JOURNAL ENTRY FOR DIFFERENCE IN FOREIGN EXCHANGE RATE FOR IMPORTS (INCLUDING TREATMENT AS PER ACCOUNTING STANDARD)

Journal entry for foreign exchange fluctuation (Imports)

As per Accounting standard 11 : The effects of changes in foreign exchange rates issued by ICAI

A foreign currency transaction should be recorded ,by applying the foreign currency amount the exchange rate as on date of purchase.

Foreign exchange fluctuation is difference between the rate of currency at the time of purchase and the rate at the time of payment. The rate of currency in the market will varies daily it causes loss or gain to entity.

  

Computation of foreign exchange loss or Gain

Currency Rate as on purchase less Currency rate as on payment = If difference is negative then it is treated as loss, If difference is positive it is treated as Gain.

Journal Entry for foreign exchange (Purchase & Payment made within financial year)

A ltd purchased material of $15000 on 01^st February 2015 from BUK CO. The Due date is on 15^th march 2015.

 $ is quoted at market as on 01/02/2015: - Rs.61.50

 $ is quoted at market as on 15/03/2015: - Rs.60.50

The Journal entry on date of purchase

Purchase imports A/C      Dr.      922500

To BUK CO.A/C                                 922500

 (Narration:- Being goods Purchased on credit vide bill no111)

The rules for passing Journal entry

Debit

Due to purchase goods are coming into business.As goods are treated as asset.

As per Real account rule (Purchase imports) “Debit what comes into business"

Credit

Due to credit purchase we are liable to him. And he is giving us the goods on credit. The creditors balance will increase.

As per personal account rule(BUK CO.) "Credit the giver account"(Current Liabilities)

The Journal entry for payment: -

BUK Co. A/C                   Dr      907950

                             To Bank A/C                               907950

(Being amount paid to BUk co.)

Rules for passing Journal entry

Debit

Amount payable to BUK co. was paid and the credit balance sitting in the account will be cancelled by debiting account.Here he is receiver of cash. So, as per Personal account rule (BUK Co.) "Debitthe receiver account "(Current liabilities)

Credit

Due to payment there will be decrease in bank balance and outflow of cash from business. So, as per Real account rule (Bank) "Credit what goes out of business"(Asset)

The Journal entry for foreign exchange gain: -

BUK CO   A/C           Dr                14550(922500-907950)     

        To Foreign Exchange Gain A/c              14550

(Narration:- Being  foreign exchange gain recognised)

The rules for passing Journal entry

Debit

In case of foreign creditors we need to pay in their currency but the universal currency is $ dollar here at the time of purchase we credited his account with Rs. 9,22,500/- but at the time of payment it is Rs. 9,07,950/- it is due to change in currency rates. The balance in the account is treated as gain when it shows credit balance and the balance will be transferred to foreign exchange gain account. So, the account will be debited 

Credit

The gain on payment will be treated as income and this is shown as income in profit and loss account at year end. So, Asper nominal account rule (Foreign exchange gain) “Credit all Income or gains"(Income Account)

Here the gain is calculated as follows

The difference between purchase and payment is positive then it is gain

Purchase=922500/- , Payment =907950/-

Gain=922500-907950=14550/-

Journal Entry for foreign exchange (Purchase in one financial year & Payment made in next financial year)

 AB ltd purchased material of $10000 on 01^stMarch 2015 from BUK CO. The Due date is on 15^thApril 2015.

 $ is quoted at market as on 01/03/2015: - Rs.61.50

 $ is quoted at market as on 31/03/2015: - Rs.61.00

 $ is quoted at market as on 15/04/2015: - Rs.61.75

 The Journal entry on date of purchase

Purchase imports A/C      Dr.      615000($10000*61.50)

To BUK CO.A/C.                                  615000

(Narration:- Being goods Purchased on credit vide bill no112)

The rules for passing Journal entry

Debit

Due to purchase goods are coming into business. As goods are treated as asset.

As per Real account rule (Purchase imports) “Debit what comes into business"

Credit

Due to credit purchase we are liable to him. And he is giving us the goods on credit. The creditors balance will increase.

As per personal account rule(BUK CO.) "Credit the giver account"(Current Liabilities)

As per Accounting standard 11 : The effects of changes in foreign exchange rates      

A foreign currency transaction should be recorded ,by applying the foreign currency amount the exchange rate as on date of purchase.

At each balance sheet date, foreign currency monetary items should be reported using closing rate. The difference between closing rate and purchase rate should be recognized as loss or gain.

The Journal entry for foreign exchange loss as on 31/03/2015: -

BUK CO.  A/C   Dr         5000 [$10000*(61.50-61)]     

      To Foreign Exchange Gain A/c   5000                 

(Narration:- Being  foreign exchange gain recognised)

The rules for passing Journal entry

Debit

In case of foreign creditors we need to pay in their currency but the universal currency is $ dollar here at the time of purchase we credited his account with Rs.615000/- but at the year-end it will be shown at Rs.610000/- it is due to change in currency rates. The balance in the account is treated as gain when it shows credit balance and the balance will be transferred to foreign exchange gain account. So, the account will be debited 

Credit

The gain on payment will be treated as income and this is shown as income in profit and loss account at year end. So, Asper nominal account rule (Foreign exchange gain) “Credit all Income or gains"(Income Account)

Here the gain is calculated as follows

The difference between purchase and payment is positive then it is gain

Purchase=615000/- , Amount payable as on balance sheet date =610000/-Gain=615000-610000=5000/-

The Journal entry for payment: -

BUK Co. A/C                   Dr      617500($10000*61.75)

                             To Bank A/C                               617500

(Being amount paid to BUk co.)

Rules for passing Journal entry

Debit

Amount payable to BUK co. was paid and the credit balance sitting in the account will be cancelled by debiting account.Here he is receiver of cash. So, as per Personal account rule (BUK Co.) "Debit the receiver account "(Current liabilities)

Credit

Due to payment there will be decrease in bank balance and outflow of cash from business. So, as per Real account rule (Bank) "Credit what goes out of business"(Asset)

Journal entry for foreign exchange loss as on 15/04/2015: -

Foreign Exchange Loss A/c Dr    7500    [$10000*(61.00-61.75)]      

                To BUK CO. A/C                  7500         

(Narration:- Being  foreign exchange gain recognised)

The rules for passing Journal entry

Debit

Loss on payment is due to change in exchange rate .here the rate is increased from Rs.61 per $ to Rs.61.75 per $. So, Asper nominal account rule (Foreign exchange loss) “Debit all expense or loss"(Expense Account)

Credit

Do excess payment due to change in dollar rate will left excess debit balance in BUK co. so to cancel it the account will be credited.

Here the loss is calculated as follows

The difference between purchase and payment is positive then it is gain

Amount payable as on balance sheet date =610000/-,Amount paid=617500/-

Loss=610000-617500=-7500/-