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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. |
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| 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) |
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| 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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