Foreign Exchange Gain/Loss - Overview, Recording, Example
Exchange rate profit.
Exchange gains and losses are transactions that affect the income statement as a result of transactions made in foreign currencies (supplier debts, customer receivables, loans, borrowings). Thus, the detected gap between the initial and final cost will lead to an increase or loss in the exchange rate.
1. Loss of currency.
A currency exchange loss is the difference between the purchase or sale price and the closing price of a currency that negatively impacts a company's profits.
To better understand the loss of currency, let's consider the following example: a company buys goods from a US supplier. 09/01/N she buys $1,000 worth of goods. 31/12/N she makes the calculations.
The EUR/USD rate as of 01/09/N is 1 USD = 1 EUR, the EUR/USD rate as of 31/12/N is 1 USD = 1.2 EUR.
As of 01.09/n. e. the purchase price of the item is 1,000 euros (1,000 US dollars * 1).
As of 31/12/N, at the time of payment to the US supplier, the value of the debt is 1,200 euros (1,000 US dollars * 1.2).
Since the payment exceeds the purchase price, the company incurs a foreign exchange loss of 200 euros (payment 31/12 / N - purchase price 01/09 / N, 1200 euros - 1000 euros).
2. Exchange rate profit.
Exchange rate profit is the difference between the purchase or sale price and the closing price of a currency, which positively affects the company's profit.
To better understand exchange rate gains, consider the following example: A company buys goods from a Japanese supplier. 01.10 / p. n. e. she buys goods for 2000 yen. 31/12/N she makes the calculations.
The EUR/JPY exchange rate on 01/10/N is 1 yen = 1.5 euros. The EUR / JPY exchange rate As of 01/12/N is 1 yen = 1.2 euros.
As of 01/10/s. n. e. the purchase price of the item is 3,000 Euros (2,000 yen * 1.5)
As of 12/01/N at the time of payment to the Japanese supplier, the value of the debt is 2,400 euros (2,000 yen * 1.2).
Since the payment is lower than the purchase price, the company earns a market profit of EUR 600 (purchase price 01/10/N - payment 01/12/N, EUR 3000 - EUR 2400).
You can follow the following principles:
- - When purchasing goods (purchases of goods, services, fixed assets, etc.) in a foreign currency, the conversion rate used is the exchange rate on the date of entry (the date of purchase or invoicing).
- - When transferring goods (sale of goods, sale of services, etc.) in foreign currency, the conversion rate used is the exchange rate on the date of entry (date of sale or invoicing).