FOREIGN EXCHANGE

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CA. A. K. GUPTA (Querist)

11 May 2010 SIR/MADAM,
ONE OF MY CA's CLIENT HAS BUSINESS OF EXPORT. when we make bill on sale , we enter an average rate for all sales entry into books of accounts.

customer a/c Dr. ( with average rate,let rs.55)
To Sales a/c

but when party outside india gives payment , then it goes into "Euro A/c" in SBI. we pass an entry-

Euro a/c Dr. (with rate on which amount come into Euro a/c, let Rs. 56)
To Customer A/c

after some days, when rate of Euro is higher,then we convert it into indian rs. and pass an entry-

HDFC BANK A/c Dr. (with rate of conversion, let Rs. 60)
To Euro A/c

my question are - 1. what is the treatment of difference between Rs56 & Rs. 55?
2. what is the treatment of difference between rs. 60 & Rs.56?

as per my opinion, difference of Rs 1(56-55) will be transferred to P&L A/c and difference of Rs 4 (60-56) will be treated as Capital Gain or exchange difference.

plz reply as soon as possible.

Bindu Madhav

Bindu Madhav (Expert)

11 May 2010 As per AS-11, initial recognition should be on the date of transaction (or Avg Rate - which is OK in your case).

Any difference, in settlement has to be treated as 'Exchange Gain/(Loss" and transfer to P&L A/c. Settlement means -conversion into 'reporting currency' -i.e INR. So, till date of converting into Rs, whatever difference should be treated as 'Exchange Gain/Loss' & transfer to P&L.

In your case, Rs. 5 (1+4) will be Exchange Gain/(Loss) and to transfer to P&L.

As this difference is related to Exports -at any point of time you can't capitalise

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