JOURNAL ENTRY FOR DIFFERENCE IN FOREIGN EXCHANGE RATE FOR EXPORTS

Journal entry for foreign exchange fluctuation (Exports)

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.
Foreign exchange fluctuation is difference between the rate of currency at the time of sale and the rate at the time of receipt. The rate of currency in the market will varies daily it causes loss or gain to entity. 
Let us see a simple illustration:-

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.

There are different situations in foreign exchange as follows: -

1)   Sale&Receipt within same financial year.
2)   Sale in one financial year &Receipt in next financial year.


Journal Entry for foreign exchange (Sale & Receipt within same financial year)

C ltd sold material of $5000 on 01st February 2015 to ADL Co.. The Due date is on 15th march 2015.
1 $ is quoted at market as on 01/02/2015: - Rs.59.50
1 $ is quoted at market as on 15/03/2015: - Rs.60.50

 The Journal entry on date of sale

                   ADL Co. A/C  Dr      297500($5000*59.50)
                             To Sales Export A/C          297500

(Narration:- Being goods sold on credit vide bill no 020)
The rules for passing Journal entry
Note:-
As per personal account rule (ADL CO.) "Debit the receiver account"
(Current Asset)
As per nominal account rule (Sale Export) “Credit all Income or gains"
(Income Account)

The Journal entry for Receipt: -

          Bank  A/C             Dr      302500($5000*60.50)
                             To ADL Co. A/C                          302500
          
(Being amount received from ADL co.)
Rules for passing Journal entry
Note:
As per Real account rule (Bank) "Debit what comes into business"(Asset)
As per personal account rule (BUK CO.) "Credit the giver account"
(Current Asset)

  

The Journal entry for foreign exchange gain: -
          
            ADL Co. A/C       Dr            5000[$5000*(60.50-59.50)]    
      To Foreign Exchange Gain A/c   5000

(Narration:- Being  foreign exchange gain recognised)
The rules for passing Journal entry
Note:-
As per personal account rule (ADL Co.) "Debit the receiver account"
(Current Asset)
As per nominal account rule (Foreign exchange gain) “Credit all Income or gains"(Income Account)

Here the gain is calculated as follows:-

The difference between Receipt and sale is positive then it is gain                  Sale=297500/- , Receipt =302500/-
Gain=302500-297500=5000/-

Journal Entry for foreign exchange (Sale in one financial year & Receipt in next financial year)

CD ltd sold material of $20000 on 01st March 2015 to ADL Co.The Due date is on 15th April 2015.
 $ is quoted at market as on 01/03/2015: - Rs.61.00
 $ is quoted at market as on 31/03/2015: - Rs.61.50
 $ is quoted at market as on 15/04/2015: - Rs.61.75

The Journal entry on date of sale

                   ADL Co. A/C Dr      1220000 ($20000*61.00)
                             To Sales Export A/C          1220000

(Narration:- Being goods sold on credit vide bill no 022)
The rules for passing Journal entry
Note:-
As per personal account rule (ADL CO.) "Debit the receiver account"
(Current Asset)
As per nominal account rule (Sale Export) “Credit all Income or gains"
(Income Account)

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 gain as on 31/03/2015: -

ADL Co A/CDr        10000  [$20000*(61.00-61.50)]
      To Foreign Exchange Gain A/c   10000               

(Narration:- Being  foreign exchange gain recognised)
The rules for passing Journal entry
Note:-
As per personal account rule (ADL CO.) "Debit the receiver account"
(Current Asset)
As per 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       
The difference between Balance receivable and sale is positive then it is gain
Balance receivable = 1230000/- , Sale=1220000/-,  
Gain=1230000-1220000=10000/-

The Journal entry for Receipt: -

          Bank  A/C             Dr      1235000 ($20000*61.75)
                             To ADL Co. A/C               1235000

(Being amount received from ADL co.)
Rules for passing Journal entry
Note:
As per Real account rule (Bank) "Debit what comes into business"(Asset)
As per personal account rule (BUK CO.) "Credit the giver account"
(Current Asset)


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

ADL Co. A/CDr            5000[$5000*(61.75-61.50)]    
      To Foreign Exchange Gain A/c   5000

(Narration:- Being  foreign exchange gain recognised)
The rules for passing Journal entry
Note:-
As per personal account rule (ADL Co.) "Debit the receiver account"
(Current Asset)
As per nominal account rule (Foreign exchange gain) “Credit all Income or gains"(Income Account)

Here the gain is calculated as follows

The difference between Receipt and Balance receivable is positive then it is gain
Receipt =1235000/-, Balance receivable=1230000/-
Gain=1235000-1230000=5000/-

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