Exchange Accounting for Accounts Payable

This topic describes how to account for gain/loss on foreign exchange and traces what happens when the exchange rate changes between posting an Invoice and paying an Invoice. This simplified example pays a US Supplier out of a US Bank account and demonstrates the use of a single Exchange Gain/Loss account in the P&L section of the Chart of Accounts.

Transaction/Impact on General Ledger Debit Credit
Post Invoice for US$1000. Exchange Rate = 1.20    
Accounts Payable   1200
Purchase/Expense 1200  
     
At end of month, Exchange Rate changes to 1.15.
Run AP83 with Restriction 8 for Invoice Rate = $1200.
Run AP83  with Restriction 8 for Current Rate = $1150.
Difference = $50 unrealized gain on exchange.
Post Accrual Entry using GL30.
   
Accrued Exchange on AP (Liability Section) 50  
Exchange Gain/Loss (Expense Section)   50
     
At this point Balance Sheet correctly reflects AP at current rate
(Net of Accounts Payable plus Accrued Exchange on AP
accounts = $1150, which is value of AP83 at Current Rate)
   
     
Purchase US$1000. Exchange Rate=1.15    
US Bank 1000  
Domestic Bank   1150
Exchange Gain/Loss 150  
     
Pay Invoice out of US Bank Account    
US Bank   1000
Accounts Payable 1200  
Exchange Gain/Loss (uses Invoice Rate)   200
     
Accrual for Gain on Exchange-AP reverses at month end    
Accrued Exchange on AP   50
Exchange Gain/Loss 50  
     
At this point the balance in the Exchange Gain/Loss account=
$50 credit, which is the realized gain on exchange between
posting the Invoice at 1.20% and paying the Invoice at 1.15%
   
     

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