Accounting of foreign exchange transactions

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This query is : Resolved

Suraj (Querist)

26 June 2012 Dear Experts / friends,

I wish to know accounting of foreign exchange transactions. Request you all to guide me.

Mr. B purchases and sells goods in dollar currency. He raises sale bill and receives purchase bill in foreign currency and also receives and pays in foreign currency, say $.

Part A – Recording of Sale & Purchase transaction -

Suppose, he raises a sale bill on Mr. A of 100 $ on 05-03-12 (rate as given on RBI site is, say, 49.7958):

05-03-12
Mr. A ------ Dr Rs. 4979.58 (100*49.7958)
To Sales Rs. 4979.58

On 31-3-12, bill is outstanding then, the entry will be for foreign exchange gain or loss. (say, if rate as on 31-03-12 is not published / available on RBI site, so we take earlier day rate. Say, rate available on 30-03-12 is Rs. 51.1565)

Since rate is higher than rate on 05-03-12, he has notional gain i.e. more receivable from Mr. A in rupee terms. So, the entry will be:

31-03-12
Mr. A ------ Dr. 136.07 [(51.1565-49.7958)*100]
To Foreign Currency gain a/c. 136.07

Thus, as on 31st March, receivable from Mr. A will be Rs. (4979.58+136.07) = Rs. 5115.65.

We receive the payment on 16-04-12. Rate on 16-04-12 is say Rs. 51.659/-

Bank a/c ----- Dr 5165.90
To Mr. A 5115.65
To Foreign Currency gain a/c. 50.25

Similarly for purchases.

Part B – Receipts & Payment entries
Secondly, I wish to know about receipts and payments done through Bank EEFC a/c, opened for recording receipts and payments in dollars.

Suppose, there are two entries in this account. One payment entry of $225 as on 05-03-12 and receipt entry of $335 as on 19-03-12.

Thus while passing entry for above two entries, we will convert above $ amounts on respective dates. (Bank commission is ignored)
i.e. Rupee value of $ 225 = 225*49.7958 = 11204.055 (-) &
Rupee value of $ 335 = 335*50.1245 = 16791.7075 (+)

Therefore net effect of above in Rs terms = 5587.6525 (+) as on 19-03-12 i.e. as per our Rupee accounting system, bank balance will be Rs. 5587.65

For bank, since it’s a foreign currency a/c, closing balance as on 31-03-12 will be $ 335-$225 = $110.

To match the bank balance as on 31-03-12, we have to show this as closing balance in rupee terms on 31-03-12. Therefore we will convert this at rate as on 31-03-12 and if same is not available on 31st March then as on 30-03-12 (is it correct?? Or as on 01-04-12) say rate is 51.1565.

Therefore closing balance as per bank as on 31-03-12 will be $110*51.1565 = 5627.215

Thus there is positive difference of Rs. 39.5625, which will be foreign exchange gain. We will pass journal entry for this as.
Bank a/c ---------- Dr Rs. 39.56
To foreign currency gain a/c 39.56

I wish experts, friends to advise me whether my above understanding is correct or requires my attention to some of areas. Also share your views about accounting of foreign exchange transactions.