settlement gain/loss, not the upfront margin.