Exchange Accounting for Accounts Receivable

  1. Scenario 1: Month End Accruals to Value Foreign Currency Control Accounts (A/R and Bank):

    This scenario describes the accounting entries resulting from processing Sales Invoices and collecting payments in a foreign currency. In this simplified example, the foreign currency is US$ and the domestic currency is CDN$. These accounting principals are followed:

    • Control accounts for Accounts Receivable-US$ and Bank-US$ are expressed in foreign currency.

    • Balance Sheet accounts also exist for Exchange on A/R and Exchange on Bank.

    • As foreign Invoices are processed, the foreign dollar A/R control account is updated in foreign currency, Sales are updated in domestic equivalent and the difference is posted to the Gain/Loss on Exchange in the P&L section of the Chart of Accounts. Note: The A/R and Gain/Loss on Exchange G/L accounts are assigned in the Bank Code record in Maintain Bank Codes (AR02).

    • Prior to producing month end financial statements, an accrual entry is manually entered to bring the foreign currency Balance Sheet account into domestic dollars at the current exchange rate. The offsetting amount is posted to the Gain/Loss on the Exchange account in the P&L.
Scenario 1: Transaction/Impact on General Ledger Debit Credit
Post Invoice for US$10,000. Exchange Rate = 1.12    
Accounts Receivable-US$ 10,000  
Sales   11,200
Gain/Loss on Exchange 1,200  
     
At end of month, Exchange Rate changes to 1.16    
A/R-US$ current account balance = $10,000    
A/R-US$ value at today's rate =$11,600    
Post Accrual Journal Entry to account for exchange on    
US A/R    
Exchange on A/R 1,600  
Gain/Loss on Exchange   1,600
     
Month end financial statement reflects a gain of $400    
     
GL81-Final automatically generates a reversal of
accrual entry
   
Exchange on A/R   1,600
Gain/Loss on Exchange 1,600  
     
Partial payment received    
Bank - US$ 8,000  
Accounts Receivable - US$   8,000
     
Next month end, Exchange Rate changes to 1.13    
Post Accrual Entry to convert US$ accounts    
Exchange on Bank (8,000 x .13) 1,040  
Exchange on A/R (2,000 x .13) 260  
Gain/Loss on Exchange   1,300
     
Month end financial statement reflects YTD gain of $100    
     
GL81- Final automatically generates reversal of accrual
entry
   
Exchange on Bank (8,000 x .13)   1,040
Exchange on A/R (2,000 x .13)   260
Gain/Loss on Exchange 1,300  

  1. Scenario 2: Month End Journal Entries to "True Up" Exchange Accounts for A/R and Bank:

    This scenario describes the accounting entries resulting from processing Sales Invoices and collecting payments in a foreign currency. In this simplified example, the foreign currency is US$ and the domestic currency is CDN$. These accounting principles are followed:

    • Control accounts for Accounts Receivable-US$ and Bank-US$ are expressed in foreign currency.

    • Balance Sheet accounts also exist for Exchange on A/R and Exchange on Bank.

    • As foreign Invoices are processes, the foreign dollar A/R control account is updated in foreign currency, Sales are updated in domestic equivalent and the difference is posted to the Exchange on A/R Balance Sheet account. Note: The Accounts Receivable and Exchange on A/R GL accounts are assigned in the Bank Code record in Maintain Bank Codes (AR02).

    • Prior to producing month end financial statements, journal entries are manually entered to "true up" (express at today's exchange rate) the Balance Sheet Exchange accounts. The offsetting amount is posted to the Gain/Loss on Exchange account in the P&L.
Scenario 2: Transaction/Impact on General Ledger Debit Credit
Post Invoice for US$10,000. Exchange Rate = 1.12    
Accounts Receivable - US$ 10,000  
Sales   11,200
Exchange on A/R 1,200  
     
At end of month, Exchange Rate changes to 1.16.    
A/R-US$ current value-$11,200 (A/R + Exchg on A/R)    
A/R-US$ value at today's rate = $11,600    
A/R-US$ understated by $400. Post journal entry to    
"True Up" US A/R    
Exchange on A/R 400  
Gain/Loss on Exchange   400
     
Month end financial statement reflects a gain of $400    
     
Partial payment received.    
Bank - US$ 8,000  
Account Receivable - US$   8,000
     
Next month end, Exchange Rate changes to 1.13    
Exchange on A/R currently = $1,600    
A/R-US$ value at today's rate = $260 (2,000 x .13)    
Exchange on A/R overstated by $1,340. Post journal
entry to 'True Up" US A/R
   
Exchange on A/R   1,340
Gain/Loss on Exchange 1,340  
     
Exchange on Bank currently = $0    
Exchange on Bank at today's rate = $1,040 (8,000 x .13)    
Exchange on Bank understated by $1,040. Post journal
entry to "True Up" US A/R
   
Exchange on Bank 1,040  
Gain/Loss on Exchange   1,040
     
Month end financial statement reflects YTD gain of $100    

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