Foreign Exchange Loss Journal Entry
Foreign exchange loss occurs when the value of a foreign currency declines relative to the reporting currency between the time a transaction is recorded and when it is settled. This loss needs to be recorded to accurately reflect the financial impact on the business.
Scenario:
A company has an accounts payable of $10,000 when the exchange rate was ₹75 per USD. By the time the payment is made, the exchange rate has risen to ₹80 per USD, resulting in a foreign exchange loss.
1. Initial Transaction Recording
When the accounts payable was initially recorded:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Purchases A/c | 750,000 | |
| To Accounts Payable A/c | 750,000 | |
| (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 Foreign Exchange Loss
When the payment is made, the exchange rate is ₹80/USD:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Accounts Payable A/c | 750,000 | |
| Foreign Exchange Loss A/c | 50,000 | |
| To Cash/Bank A/c | 800,000 | |
| (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.
