Exchange loss occurs when there is a difference in the exchange rate at the time of recording a transaction and at the time of settlement. Below are examples of journal entries to record exchange losses in different scenarios.
Initial Purchase on Credit and Subsequent Payment with Exchange Loss
Scenario: ABC Pvt Ltd purchases goods from a foreign supplier for $10,000 when the exchange rate is ₹75/USD, and the transaction is recorded. Later, the company pays the supplier when the exchange rate is ₹80/USD, resulting in an exchange loss.
1. Initial Purchase Recording
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Purchases A/c | 7,50,000 | |
| To Accounts Payable A/c | 7,50,000 | |
| (Being purchase recorded at an exchange rate of ₹75/USD) |
Explanation:
- Purchases A/c is debited to record the cost of the purchase.
- Accounts Payable A/c is credited to reflect the liability in INR.
2. Payment and Recording the Exchange Loss
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Accounts Payable A/c | 7,50,000 | |
| Foreign Exchange Loss A/c | 50,000 | |
| To Cash/Bank A/c | 8,00,000 | |
| (Being payment made and foreign exchange loss recorded) |
Explanation:
- Accounts Payable A/c is debited to eliminate the liability.
- Foreign Exchange Loss A/c is debited to record the loss due to exchange rate fluctuations.
- Cash/Bank A/c is credited to reflect the cash outflow for the payment.
Exchange Loss on Foreign Currency Loan
Scenario: ABC Pvt Ltd has a foreign currency loan of $20,000, initially recorded when the exchange rate was ₹70/USD. At the end of the period, the exchange rate changes to ₹75/USD, resulting in an exchange loss.
1. Initial Loan Recording
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Cash/Bank A/c | 14,00,000 | |
| To Foreign Currency Loan A/c | 14,00,000 | |
| (Being foreign currency loan recorded at an exchange rate of ₹70/USD) |
Explanation:
- Cash/Bank A/c is debited to record the receipt of loan funds.
- Foreign Currency Loan A/c is credited to recognize the loan liability.
2. Recording the Exchange Loss at Period-End
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Foreign Exchange Loss A/c | 1,00,000 | |
| To Foreign Currency Loan A/c | 1,00,000 | |
| (Being exchange loss recorded due to change in exchange rate to ₹75/USD) |
Explanation:
- Foreign Exchange Loss A/c is debited to record the loss due to the exchange rate fluctuation.
- Foreign Currency Loan A/c is credited to adjust the loan liability to the current exchange rate.
Exchange Loss on Foreign Receivables
Scenario: ABC Pvt Ltd has foreign receivables of $5,000, initially recorded when the exchange rate was ₹72/USD. At the time of payment receipt, the exchange rate changes to ₹70/USD, resulting in an exchange loss.
1. Initial Receivable Recording
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Accounts Receivable A/c | 3,60,000 | |
| To Sales A/c | 3,60,000 | |
| (Being foreign receivables recorded at an exchange rate of ₹72/USD) |
Explanation:
- Accounts Receivable A/c is debited to recognize the receivable amount.
- Sales A/c is credited to record the revenue from sales.
2. Receipt of Payment and Recording the Exchange Loss
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Cash/Bank A/c | 3,50,000 | |
| Foreign Exchange Loss A/c | 10,000 | |
| To Accounts Receivable A/c | 3,60,000 | |
| (Being payment received and foreign exchange loss recorded) |
Explanation:
- Cash/Bank A/c is debited to reflect the cash inflow from the receivable.
- Foreign Exchange Loss A/c is debited to record the loss due to the exchange rate fluctuation.
- Accounts Receivable A/c is credited to eliminate the receivable.
