I would really appreciate some guidance as the best way to account for Forex gains and losses for creditors and debtors.
At month end, we set a new FX rate, and revalue the outstanding debtors and creditors. My understanding is that this goes to the Unrealised Exchange Gains/Losses account(s).
If the debt is still outstanding at the start of next month, what do I do? Should I reverse the original gain/loss and calculate a new one?
When the debt is paid what should happen? Reverse the unrealised gain/loss and make it a realised gain/loss?
A fool-proof procedure would be appreciated.
Liz
Replies (5)
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Hope this helps...
Realised gains/losses - put through the P&L on a cumulative basis
Unrealised - do exactly the same, but when the debtor / creditor is realised, it's a realised gain
Example:
Someone owes you $100. It's 2:1 - you recognise initially @ £50
Next month, it's 4:1. Revalue debt to £25, you lose £25
DR Unrealised losses £25
CR Debtors £25
Next month it's 1:1. Revalue debt to £100, you gain £75 (at this point, cumulative gain of £50)
The individual pays their $100 when it's 1:1. You transfer the unrealised gain of £50 as a realised gain:
DR Cash £100
CR Debtors £50
CR Realised gains £50
Do you have to do monthly reporting? I only ask as it sounds like you're not using a system that does this for you, and as a result it sounds like monthly reporting may not be a requirement. If so, you only need calculate your unrecognised gains/losses at period end to save you hassle each month
You have got the gist of it Liz
Hi Liz
For monthly management accounts what you suggest is about right. Just re-calc your fx debtors and Creditors at the month-end rate and do a provision, as a reversing journal if your system allows it. As you say; when your Dr pays, or you pay a Cr, you should post the diff. on fx as a realised gain/loss; however the effect on the bottom line should be minimal as you will already have accounted for any 'creeping' rise or fall month by month.
The only exception to this would be if a currency soared or dived after the end of the previous month; then you could take a hit, good or bad.
P.S. Be wary of sytems that claim to do all this for you; they sometimes do very strange things! Sage L50, for instance, only re-values bank holdings, not Drs & Crs. I prefer to do it by hand so that I know what has gone on!!!
Sage L50 does revalue both the debtors and creditors ledger - you just need to activate the setting
It's no by default
What to do
Hi,
What to do if starting balances is "Zero" ?
New company wish Capital £1 the rest is borrowing in EUR ,reporting is USD,cost is in GBP ?
Thank you in advance for ANY contributions.
Serg